Payment Plans for Contractors and Consultants

Last Updated Aug 19, 2009 1:43 PM EDT

Now that you've found a contractor you want to work with, you need to figure out how best to compensate that person: Hourly rate or commission? Per-project fee or monthly retainer? "It all depends on the type of project," says Raquel Garcia, founder of Silicon Valley Human Resources. And, of course, your resources. Here are four ways to structure that relationship:

The Hourly Rate

Best for: Ongoing projects with an inconsistent work flow and a flexible budget.

Example: Company XYZ contracts with a Web developer to maintain its Web site. This typically requires just a few hours each month, but if a problem arises, it can require considerably more time.

The logic: Flexibility is the main benefit of an hourly rate. If a project is finished earlier than expected, you aren’t stuck with a monthly bill that’s out of whack with the amount of work performed. On the other hand, if a project suddenly requires extra attention, you can pay out more to match the workload.

The main drawback: You take on some risk with this method because it gives contractors an incentive to overestimate the amount of time they’re spending on a particular project. So pay by the hour only if you really trust your contractors, or if you have a way to closely monitor the project’s progress.

The Per-Project Fee

Best for: Standalone projects that may require revisions or follow-up.

Example: Company ABC wants to hire a contractor to redo its employee handbook. The managers in charge, however, don’t want to pay by the hour because they aren’t sure how long it will take.

The logic: Tasks such as this typically require lots of back-and-forth between the contractor and management. Using an hourly rate can dissuade supervisors from suggesting necessary changes. In this case, a per-project pay structure makes more sense because it lets both sides focus entirely on the work at hand. You might end up spending more per hour depending on how quickly the contractor does the work, but it eliminates the unknown.

The Commission-Based Structure

Best for: Short-term positions where success is based on quantitative measures.

Example: A summer sales representative is joining Company X, and management wants this person to generate as many leads as possible in three months.

The logic: In an area like sales, few things are more important than converting calls into customers, so aligning the contractor’s financial incentives with specific requirements makes perfect sense. Even more important, providing a sales rep with a static compensation structure gives him or her less incentive to go beyond the minimum requirements.That said, an experienced salesperson could require a nominal base pay, which you should certainly consider.

The Monthly Retainer

Best for: Ongoing projects with vaguely defined objectives.

Example: Company Q is preparing to release a new product, so it pays a PR contractor a monthly retainer so management has someone it can call on as it looks to generate buzz.

The logic: In certain situations, managers know that they will need a contractor to help them reach a specific goal, but the task is subject to outside forces (like the press or competitors) and carries an uncertain timeline (like the time it takes to generate buzz for a product). The solution is to pay a contractor a retainer, Garcia says. The drawback: You’re at the mercy of the contractor to tell you what amount of work he or she can complete within a given month, so make sure your contractor comes highly recommended.