Project Management

Is billing by the hour unethical?

IT consultant Chip Camden replies to a member's inquiry about value-based fees. He says a little flexibility is the key to overcoming the disconnect between hourly and value-based billing.

 TechRepublic member Kent Skinner sent me a private email asking about value-based fees, a concept promoted by the famed consultant's consultant, Alan Weiss. Weiss believes that you should bill clients for the value you provide them, rather than the time you spend on their project. He summarizes the dichotomy on his blog:

If a client is best served by a problem being remediated quickly, or an innovation being implemented rapidly, or an improvement being installed momentarily, then why isn't the consultant charging for the velocity of the work rather than for the duration?

In other words, hourly billing is inherently unethical. The client's best interests are served by a quick resolution but the consultant's best interests are served by a lengthy encampment. That isn't what I'd call a "partnership."

This makes a lot of sense, in theory. I've always agreed with Earl Nightingale that the money you receive directly relates to the service you provide. Since "service" is in the eye of the recipient, "value" is a better word. No matter how you bill, the perceived value that you provide your client marks the limit of what you can charge them. Violate that equation, and you won't keep your client very long.

Weiss also highlights another side to the same coin: Billing by the hour is unfair to the industrious consultant, because it penalizes getting things done quickly. Hourly billing therefore acts as an incentive to do the wrong things for your client in order to avoid cheating yourself out of the money the client would gladly pay you for the value you provide.

But the dichotomy that Weiss paints between hourly and value-based billing is not always real. It presumes that the client says, "I need someone to do X," and that the consultant can then respond "I can do X for $Y." Some tasks are that simple, but many are not.

The smart consultant should know that the client can usually only vaguely define X, so one way to stick to fixed-price billing would be to change the question in your response. "You're asking for X. For $Y, I can help you analyze your need for X and define what X means, and then we can talk about what it will take to implement X." Or if you're really brave, you can include the implementation in your price and inflate it accordingly. Either way, you force the client to make a value determination before the client even knows what they're asking of you. An hourly rate, on the other hand, allows your client to incrementally discover what they want to achieve. In that case, your time really is valuable to them, because it represents the amount of attention you're giving to their question.

In order to place a fixed price on your work, you have to be able to demarcate discrete results. Ultimately, what you're being paid for are results, but results are often hard to quantify -- especially in advance. In research-based projects, the result your client wants is often an answer to the question, "Where do we go from here?" This question recurs so frequently that billing for the value of each time you answer it becomes impractical.

Placing a value on each result chunk also means that the scope of each chunk must remain unchanged -- or else it requires a reevaluation. In software development, clients need the freedom to redefine scope dynamically. Sure, for very small projects with well-defined scope you can get by with a fixed-price contract, but even then it often requires rescoping and either you have to renegotiate the price or someone gets cheated.

Rather than drawing a line between value-based and hourly billing, let's draw a distinction between types of value. Some engagements (but very few in my experience) follow the model of providing a specific, discrete service that has a well-defined result. Many more engagements fit the concept of the consultant as advisor or as an ongoing participant in the growth of the client. The results provided in the second category are numerous and sometimes difficult to pin down. Beside the stated goals, the results can include intangible side benefits such as mentoring the client's employees. Can anyone tell me how to quantify this value other than by the amount of attention provided by the consultant?

At the root, however, Weiss is right -- it must all come back down to value, or you won't succeed. So even if you bill hourly (which I almost always do), you must insure that you provide value to your client for each of those hours. Conversely, if you find that you're able to do the work so quickly that you're not getting your due, you don't have to abandon hourly billing -- just raise your rate.

I admit that hourly billing is far from perfect. You really shouldn't be paid the same amount for all activities -- designing a framework is far more valuable than tweaking the UI of a specific form, for instance -- but nobody ever said that you always have to charge the same rate. A little flexibility here and there can go a long way towards overcoming the disconnect between hours and value. Furthermore, you and your client should work together to apply your talents where they'll do the most good. If you're converting time into real value, then you can charge handsomely for it.

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About

Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant b...

43 comments
jdclyde
jdclyde

[i]"We are working really fast THIS TIME, so we are going to charge you more?"[/i] Keep in mind, many people are stuck the the backwards thinking about punching a clock instead of value that employees contribute to. The lower worker that stays over to finish the same amount of work is seen as working more and mistakenly thought of as a better employee. Hourly is a measure people understand. The only other option I see is charging by the job instead of the hour, something that can come back to bite the consultant hard if there are any unforeseen issues.

Sterling chip Camden
Sterling chip Camden

... I answered "No", "Yes", and "hourly" -- so I guess I've either overcome the dichotomy for myself or I'm operating under inconsistent assumptions. Which do you think is the case?

Lukas Kasha
Lukas Kasha

I spent a long time reading through each of the 118 posts that existed at the exact moment of my deciding to respond to this. If you read this post first, I can save you some time with a quick summary. Nevertheless, I learned a great deal about billing and different options or scenarios from reading through all of it, so I would still encourage doing that. The consensus (and I agree with it) is this: Hourly billing is not inherently unethical, but not universally appropriate in every circumstance. Any billing model can be gamed if the one doing the billing is themselves unethical. Use the billing model most appropriate for the situation. Most of the comments have to do with determining the correct billing model for a given situation.

thomas_w_bowman
thomas_w_bowman

I've worked with consultants that 'fill the hours' with 'work', and find that after a time I'm still there and they aren't. Perhaps that's because of 2 things: 1) I honestly strive to deliver maximum value for my time, including planning my work and documenting alternatives. 2) I document what I do daily in a Status Report that also includes my Priorities for next week - so the client realizes what I'm doing and what the value is Hourly billing is a metric that's imperfect, but if one strives to deliver and document value - they will have more extentions to their contract (often with different areas, promoted by management of past projects) - value is appreciated and becomes the essence of promoting me as a resource that is more desirable.

DesD
DesD

Excellent discussion here - from many quarters and much experience. My response is : why would I decide to limit my charging options by not agreeing to hourly billing? Example 1: Customer hired me on an hourly rate for a couple of months, to the end of the F.Y. using discretionary budget for contractors. He knew his funds could cover it without any more paperwork. Should I have said no? But then he has 2 more jobs for me to do, and needs to get them into the new FY budget. I warn him that my estimates will be high, because OS extensions can be a minefield. No problem, he says, I just want it done. Did I mention it was a large bank? So I billed off of my timesheets to the end of May, and then invoiced the other fixed price jobs as they were completed in the new F.Y. Because of the advance warning, they both came in well under my estimates. General happiness all round. Example 2: OEM has several million bucks of networked mini systems at risk because of software issues with the data rollup back to head office. Two of us were given a list of 24 problems, of which 11 must be fixed in 60 days, and a good hourly rate with no limits. Plus "if you mess up, don't call back". We worked 80 hour weeks, fixed 23 of the 24 issues (#24 was waiting on the client for testing on the last day), and had the best celebration lunch ever when it was done. No, I don't thing hourly rates are unethical.

Shellbot
Shellbot

Some jobs may lend them themselves to hourly billing, while other, maybe more long term job will lend itself to a set value. I charge daily rates, but I'm in a contract for 12 months..if it was a small job, lets say a couple weeks, you bet I'd be doing it by the hour.

josh.t.richards
josh.t.richards

The reason so many have such a hard time accepting value-based fees is because it's really about value-based positioning. That's all about being strategic. It's not just about providing fixed fee proposals nor about inflating fixed fee arrangements to all hell to cover every possible contingency. Remember, most IT consultants lack any particular strategy or positioning. They lack any concept of targeting specific types of clients (who are more likely to value what they do better) and building compelling prospect-focused messages. But getting strategic is a delicate subject. Not only does it take work and consist of part science and part art but it also means facing sore spots like how most independent IT professionals (and small business owners alike for that matter) live in constant fear. They do not know where their next sale is going to come from because they have no coherent marketing systems. This makes it hard to say "no" to _any_ business that comes along and concern that each prospect must be worked as hard as possible to say "yes". Which brings things often around to price. After all, if you've no strategy or positioning it's sort of hard to charge anything but middle-of-the-road fees because you have, inherently, accepted the default positioning of the marketplace: an inter-changeable commodity. (And don't give me all that hoopla about have more technical competence, experience or intelligence than your competition; your marketplace has no way of knowing that for sure unless you've got to tremendous strategic lengths to position yourself well in that regard). This leads to setting rates too low, promising too much without compensation, painful discounting, etc. Look, there are worse things in the world than not getting a gig because you are perceived as too expensive. It also doesn't always mean it wasn't a great proposal. Perhaps we did a poor job communicating our unique value. Perhaps the client wasn't serious. Maybe we weren't actually talking to an economic buyer but a gatekeeper or middle manager who can't actually sign checks. Etc. But maybe, just maybe, the project did not make sense in the context of the business objectives of the client. If we'd done things better at the start (making sure we were talking to an economic buyer and that we were talking about the engagement objectives, measures of success, and value strictly in business terms) we be better off. But that takes us back to facing underlying issues that many of us are afraid (or perceive ourselves as being too busy) too address. Well, there's only so much complaining one can do. You either settle for what you've got (and quit complaining) or not. Back to value-based fees specifically... Value may be in the eye of the beholder but the only beholder that matters, when it comes to making the buying decision, is the client. Now there is another one that matters too but it has to live with whatever the clients view of the value is: yours. What are your time, risk, opportunity cost, expertise, and unique experiences worth? If you spend a bit of effort determining how your particular engagement fits into the business objectives of your buyer you will get an idea of the value of the _outcome_. With that in mind you can come up with a proposal outlining a series of options (of varying levels of involvement on your part, risk, time lines, etc.) for the prospect to consider. You must make sure that the options fall within acceptable ranges for _you_ as well. Is it worthwhile to you to even do the project in the parameters defined? Not every project or client is for you. Or sometimes the real problem is that the project isn't worthwhile for _anyone_ (the client or you) to begin with. Good upfront discussions that center about client-perceived business value are the key to recognizing this early...as well as recognizing situations where your unique background brings a lot of added value to the table (which should be reflected in your fee). Of course if you're unable to come up with any reasonable options that fall within the range of value you understand the prospect to place on the outcome than there are only several paths: defer on accepting the engagement, get creative about other options (that might change the value), or tell the prospect what you are willing to do actually do it for along with your reasoning. Ultimately though the clients perception of value is reality. That doesn't mean you both have to agree on it. But it does mean you have just as much of a decision to make as your client: does this project make sense at this price? :) -jr -- Are You An IT Consultant? FREE Marketing & Professional Success Strategies... http://www.ITConsultingLessons.com

SilverBullet
SilverBullet

just like in the construction industry. Works fine for me and my customers like the principals too.

GSG
GSG

If your client asks for something concrete like, "Here are 20 identical PCs, I need them all built to this specification", then I think you should be able to come up with a flat fee fairly easily. If the customer puts another condition on it, such as "by tomorrow at noon", then the fee goes up. However, if the customer says, "I need you to write a program that does X, Y, and Z", but you find out later, that it needs to do X, Y and Z, but only when condition A exists, then your flat fee doesn't work. The way around this is a project charter and contract. In the first example, I'd write up an agreement stating that 20 pcs will be built based on the attached specifications for x amount of money, and everyone sign it. If the customer suddenly finds 5 more PCs, then they can be charged extra. Same with the 2nd example. Do a project charter and make it part of the contract and use a change form. Put in the contract that changes may be charged at a higher rate. It's not perfect, but it will protect both you and the client.

Oz_Media
Oz_Media

As with any trade i peform, you pay for teh first hour or par tthereof than every half hour after that. Of course that is unless I have quoted time and charges on a piece work basis, in which case I'll bill you a set amount and get the job done in a heartbeat.

jdclyde
jdclyde

it has been proven over and again, techs are notorious for under estimating the time it will take to perform a task, which is the most common reason I know of for project overrun. Of course, quoting by the job you would HAVE to add in an average buffer for the unforeseeable. Some fall short, some go over, it averages out.

PMPsicle
PMPsicle

My contracts are either long term 100%ers or very short little bit here, little bit there. However, I take a different attitude of charging largely by the hour -- especially with long contracts. The one long term contract I accepted with a daily rate I got badly burned on. By the time I finished the first month I already had close to 20 hours in overtime booked. Some of the other contractors threatened to quit over the number of "extra" hours. On the other hand I frequently do the short term work as fixed. With fixed rate someone always gets burned. Either I have to say - "No, you only paid for x and that's all you can have". Which ticks off my clients because they're expecting the extra for free. Or I give them extra and I'm burned. At least with the short stuff, I can estimate easier and limit the exposure. If I lose the occasional hour (or even day) because even if I took twice as long as I estimated then I've still only lost an hour. But if I'm working for 12 months and putting in an extra 5 hours a week because the client thinks I should be happy to have a job and they want to crash the project without paying the price, then I've got a 260 hour problem. I'd rather be fair to everyone. And that means hourly unless I'm selling a product. Glen Ford, PMP http://www.trainingnow.ca http://apps.learningcreators.com/blog

Sterling chip Camden
Sterling chip Camden

... but I charge by the hour because I don't give a full day at a time to most projects.

PMPsicle
PMPsicle

Good, well thought out reply Josh. Ultimately it comes down to three things ... the difficulty of determining your client's opinion of value, the difficulty of determining your opinion of cost and the issue of moving targets. It's all a matter of risk exposure ... how much do you stand to gain vs how much do you stand to lose. Fixed cost is a technique to transfer risk exposure. If the downward risk exposure is high then accepting that risk exposure is a bad business decision. However, ultimately the whole issue of fixed price and variable price (i.e. hourly) is a red herring. Pricing your work on value is just as applicable to hourly rate as it is to fixed price. The trick is to determine what your client feels is fair value and then price up to that. Or walk away if the value isn't higher than your costs (plus). If your client doesn't feel that your price is worth it -- they won't buy. If you aren't charging as much as the market will bear then you aren't maximizing your earnings. It's called price elasticity. And it affects hourly rates every bit as much as it does fixed bids. Glen Ford, PMP http://www.trainingnow.ca http://apps.learningcreators.com/blog

SilverBullet
SilverBullet

language for this must be in orginal order/contract.

PMPsicle
PMPsicle

Even my Inuit friend groaned at that one ... and she's been chased by a polar bear.

Deadly Ernest
Deadly Ernest

and a half or two, or an expansion. Of course, you may have missed the human meat requirement so the polar bear and the fact they prefer it much colder than it comes when first harvested. edit to add, please feel free to read it as "chillin' out, man." if you wish.

santeewelding
santeewelding

Missing comma. Unless you meant to leave it out. Then, I find myself still thinking about what you said.

Charles Bundy
Charles Bundy

I watch too much History channel. :) Polar and Grizzlies seem to like one another...

jdclyde
jdclyde

they taste like chicken.....

herlizness
herlizness

I think it IS hard to do with some clients; it really comes down to trust. If you can look a client in the eye and say, "look, I'm pretty sure based on your specs that this is going to take X weeks at 40 hrs/week ... but, I know that Mr. X sometimes likes to move things around in ways that cost quite a bit more time so how about if we cover that contingency just in case it occurs ..." then I think you're halfway home IF you have personal credibility. One of the things which helps to build the credibility is saying "I'm willing to eat the first 5 hours per week of overage" that was part of what I posted earlier. It not only sounds fair, it IS fair .. maybe even TOO fair. We have to keep in mind that there are no perfect contracts and no perfect prices .. these kinds of arrangements are just a way of avoiding getting slaughtered on a job but still providing some cost protection for the client. The other thing that adding in a contingent "over 45/week and you pay more" clause is help to make the client THINK about using your time; somebody has to go to the boss and say, "yes, we can move that demo at HQ up a week but we'll have to pay extra to do it." Either way, you win.

Sterling chip Camden
Sterling chip Camden

... but one I hadn't thought of before. I bet most consultants haven't. We tend to think of either hourly or fixed, not a combination. I wonder, though, about client acceptance. Seems like the reason why clients sometimes prefer fixed-price is to limit their costs -- by adding an 'hourly if beyond X' clause, that limitation no longer exists.

santeewelding
santeewelding

For your kind answer to my secondary concern.

herlizness
herlizness

> it's just a way of splitting the difference on risk. Suppose you make bid and assume a 40 hour week for 6 weeks; in the interest of making the client happy you allow slippage up to 45 hours per week ... but you want to cut your losses there. If the client says, "we need to get that interim release in front of the boss by X date," and that requires you to work 50 hours per week, what you're saying is that the additional 5 hours they have to pay for. It's really not a bad idea since some clients with a fixed bid contract seem to think they are entitled to use up all of your time indefinitely ... and whenever they want it. You could also stipulate that the bid is good so long as the work takes no longer than X days ... again allowing some leeway on either the short or long side. In fairness, the client might ask for a reduction in fee if the work somehow gets completed in a much shorter time than anticipated by the fixed bid ... but we know THAT never happens.

santeewelding
santeewelding

Your one sentence, that. I found myself (trying) to analyze it in order to divine your contractual habits, that I would retain you.

herlizness
herlizness

> There are limitless contractual options; one of them is a hybrid: "I'll do the job for $20k but that's predicated on my working not more than 45 hours per week; if more hours are required, my normal hourly rates will apply for that time"

Sterling chip Camden
Sterling chip Camden

In the end, it's the results that count. But as Glen said, it matters to the consultant what you're paid for those results. As he and others have said, hourly provides a common ground that is easy to comprehend (even if it can be fudged).

santeewelding
santeewelding

The one you can fudge only a little bit. The other; well, the other is what infuses the whole thing and gives it healthy color.

Shellbot
Shellbot

I've a 12 month full time contract though, so..I'm not too worried. If they decide they don't need me anymore, they'd have to pay out the cost of the contract. But if I didn't have that, yes, I would pick up other clients.. I know I'm pretty relaxed about these things, its just the way I am..something always turns up.. :)

Sterling chip Camden
Sterling chip Camden

You're right about that. Historically, the major bumps in the road for me have been when a client that represented a fairly large percentage of my business suddenly dropped off the radar. If they had been full-time I would have been wrecking my credit score, but since I've always maintained at least three or four at a time, it was just a small belt-tightening.

herlizness
herlizness

> good ... having one client is risky business as many employees have found out in the past year of course in the past year many have found that having multiple clients can also be risky ... getting out of bed is risky too

Shellbot
Shellbot

I'm not trying to save to buy a mansion or anything..doing ok so I prefer to keep it simple Not saying I'd turn down a few quick jobs..but I never go looking for them.

Sterling chip Camden
Sterling chip Camden

I used to work for one client full time, but I found that I could pull down more business by keeping everyone part-time.

Shellbot
Shellbot

I'm working only for them all day every day..so its not an issue. I would only take on extra work if I could do it evenings and weekends..and i like my time off too much to do that! I'm pretty rigid in my work time, if they don't pay overtime, i take time in lieu. Thankfully I've always managed to work for good people and its never been an issue. The plac eI'm now is good..they ok if you bill them for a full week even if your short a couple hours..and then just make that couple hours up the next week. Keeps the accounting easier on them :)

PMPsicle
PMPsicle

That was just my wife bouncing something off my head to tell me to go to bed so she can have the computer. :)

santeewelding
santeewelding

To, "elasticity", may I suggest, "protean", so as to imply going outside a given?