16 September 20258 min read
You asked three providers for a price on the same piece of work and got back three documents that cannot be laid side by side. One quotes a day rate. One quotes a monthly figure per person. One quotes a single number for the whole project with a payment schedule attached. Every one of them is a defensible way to sell the work, and none of them tells you what you want to know, which is what this will cost you by the time it is finished.
A quote is a compressed description of a commercial model. Decompressing it is a mechanical exercise, and it is worth doing properly once, because the habits you build here apply to every quote you read afterwards.
Start with the unit, not the number
The first thing to establish is what is being sold. There are four common units and they carry completely different risk.
- A day or hourly rate per person: you buy time. Scope risk sits with you.
- A monthly rate per person: you buy a commitment to a person's availability. Scope risk still sits with you, but so does a minimum term.
- A fixed price for a defined scope: you buy an outcome. Scope risk sits with the provider, which is why the price includes a buffer you cannot see.
- A capped time-and-materials arrangement: time billed as used, with a ceiling. A hybrid, and often the honest one.
None of these is inherently better. What matters is that the unit matches the work. Work whose requirements are still moving is badly served by a fixed price, because every change becomes a negotiation and the provider is now financially motivated to interpret your requests narrowly. Work that can be specified fully in advance is badly served by a day rate, because you carry the risk of an estimate you cannot verify.
What a day actually means
A day rate is a price for a unit that nobody defines in the quote. Before you compare two of them, establish what a day contains at each provider: how many working hours, whether that is contracted or nominal, how many of those hours overlap with your own working day, and what happens to the rate for work outside them.
Then establish how many days there are. Public holidays in the provider's country, annual leave, sick leave and training days are all days you either pay for or do not, and providers differ. A rate that looks lower can quietly be a rate you pay on more days than the alternative, and the annual figure inverts.
The number you want, from every quote, is cost per productive day of your work. Everything else is a step towards it.
Blended rates and what they conceal
A blended rate is a single price charged for every person on the engagement regardless of seniority. It is offered because it is simple to administer and simple to compare, and both of those are true. What it also does is hide the seniority mix, which is the single largest driver of whether the work goes well.
The arithmetic runs one way. If the blend is priced on an assumed mix of senior and junior people, the provider improves its margin by shifting the mix towards junior without changing the price. There is nothing dishonest about a blended rate, but there is something asymmetric about it: the provider knows the mix and you do not.
If you accept a blended rate, make the mix contractual rather than assumed. Name the seniority levels, name how many of each, and agree what happens commercially if the mix changes. A provider that will not commit to a mix is telling you something about how it intends to staff the work.
A blended rate is a price for an average. Ask what the average is made of, because you are not going to receive an average, you are going to receive specific people.
The lines that are deliberately not on the bottom line
Every quote has a boundary, and the interesting part of a quote is where the boundary sits. These are the items that most commonly fall outside it, in roughly the order they surprise people.
- Onboarding and ramp: the days at the start that you pay for and get little from, and whether any of them are discounted.
- Project management and coordination: sometimes bundled, sometimes a separate line, sometimes assumed to be your job.
- Quality assurance and code review: whether there is a QA layer at all, or whether acceptance testing is entirely yours.
- Tooling and licences: seats in your systems, and any of the provider's tools passed through at cost.
- Change requests: the mechanism, the notice period, and how a change is priced once work is underway.
- Replacement and continuity: what you pay when a person leaves the engagement and someone new has to ramp.
- Notice and minimum term: how much you owe if you stop early, which is a real cost even though it appears nowhere in the rate.
- Banking, currency and taxes: transfer charges, which currency the invoice is denominated in, and whether VAT or withholding applies to you.
Not one of these is a trap. They are ordinary commercial terms, and a provider is entitled to price them separately. The failure is on the buying side, where the number at the bottom of page one is treated as the cost of the engagement.
Fixed price, and the change request economy
A fixed price transfers estimation risk to the provider, and the provider prices that risk. You are paying a premium for certainty, which can be entirely worth it, particularly when the work is well understood and you need to commit a budget in advance.
The thing to understand is what happens after signature. From that point the provider's margin improves whenever scope is interpreted narrowly and worsens whenever it is interpreted generously. This is not cynicism, it is arithmetic, and it operates whether or not anyone intends it. So the quality of a fixed-price engagement is almost entirely determined by the quality of the specification and the clarity of the definition of done.
Before accepting a fixed price, read the change request clause the way you would read the exit clause of a lease. How is a change requested, who estimates it, on what basis is that estimate priced, and how quickly must you approve it before the schedule slips. If that clause is vague, the fixed price is not fixed, it is an opening position.
Turn the quote into an annual number
Whatever the unit, convert every quote into the same shape before deciding: total cost over a defined horizon, for a defined amount of work. Twelve months is usually the right horizon because it captures leave, holidays, at least one likely staffing change and any annual rate escalation clause.
Include the items from the list above that apply to you, and include your own side: the management time your people will spend, and the ramp period before anything useful comes out. That gives you a total cost of ownership rather than a unit price, which is the only figure that can be compared against the fully loaded cost of doing the work in-house.
Do this and the ranking of the three quotes changes more often than not. That is the point of doing it.
What a good quote looks like
A good quote is not the cheapest one and it is rarely the shortest. It names the people or at least the seniority levels, states what a billable day contains, separates what is included from what is billed on top, and describes the mechanism for changing scope. It has a notice period that a reasonable person would accept in both directions.
Most importantly, it is a document you can hand to your finance function without a translation layer. If you find yourself explaining what the provider probably means, that is not a communication problem, it is the quote doing its job for the other side.