Why I Never Bill by the Hour

Posted on November 17, 2009, 8:22 AM, by Mark A. Richman, under consulting, value-based-fees.

If you’ve been reading my blog for any length of time, you know that I’m an advocate of Value-Based Fees. In a nutshell, here is the value proposition to the prospective client:

  1. There is a cap on your investment. You know exactly what is to be spent and there are no surprises.
  2. There is never a “meter running.” You do not have to worry each time my help is requested that I might be here for an hour, a day, or a week.
  3. It is unfair to you to place you in the position of making an investment decision every time you may need my help. Otherwise, you’re trying to determine the impossible: Is this an issue that justifies a $2,000 visit or a $500 phone call. No client should ever be in that position.
  4. Your people should feel free to use my assistance and to ask for my help without feeling they have to go to someone for budgetary approval. This only makes them more resistant to sharing their views, and at best delays the flow of important information.
  5. If I find additional work that was unanticipated but must be performed, I can do it without having to come to you for additional funds. In those instances, legitimate, additional work would otherwise be viewed as self-aggrandizing and an attempt to generate addition hours or days.
  6. If you find additional, related work that must be done, you can freely request it without worry about increased costs.
  7. The overall, set fee, in relation to the project outcomes to be delivered, is inevitably less of a proportional investment than hourly billing.
  8. If conditions change in your organization, you won’t be in the difficult situation of having to request that the project be completed in less time. The quality approach is assured, since the fee is set and paid.
  9. If I decide that additional resources are necessary, there is no cost to you and I can employ additional help as I see fit.
  10. This is the most uncomplicated way to work together. There will never be a debate about what is billable time (e.g., travel, report writing) or what should be done on site or off site.


  • Shawn Stratton

    But doesn’t this trap you in the inevitable feature creep that clients generally tend to do. Ie. you quote a project that should be fairly easy and with the new feature requests you now have 4 or 5 times the work. Where do you draw the line?

  • http://www.markrichman.com Mark A. Richman

    This is probably the most difficult question in applying Value-Based Fees to IT consulting. I do not yet have a perfect answer. According to Alan Weiss, who pioneered Value-Based Fees, the short answer would be “it doesn’t matter.” Presumably, since you are providing so much value to your client (versus hourly billing), and your fee is substantially higher as a result, that scope creep is acceptable, given that it is in alignment with the objectives, measures, and value conceptually agreed upon during your initial engagement with the client. (Holy run-on sentence, Batman!)

    That said, I think that is an evasive bullshit answer. For this reason, I’ve created Mark’s Forums, where hopefully we can explore these issues together, and create an online community of best-practices for concerns such as these.

    Would you mind registering and reposting this question on the forums? It’s the perfect starter thread for the community!

    Thank you very much!

  • http://www.davidwinch.co.uk David Winch

    Mark

    I don’t think Alan Weiss actually says ‘Scope Creep’ doesn’t matter.

    Given the starting point of a fixed-fee, fixed scope project, if anything comes up that’s within the scope, it gets done within the fee.

    However, Alan says in his book Value-Based Fees <>

    By definition, Scope Creep is outside the agreed scope, so those tasks can form a separate, separately chargeable project.

    The Client then faces, because you put it in front of them, the question of do we stop the current project to work on the new one, or do we do the new one when the current one is finished.

    You can’t be working on two projects for the same client at the same time.

    David

  • http://www.davidwinch.co.uk David Winch

    This comment editor deleted the quote from Alan’s book!

    #29 out of Seventy Ways to Raise Fees and/or Increase Profits Immediately says:-

    Respond to “Scope Creep” with “I’ll send you a new proposal”

  • http://www.markrichman.com Mark A. Richman
  • http://www.novitechsolutions.com Johnny

    Thanks a lot for sharing this information has really proven to be helpful. I really enjoy reading easy articles leading straight to the point.

  • Pingback: Why I Always Bill By The Hour | Brent Ozar - Too Much Information

  • http://mnoack.com/ Michael Liberty

    Agreed. I also think that the big argument against fixed billing is “flexibility” and how people relate that to Agile programming, but there's no reason why you can't negotiate fixed extra costs for new features of changes to existing requests that will take more time.

  • http://mnoack.com/ Michael Liberty

    I agree and the point I always hear against fixed billing is it isn't flexible.

    I think it is, you can easily negotiate reduced/increased costs for the client if they are adding/changing features.

  • 12ewfgdb

    This is software. It's not like renovating a bathroom where only labor is involved (choose a different tile, pay for the costlier tile, but the labor cost is the same). As long as the client is so so so sure of what he/she wants, the fixed price is a great way to go. But in software, things change (understandably so). If the client want's a change today and another 2 days later that completely contradicts the change requested, what are you going to do? Tell yourself, oh heck, now I have to start all over again, or, I know you're a small business, and you didn't know exactly what you wanted, so you know, I really need to charge hourly to make this work for both you and me.

  • mrichman

    Why would you do business with a client who doesn't know what they want? It's okay for them to change their mind, but your response should be a new proposal, not an hourly rate.

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