How it's calculated
The same piece of work can be sold three ways, and they differ mainly in who carries the risk of the estimate being wrong. The calculator prices the work under each model and compares what the client pays and what the agency keeps when the work takes the number of hours you enter as actual.
The formula
- Time and materials: client pays actual hours × hourly rate
- Fixed price: client pays estimated hours × hourly rate × (1 + risk buffer), however long the work takes
- Retainer: client pays monthly fee × months, plus (actual hours − included hours) × overage rate if the work runs over
- Agency profit = what the client pays − actual hours × delivery cost per hour; effective rate = what the client pays ÷ actual hours
Worked example
Work estimated at 400 hours actually takes 480. At 120 an hour and a delivery cost of 70 an hour, time and materials bills $57,600 for a profit of $24,000. A fixed price with a 15% buffer bills $55,200, so the overrun cuts profit to $21,600. A six-month retainer at 8,000 a month for 60 hours, with overage at 140, bills $64,800.
| Line | Time and materials | Fixed price | Retainer |
|---|---|---|---|
| Client pays | $57,600 | $55,200 | $64,800 |
| Delivery cost | -$33,600 | -$33,600 | -$33,600 |
| Agency profit | $24,000 | $21,600 | $31,200 |
| Margin | 41.7% | 39.1% | 48.1% |
| Effective hourly rate | $120.00 | $115.00 | $135.00 |
If the work takes only 360 hours, the fixed price earns the most: Fixed price.
Assumptions and limitations
- One delivery cost per hour for the whole team.
- The retainer's unused hours are kept by the agency; many contracts roll some over instead.
- No change requests. A fixed price usually comes with a change process for new scope, which recovers some overruns.