Semi-fixed-price contract - look IR35 safe?

[ashleymoran]

Hi

This is a follow-up to my last post about IT teleworking to Germany. I've suggested to the guy interesting in my time that we work in this sort of basis:

He identifies a piece of work that needs doing. Something that could be completed in a relatively short time, say 20-80 hours. We could break it down to check that this is reasonable.

When we are both in agreement that whatever he wants doing is worth paying for the time we estimate it will take to develop, we agree a standard cost for the project assuming it goes to plan. To keep the maths simple, say £50/hr x 20hrs, or £1000.

This could end one of two ways, either it takes me more or less time to develop than expected. So, I was thinking:

• if it takes LESS time, gets a discount of 80% off the extra hours he booked me for that I didn't need to complete the work
• if it takes MORE time than expected, I work at 40% rate to complete it

Three examples, based on an estimated 20 hour project:

• it only takes 15 hours: he pays 15x£50 + 20%x5x£50 = £800
• it takes exactly 20 hours: he pays the standard fee of £1000
• it takes 25 hours: he pays 20x£50 + 40%x5x£50 = £1100

Here is my thinking: he needs an indication of the cost in order to decide whether the feature is worth having (and if I am worth paying to do it). I want to give him an accurate estimate, because obviously my reputation is at stake.

If the project under-runs, then something he considered quite valuable turned out to be either quite simple, or I was good at my job (in which case I deserve a better hourly rate). If it over-runs, then something turned out to be harder than expected, or I was bad at my job (in which case I didn't deserve my hourly rate). After each 20-or-so-hour sub-project, we can identify the reason for the over/under-run and factor that in to future estimates. He can then decide if I am worth taking on for more work.

First thing I'm concerned with, is does this look IR35 safe? It is half-way between an hourly rate and a fixed price contract. Bear in mind that I will be working from home, with my own equipment, at times when it suits me.

Second, has anyone got any thoughts about this as a basis for doing freelance work?

[maverick]

Why don't you estimate the work allowing 20% contingency and let him decide if he can afford it. Depends on how good/realistic at estimating you are. If you do it quicker then it means you can move onto something else (profit). If it takes longer then your estimates were wrong and you have to live with getting paid the same amount for more work.

[ashleymoran]

Why don't you estimate the work allowing 20% contingency and let him decide if he can afford it. Depends on how good/realistic at estimating you are. If you do it quicker then it means you can move onto something else (profit). If it takes longer then your estimates were wrong and you have to live with getting paid the same amount for more work.

Well, if I do it quicker, that's likely to be for two reasons, partly because I worked better than usual, and partly because the work was easier than I expected. If he still has to pay the full rate, he may think I manipulated the contract to get an unreasonably high fee. I would prefer to collect less on that piece of work (although, at a slightly higher rate), and re-negotiate a higher standard fee later, if he is happy.

With a contingency, it's in my interest to over-run by 20% every time. On the above scheme, it's in my interest to finish faster (because it puts my effective rate up slightly if I finish early, and reduces work at a discounted rate if I am late) and move on to another project.

If we get to a situation where 50% of work runs over and 50% runs under (with a reasonable standard deviation), we will know that the estimating is reasonable, and that neither of us is taking advantage.

Essentially, I'm trying to make a contract that encourages both parties to be reasonable.

But the key is... is it IR35 clean?

[XLMonkey]

IANAL etc, but it does not look like it would be deemed within IR35. Of the three principal tests you are clearly outside two...
1. Mutuality of obligation - presumably he is under no obligation to pay you if there is no work to do.
2. Direction & Control - you are clearly not being told how to do the work (since you are using your own equipment, producing an estimate in advance and taking responsibility for delivery within your estimate)

on the third (Right of Substitution), you don't mention whether you could have someone else do the work, but I don't think that this is particularly material given all the other indicators against a deemed employment status.

as regards whether its a suitable basis for freelance work - it is fine, provided that you can earn enough money from this structure. The commercial risk you are taking is around whether your client will have sufficient work to deliver a consistent income, and/or whether you are able to find alternative clients to fill in the gaps.

[TheFaQQer]

But the key is... is it IR35 clean?

1 - MOO: Fine
2 - D&C: Fine
3 - RoS: Not mentioned, but should be fine if you get it in the contract.

I wouldn't offer to do it at a reduced rate for delivering early - that's the nature of the beast.

If you have a detailed requirements spec, and can estimate it, then do it fixed price. Make sure that if the scope changes, that there is a change control process to ensure that you don't get fleeced for doing more work than you thought it would be when you did the bid.

If it takes less time, then that's because you were good at it. If it takes more time, it's because you didn't get the estimates right. At least that way the client knows exactly what he will pay, and unless they change the scoipe of deliverable, that isn't going to change.

Oracle used to have a way of pricing the contract as "time and materials with a cap" - i.e. we'll charge a daily rate, but up to a limit. One thing that was always emphasized was that this was a really BAD way to sell the work - if I'm good, I'll do it cheaper; if not then I'll still do it cheaper. It only works if you are on time exactly.

HTH

[VectraMan]

I've done fixed price stuff before, and I understood it was pretty much a magic bullet for IR35 because it's clear you're taking a risk. I liked working that way as it means you're rewarded for working harder (unlike contracting where you're effectively punished for working harder).

I don't think the same would apply here as you're still being paid per hour; you're just doing it with a variable rate. If you screw it up and it takes longer than you planned, the client still has to pay for your mistakes.

I understand what you're saying about being reasonable and not wanting to look like you're taking advantage. But if the client agrees a price and you can deliver early, chances are they'll be pleased. They've no idea whether you've worked 16 hour days, 7 days a week, or if you've done the whole thing in a couple of hours on a wet Thursday afternoon inbetween reading carp on CUK. It's not really any of their concern.

I would try for proper fixed price working, and accept that you might screw up the scheduling from time to time. If one project turns out to be easier than expected, you could always offer them a discount on the next one.

[ashleymoran]

I don't think the same would apply here as you're still being paid per hour; you're just doing it with a variable rate. If you screw it up and it takes longer than you planned, the client still has to pay for your mistakes.

This is a valid point. I was also thinking of capping it at 100% over-run, which means the upper end of the fixed-price scale is a fixed percentage above the estimated cost. So hopefully this will be looked upon as being outside IR35. You could equally well phrase it that the fixed price is 1.4 x Rate x Time, and that anything less than 100% late is a bonus. For some software companies that is true anyway

Of course there are other positive things about the contract as XLMonkey and TheFaQQer pointed out, eg no MOO, little DAC (obviously he has to identify features that need building, but I will have input and will determine how to do the work). However, there will be no ROS, because I cannot reasonably provide a substitute, and he would not accept one.

My intention was to make the hourly rate primarily a basis to determine the business validity of any work he requests, and to fairly assess my value as a development service, rather than to be a guarantee of my income.

[ashleymoran]

1 - MOO: Fine
2 - D&C: Fine
3 - RoS: Not mentioned, but should be fine if you get it in the contract.

I wouldn't offer to do it at a reduced rate for delivering early - that's the nature of the beast.

Actually, I will be offering to do it at an increased rate if I finish early - just a lower total cost. It would work to my benefit if I could finish early and get more work. He should still be pleased if he thought his other developers would have taken the estimated time or longer to complete the same job.

If you have a detailed requirements spec, and can estimate it, then do it fixed price. Make sure that if the scope changes, that there is a change control process to ensure that you don't get fleeced for doing more work than you thought it would be when you did the bid.

I would make sure the scope was fixed, and that at any variation in it would void the original estimate. Not sure exactly what these terms should be yet... I don't intend to quote for anything that is longer than 2, maybe 3 weeks full time work, so a fixed scope on that time scale should not be an issue.

In my experience, people understand when "time is up" but not when "work is done". To some managers, the former translates to "My Fantastic Idea Should Be Built By Now!" but the latter translates to "WHY IS IT IN GREEN AND NOT BLUE, AND WHERE ARE ALL THE FEATURES YOU SHOULD HAVE KNOWN I WANTED? .".

If it takes less time, then that's because you were good at it. If it takes more time, it's because you didn't get the estimates right. At least that way the client knows exactly what he will pay, and unless they change the scoipe of deliverable, that isn't going to change.

Well, there are two possible reasons for an under-run, and in practice it is likely to be a combination of both our mis-estimation and my good/bad performance. Hence my attempt to distribute the blame (assuming that over-runs are slightly more my fail than under-runs are my win).

Oracle used to have a way of pricing the contract as "time and materials with a cap" - i.e. we'll charge a daily rate, but up to a limit. One thing that was always emphasized was that this was a really BAD way to sell the work - if I'm good, I'll do it cheaper; if not then I'll still do it cheaper. It only works if you are on time exactly.

Hmm interesting comparison. I assume the best strategy for the staff was to finish early but then drag the conclusion out so they could bill for the maximum cost.