Hourly Charge As We Go. This means the contractor charges by the hour and the client pays as often as the contractor bills (typically biweekly or monthly). This form of compensation is the most common as far as Dr. Tak knows.
The positive side of this form of compensation is that the contractor makes money as the project progresses so his/her family will not starve. At the same time, the client does not need to have a huge chunk of cash available up front.
The down side of this arrangement is that it is open ended. A contractor who just wants to leech off a client can keep a project in zombie state and continuously charge for work that may or may not have been done. Unless the contractor is working on site (has tax and insurance implications, clients should check with tax and insurance experts first), it is difficult to verify whether the work is actually done. This is especially the case with design work.
Lump Sum Up Front. This arrangement requires that the contractor and the client agree on a fixed amount of compensation before the project starts. Then, the client pays the sum up front.
Obviously, this is a risky way to contract. What if the contractor cashes the check and takes off? Surely, the contract is a legal document and the client can legally hold the contractor accountable. Nonetheless, it is a lot work to track down people and bring them to court.
Some Now, Some Later. This arrangement is a modified version of ``Lump Sum Up Front''. The client pays a portion up front to the contractor. This may be required because materials, tools or equipment have to be purchased.
As the project reaches milestones previous agreed on and documented in the contract, the client pays the contractor according to the contract. Compared to the previous approach, this approach is safer. Although a contractor can still run off with the initial amount, the amount is at least smaller. This approach also gives the contractor more incentive to work harder so the project is done earlier.
With this approach, it is important to establish a schedule roadmap for the project before it begins. The milestones should be specified with quantifiable and qualifiable statements. It may be a good idea to leave some flexibilities in the contract to reevaluate the project at some point.
Our Success is Your Success. For clients with little cash, this is one option. This arrangement requires the contractor work on the project first. As the project completes and the client starts to make money from the product, a portion of the revenue goes to the contractor.
Let me tell you this, most consultant don't like this type of arrangement.
The reason is simple. There are many factors that determine whether a product will be successful or not, many of which is completely out of the control of the contractor. What if one of these external factors lead to poor sales of the product? The contractor does not make much money, then.
Combo. It makes sense to mix all these compensation plans in a contract. For example, a client with little cash can pay a lower hourly rate and agree on a royalty form of payment as the product sells. This may be enough to convince an otherwise unwilling contractor to work on a project.
It also makes sense to mix a lowered hourly charge with phased payment. This way, in case a phase unexpectedly takes longer, the contractor still gets compensated for the extra time. At the same time, since the phased payment is more significant than the hourly rate, the contractor still has enough motivation to try to get the project done as early as possible.