Freelancer Compensation Compromise

"The Great Pricing Debate"

The Problem

How should a freelancer bill his clients? I should note that I can't really say I have much experience freelancing, but it's something I've semi-seriously considered as a possible career path as a software developer. As I understand it, the two opposing sides are fixed, per-project pricing and hourly rates. To read more on that debate, here's an article with freelancers passionately making their cases.

The Solution

My audacious proposal would be a compromise of the two sides - "por qué no los dos?" as the kids say. How do you do a fixed price and a not fixed price, you ask? You start by framing it into terms of projected and actual hours. Fixed, project-based pricing would be like taking pay for the hours you projected while hourly pricing is like taking pay for the hours you actually spent. With this in mind, it might become obvious that you could factor in both the projected hours and the actual hours in determining compensation.

Now if you're hoping my solution is simply to add them together and divide by two, sorry, I like calculus. Furthermore, the solution I would actually want to pursue as a freelancer assumes that I'm trying to foster long-term relationships with clients. And if that's the case, we would gather data around how long I projected something would take and how long it actually took. Aggregate that historic data, and you can see on average how my projections compare to reality - do I over-project or under-project?

Using that data, you can sort of gamify the whole process. You can give me a "Projection Score." For instance, if historically I've projected 100 hours and have only taken 50, you can give me a score of 2: 100/50. That score demonstrates integrity because I'm leaving money on the table by not taking the full time projected. That integrity gets baked into my Projection Score and essentially fills up this "Bucket of Grace" that the client is now obligated to sprinkle on me next time I find myself beyond the projected hours. Why would the client want to do that? Because it encourages you to work no more nor less than you believe appropriate. In software terms, it means you write quality code without twiddling your thumbs while on the clock.

Mathematically, this Projection Score serves as a rate of decay on your hourly wage when you're beyond the projected hours. So filling that "Bucket of Grace" causes the hourly wage to decay more slowly than it otherwise would. Here you can see how quickly wage decays is dependent on this s term, Projection Score. You can play around with this demo here or on the dedicated demo page as well.

This solves all of the integrity issues I can think of assuming both parties are interested in a long-term relationship. This is because every short-term greedy decision is met with a long-term consequence. For instance, in a simple hourly-rate situation, one might be tempted to take one's time on a project to ultimately get paid more. In this case, however, the long-term consequence of that is that you don't get grace - in the form of a slowly decaying wage - when you actually perhaps need it.

So the biggest beef I've heard with this proposed solution - particularly for software development purposes - is that engineers always underestimate the project. First of all, if that's the case, then an hourly rate would always be the best option for the developer. But I do see some software developers arguing for per-project pricing. So it would seem that some developers are able to get away with over-projecting. Additionally, I believe one of the primary reasons for software developers under-projecting on these projects is that they are being pressured by the other side to project low. In this compromise, it should be understood by the client that it is in both your best interests to not pressure the developer because that will very likely result in low quality software.

For anyone interested in more on this, I have the Google Sheet I birthed this idea in, except it's cleaned up a bit. In addition to a tab demonstrating how the Projection Score would be tracked and how compensation for projects would be calculated, it also outlines some of the unethical temptations present in each of the sides of the debate.