Recently, I wrote an article titled “Do you have the right personality to be an independent contractor?,” in which I challenged you to think before you make the plunge into freelance work. Many of you have written asking about the best ways to negotiate a contract for that kind of work. Here’s my take.

You get what you negotiate
One of the trickiest parts of being an independent contractor is negotiating payment and terms for a project. Overbid, and you may lose the job; underbid, and you won’t receive what your services are worth. An extremely low bid can also cost you the contract if it makes the client think you don’t know what you’re doing.

As you know, payment terms are generally by the hour or by the project. However, there are nuances to choosing, bidding, and writing the contract for either option. In this article, I’ll look at when you might choose one option over the other, and point out what you should include in either type of bid to help ensure you’re fairly compensated for the work you do.

When to choose which?
Generally, a client will already have a preference for terms of payment. When you believe one type of payment may be more beneficial than another, you may be able to steer the client your way—depending on the type of work, what you have to offer, and the client’s willingness to negotiate.

You may find it more desirable to be paid by the hour under these circumstances:

  • It’s an open-ended project or you aren’t certain you can determine within a 10 to 20 percent margin the amount of time it will take to complete the job.
  • You believe that this client or the staff you will work with is poorly organized or unfocused, causing unpredictable delays and revisions to the project.
  • You haven’t worked with this client before, and the parameters of the project are not well-defined.
  • Your client needs you to do an assortment of projects, or you have ongoing work for that client and you want to establish a base rate.

On the other hand, it may be to your advantage to be paid by the project in these cases:

  • It’s a short-term project, in which case you may be able to justify charging more than you would if paid by the hour.
  • The project may entail sporadic work, and you want to be assured of a certain amount of income.

For any type of bid, you will need to analyze the project, break it into phases, and be prepared to show your estimate to the client. It’s okay for your breakdown to include your padding for the unexpected, which is usually expressed as a percentage of the total hours estimated. Reasonable clients understand that you must be prepared for the unexpected to arise on every project. You can also point out that this gives you the flexibility to accommodate changes as the project unfolds (to a reasonable degree).

Now let’s take a look at the conditions you’ll want to be sure to attach to either type of bid.

Bidding the project by the hour
When you bid by the hour, the client will expect you to estimate the amount of time it will take you to complete the project. The client may ask for a “not-to-exceed” figure—the maximum number of hours you will bill. Obviously, set this number much higher than you initially think the job will require. If the client has in mind a set number of hours for the project, ask how they arrived at this figure before you agree to it. Then compare it to your own estimate.

As you write up an hourly contract, consider the following:

  • If the project parameters seem particularly vague, set a minimum number of hours you will bill per week or per month. You may not get this, but you can use it as a negotiating point to urge the client to better define the project.
  • Always attach a time frame to the project after which the contract is open for renegotiations. You don’t want to be tied indefinitely to a company that isn’t timely about giving you what you need to complete the project, forcing you to cut down on your billable hours and restricting your ability to take on other projects while you’re waiting.

Bidding the project at one price
If you bid a project at one price, it’s even more important to know as much as you can about the work involved. If you underestimate, you could end up “accidentally” working for an hourly rate that you haven’t seen since high school.

When you bid on a per-project basis, there are two crucial elements to not losing your shirt:

  1. Define the project parameters: When is the project to be deemed complete and by whom?
  2. Specify what is included and what is excluded: Travel? Frequent or lengthy meetings? What about project revisions or delays that are outside of your control (especially important when dealing with a software development project)?

Clearly defining the project in writing is critical. What if your client thinks so much of your work that they start asking you to “just take a look at” lots of things that aren’t directly part of your project? Don’t nitpick about every minute of your time—remember, some of your work is simple public relations—but don’t give your services for free.

If your client tries to get more than what was bargained for, point out that the work exceeds the scope of your original contract, but that you’ll be happy to write up an addendum. Even if your original contract payment terms were based on the project, you may want to bid extra work per hour, especially if you think there will be a lot of it.

Nudge the client by offering a choice
What if you want to bill by the hour but the client wants to pay by the project, or vice versa? You can simply ask for what you want and be prepared to defend your preference. You may need to be tactful—you don’t have to express your opinion that the client’s staff, network, or current documentation is a complete mess. However, you can say that you need to bill by the hour because you have found that similar projects have often involved unforeseen work.

Another option is to present two bids—one by the hour and one by the project—and let the client choose. You’ll probably need to present both a task breakdown and your “not-to-exceed” figure. You can present the numbers so that they point the client toward the option of your choice, but be prepared to live by what the client chooses.
If you’d like to comment on this article or share your experiences negotiating contracts, please post a comment below or follow this link to write to Meredith .How can you get exactly what you want from TechRepublic? By becoming a member of SupportRepublic’s Virtual Advisory Board, you can share your opinions about the kinds of topics and features you need for career success in the IT support community. As a volunteer Virtual Advisory Board member, your responsibilities include:1. Advising TechRepublic editors on topics of interest to you2. Evaluating new features of TechRepublic.com3. Helping develop our community of IT professionals in addressing the concerns we all faceWe are currently accepting applications for a limited number of openings. If you’re interested, please apply now by sending us an e-mail . We’ll send you an application and more details about how our volunteer advisory board will work. This is your opportunity to play a pivotal role in making a better resource for IT career success.

Meredith Little has worn many hats under the broad term of freelance writer, including technical writer, documentation specialist, trainer, business analyst, photographer, and travel writer.