Fixed fee changes the revenue formula—not the need for time
A fixed-fee client pays an agreed amount for defined deliverables or outcomes. The invoice does not increase simply because delivery takes longer. Internal time is therefore the evidence required to calculate the effective rate, forecast cost, and margin of the engagement.
Recording only the hours that fit the original budget produces a reassuring report and a bad business. The firm loses the actual effort needed to price similar work, identify rework, defend a change request, and understand whether the delivery model is repeatable.
Calculate current and forecast fixed-fee margin
For an operating forecast, start with the contracted fee expected to be earned, subtract forecast loaded labor cost and forecast non-labor delivery cost, then divide forecast profit by the fee. Calculate effective hourly rate by dividing the fee by forecast total hours. Keep accounting revenue recognition separate unless the same policy and cutoff are being applied.
- Forecast total hours = actual approved hours + forecast remaining hours
- Forecast labor cost = actual labor cost + forecast remaining hours by role × loaded cost rate
- Forecast project profit = fixed fee − forecast labor cost − forecast non-labor cost
- Forecast margin = forecast project profit ÷ fixed fee × 100
- Effective hourly rate = fixed fee ÷ forecast total hours
Separate the four causes of an overrun
An hour variance does not explain itself. The original estimate may have been too low, the customer may have requested work outside scope, delivery may have created avoidable rework, or the planned role mix may have changed. Add a reason and owner to material variances so management addresses the cause instead of blaming the timesheet.
Underestimation should improve the estimating model. Scope change should trigger a commercial conversation. Rework needs a quality or delivery correction. A role-mix variance may need reassignment, coaching, or a different price. Combining them into ‘over budget’ removes the management value of the data.
Use checkpoints before the budget is exhausted
Review the engagement when it consumes a defined share of budgeted hours or margin—not only at completion. The checkpoint should compare completed deliverables, hours consumed, remaining work, pending client decisions, and unpriced changes. A project at 70 percent of hours with only half the work complete needs a decision now.
Use thresholds as prompts, not automatic judgments. A senior specialist can consume budget quickly and still reduce total effort; a junior-heavy phase may spend more hours at a lower cost. Hours, cost, completion, and forecast belong in the same review.
Create a clean change-control trail
Record the original scope and assumptions, client request, delivery impact, estimated additional effort, decision, and approved commercial change. Keep pending changes separate from authorized budget. If the firm chooses to absorb the work, retain that decision so the margin result is not mistaken for delivery inefficiency.
Time detail should be useful enough to support the conversation without requiring consultants to write essays. A project, phase or task, date, hours, and short work note can show how repeated ‘small’ requests accumulated into material effort.
Turn completed projects into a pricing library
After close, compare estimated and actual hours by deliverable, role, and revision cycle. Record the final effective rate, margin, scope changes, and the estimate assumptions that failed. Group similar projects so estimators can use evidence instead of one memorable engagement.
The goal is not to eliminate all variance. It is to recognize which work is predictable, where contingency belongs, which clients create recurring delivery friction, and when fixed fee is the wrong commercial model.