Yes, the risk is one of the main pitfalls I was alluding to, and the best way I know of it mitigate that are the 2 I mentioned - per-phase and having some hourly rate in there too. A renegotiate-with-zero-consequences provision is unrealistic - that's too lopsided in your favor - but some provision to reassess if things are just completely out of whack is reasonable. But yes, there is always risk in this model, so it pays to start conservative and to really get good at it. But to some degree you
want that risk, as the risk and reward are related to each other of course - if it's uncomfortably risky, then maybe a more stable 9-5 salaried job is a better route.
As an example of what mixed billing might look like, you might scope out the work for a basic website and then your proposal would boil down to $20k for the initial phase of the site, and that includes 5 hr of customizations not covered in the requirements doc, and then $200/hr for additional customization beyond that, and then already have a rough breakdown of what will be included in phases 2 and 3. The 5 hours you've built in to the bid is your way of recognizing that no requirements doc is going to be 100% comprehensive (nor is your client going to know with 100% certainty up front exactly how they want everything). The hourly rate beyond that shows that you're willing to let some stuff be added, so they don't have to totally stress about getting the requirements doc 100% right. And then the rough sketches of future phases helps prevent you from getting stuck in just hourly mode for everything after the first phase - if they start asking for a really big chunk of work you can say, "yes, we can definitely do that, but that's a big enough chunk of work that it'll really delay the initial launch of the site - let's talk about putting that in phase 2".
One huge advantage of milestone- or phase-based billing (assuming you do it right) is that you are rewarded for efficiency and optimization - improving your skills, creating reusable libraries/templates, finding trusted people you can outsource un-fun work to, etc. - because you are billing on value provided, so over time you hopefully reduce your costs while the value you provide stays the same or increases. If you are always billing at an hourly rate, you have limited incentive to improve in those ways because you end up passing all of those gains on to your client.
> I don't even understand why they involve HR since it's none of their business. After all, you are a professional service provider. How would you counter?
Exactly right, and I think you counter by essentially saying that (in a nice way). But really you want to make the conversation about value you're providing and that if you really get down to the nitty gritty, it's a good deal for them. Don't forget that they aren't paying employment taxes for you, or paying you benefits like medical and paid vacation - those are big numbers. Also, part of the appeal of a contractor/consultant is that it doesn't have to be a long-term commitment, and they don't have to invest in finding or creating the skills you bring to the table. All of these really matter, so it's ok to make them part of the discussion. There are more subtle things too - in talking with them, you can usually get a sense for the level of dysfunction in their org and, if it's not so much that you want nothing to do with them, you can really play up things like your ability to deliver quickly.
There are some cases where you have to stand firm and be willing to walk away. If it's a client you really want to land long-term, then occasionally you might decide to do a smaller introductory project at a lower rate with them as a way to build the relationship and prove out your services, with a clear understanding that this is a good-faith concession you're making and not a permanent reduction of your rates. And then in that intro project you do your best to absolutely kill it and be a great person to work with such that when it is done, they are more convinced than ever that they want to keep working with you and that your services are worth it.