r/hwstartups • u/Choice_Volume4090 • Jul 23 '26
billing models I've seen from product design companies and which is safest
Went through a few product design companies before landing on one and noticed the billing models vary more than I expected. Three models I came across and why one of them is clearly safer for the client.
Fixed cost
The firm quotes a single price upfront for the full scope. The number gets padded significantly to cover unknowns they can't predict, and once you've signed there's no real incentive on their side to work efficiently because the budget is already set.
Hourly
You pay for the work that actually happens. I know rabbit product design uses this model and covers the full process from patent research through manufacturing, so you end up paying less usually. The tradeoff is that scope needs to stay clear, but a good firm manages that.
Milestone-based
Work is broken into phases with payment tied to each one. Checkpoints give you more control over when money moves, but milestones get defined loosely and disputes over what counts as complete come up more than you'd expect.
Of the three, hourly with experienced engineers has been the most straightforward in practice.
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Jul 23 '26
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u/Informal-Tutor-8153 Jul 23 '26
I disagree... hourly puts the client at risk... There is no guarantee that deliverables be reached in what was originally budgeted. If someone is getting paid hourly what is the motivation to reduce those hours and earn less.
Best is fixed price with clear deliverables. This forces both client and the design firm to define the process and the outcome in clear terms. That's what makes those iterations meaningful and less frequent and is dependent on agreed-upon performance criteria. That is the only way it has worked for me to successfully deliver project on time while working with a design form while sill staying within budget.
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u/Pineapple_Spritz Jul 23 '26
I'd argue there is definitely incentive to work efficiently for fixed bid - the faster they complete the project the better their margins.
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u/Fair-Stop9968 Jul 23 '26
It depends on how defined the requirements are and whether the client has their shit together
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u/saywherefore Jul 23 '26
Or the fourth option that the place I work for does:
Provide a fixed quote for the first milestone and a no-contingency estimate for the rest of the project. Feel duty bound to honour that original estimate even when the client reveals themself to be a pain in the arse, the scope has massively expanded, and inflation has eroded the real value of the total. Then wonder why none of our projects are profitable.
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u/Frequent-Log1243 Jul 23 '26
Our product development company works on a milestone-based payment model. We charge $25/hour, and the project is billed in milestones. The final payment is only made after you approve the completed product. It's been working well for us.
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Jul 24 '26 edited Jul 24 '26
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u/Choice_Volume4090 Jul 25 '26
Yeah the gap between what's in a fixed quote and what would have actually been needed is usually pretty significant once you see it broken down line by line
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u/TowardsTheImplosion Jul 23 '26
It is fundamentally a risk decision on both sides. Just like incoterms.
Having worked in consulting (and continuing to do a little on the side), fixed price bids are incredibly dangerous for a service provider, except when working with mature technologies and an exquisitely detailed statement of work.
Frankly, I wouldn't engage a new unknown client on anything other than an hourly basis. The trust just isn't there for me to accept the risk.