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A Modest Proposal for Hourly Billing

Many of you that follow my blog might also follow the work of my internet buddy, Jonathan Stark. If you don’t, you can find him, among other places, here, at an internet property called “hourly billing is nuts.”

I agree with Jonathan on this premise. I run a content agency and I’ve never once though to myself, “sweet, you’re a slow writer; I’d totally pay more for that.”  All parts of our service delivery and subcontracting are based either on totally flat rates or flat rates per scope.

Of course, my use for hourly billing, either as a provider or a consumer, expired before my Hit Subscribe days. I can’t actually remember the last time I did anything other than flat-price or value-price a consulting engagement.

Doing so would have worked against my own interest.  It’d have required me to earn less and less money as I became more and more efficient at codebase assessments.  Instead, I quoted flat prices based on the value of the program/company at stake around the codebase, and each gig became increasingly profitable.

But that’s all about to change.

You see, I’m going back to hourly billing.

And my hourly rate starts at either $250 or double your hourly rate — whichever is more.

Announcing Erik’s Hourly Laborer Management Service, Starting at $250 Per Hour

Alright, I know you’re probably a little skeptical at this point, and that’s fair. Have I just completely reversed my long standing dislike of the hourly billing model?

Well, no.  You see this hourly service I’m offering has a very, very particular use case.  It only applies when I hire you to do hourly work for me and you quote me a rate of at least $100 hour, for a predictable deliverable.

In other words, if you want to do something like prepare tax returns for me at an hourly rate, I’ll pay your rate. But I’ll only do so if you also become my management consulting client and pay my rate for the time I spend managing your labor.

Here’s exactly how it works.

The Gist

Let’s say that you offer professional services for $100 per hour. I want to hire someone to go through DaedTech and look for any outdated mentions of my hourly rate, thus making it current.

You answer this RFP, but, you say, “how can I possibly know how many mentions we’re talking here? And my time is money — specifically, $100 per hour.”

Fair enough.  You’re hired.  But with one condition.

You can start work as soon as you become my client as well, signing my client agreement to pay me $250 per hour for the time I spend managing your labor in my service.

“But wait,” you protest, “that’s not FAIR!  I really — ”

“Ah, ah, ah, I’d hold it right there if I were you” I’d reply, “since you’re already about $1 in the hole for making me listen to your complaining.  I’d just get crackin’.”

Invoicing Mechanics

Hopefully for your sake, you’d get to work.  When all was said and done, you’d send me an invoice, tabulating the number of hours you’d spent reading through my site.  The less efficiently you perform this task, the more money you earn for it.

Then, at this point, I’d start the clock, and sit down to review your invoice.

And every time I had to call you and ask “wait, you really mean to tell me it took you 2 hours to read a blog post” or “why didn’t you just do a site search for ‘hourly rate’ instead of reading posts in the first place.” I’d keep that clock running while we discussed your inefficient performance.

Now, I realize that your hourly clock is still running during these calls.  But so is mine, and mine is running at least twice as hard as yours.

B-B-But….!

Okay, okay, I can imagine some objections at this point. Let me just get out in front of those with a bit of a FAQ here.

1. That’s ridiculous, Erik. How do I know you won’t just sandbag your management hours until my labor is free!?

Hmm… perhaps you see the irony of asking me this after sending me a proposal where you freely admit that the less efficiently you work, the more I pay you.

But, alright, I’ll bite.

I will, and this I promise, do my best to review and manage your time efficiently. And, if for some reason my time goes soaring over any estimates I give you, you have my personal, earnest, heartfelt guarantee that I am totally and completely sorry about that.

(But I still logged the hours, so I’m still going to need you to pay me, even if you wind up paying me more than I pay you.)

2. This is patently insulting. I’m a PROFESSIONAL and you’re suggesting that I need to be managed!

I’d actually argue that YOU are suggesting that you need to be managed. I’m just innocently charging you for my own highly valuable hours spent managing you.

How can you possibly argue that you don’t need to be managed? Your product — the very thing that you sell — is whatever the hell you happen to feel like doing for an hour. The only vehicle for quality assurance I have on an hour of your time is spending my own time auditing how you spent your hour.

3. Even if I accept your ludicrous premise, where do you get off charging twice what I charge!?

Well, technically, at least twice what you charge. But I digress.

I just can’t go any lower than $250 per hour because that’s what my hours are worth, except when they’re worth more because they’re worth exactly twice what yours are worth.

Look, I don’t make the rules.

Talk to the hourly rate fairy who places these rates lovingly under our pillows. She’s a real stickler.

But, anyway, I’d say it’s pretty simple and has tons of commercial precedent.

You’re a laborer, and I’m your manager.  What manager doesn’t make a bunch more than the individual contributors they manage?

4. I’m not a laborer — I’m an EXPERT!

Right. Such an expert that you can’t possibly begin to guess what your cost will be to deliver the service in which you claim expertise.

So you’ve gone through hundreds of websites, making sure any mentions of an hourly rate on those websites are consistent. This makes you an expert in your craft.

But you can’t even begin to reason about your cost for such a thing or the price you’ll charge me?  Your only option is to bonk your rook on the clock, stick out your tongue in concentration, and start executing miscellaneous tasks until you happen to stumble across the finish line?

Mmm… that sounds a lot more like mindless labor than expertise.

And it’s so non-strategic on its face that someone needs to manage it. I could probably train Alexa to manage it, but for now I’ll just have to do it. And time is money, as they say, with mine starting at $250 per hour.

5. You’re out of your mind!  Nobody will ever work this way for you!

Nobody who bills by the hour for predictable deliverables, anyway, which is actually kinda my goal.

My Breaking Point: The Motivation for My New Hourly Rate

Alright, that was fun, but now I’ll break character.

Oh, don’t get me wrong — I actually am serious about this. I’m through paying hourly for predictable-deliverable, high-end professional services. And I’m declaring a moratorium on Hit Subscribe or any business interest I have engaging with such partners.

I tweeted my frustration recently:

Want to know drove me to the breaking point?  Well, a couple of things.

The Case of the “But I Did The Work” Expert

First, I asked Hit Subscribe’s now-former attorney for an estimate of the cost to review and amend a proposed client agreement, which I attached for his reference. He didn’t respond, and I had to move quickly, so I marked it up myself.

A week later he sent me the marked up contract I hadn’t actually asked for and couldn’t use. But he still invoiced me for it, “because, well, I did the work.”

Does that sound like a professional?

Or does it sound like a teenager whining that Dairy Queen should pay him for coming in at 1 by accident, when his shift started at 2?

I paid it and fired him because life is too short, and I’m too busy, to argue over $300 or whatever it was.

Hourly billing 1, Erik 0.

But with this new policy, that’d be no problem. If his rate was $300, and I received that invoice, I’d just spend half an hour reviewing my email exchange with him, carefully documenting where I’d asked him for an estimate for his labor, rather than the actual labor.

I’d then send him an invoice for $300, generously agreeing to still pay his invoice, even despite the fact that, during my more valuable time, I found his mistake for him.

Life is too short to argue over $300, but it’s not too short to lazily set a timer for half an hour, read an email slowly with my coffee, and then send a lawyer a $300 invoice for lawyer management.  Because that’ll be fun.

Hourly billing 1, Erik 1.

The Case of the Punch List Bandit

The second adventure I had recently involved trying to bring work to a business owner (a new one, too, I think).

One of Hit Subscribe’s bigger clients wanted help with a related service that falls outside of the scope of what we offer. When this happens, I subcontract or refer the work rather than over-generalize Hit Subscribe’s core offering.

And so I found myself trying to help this client by reaching out quickly to some folks I found via referral. And I’m not a believer in rent-seeking or profit by pure middleman, so we weren’t even taking a cut of this. It’s just part of the experience we offer our clients.

One vendor, in particular proved…. interesting.

Hit Subscribe flat prices everything, as I’ve mentioned. So we specified that we were planning to deliver the client a one-time, flat-priced offering. We had what I thought was a good call where I explained what the client needed, and I hung up to await a quote.

Instead of a quote, I got an hourly rate and a series of tasks that I didn’t really understand, most of which were specified as “occurring every month.” I spent some time trying to understand the proposal before I sighed and asked for an estimate.

I promptly received the estimate.

In hours. A range of hours. From about 4 to 20. Every month.

Mind you, this is an extremely predictable, one-time, stock service that I specifically asked for a flat quote on. And a situation where I all but came out and said, “it’ll probably be fine if you pad your estimate until you’re comfortable, so long as it’s a flat quote.”

I went back and forth a few more times, with a few more emails, mostly just to be polite.  All of them just kept listing different tasks and hours ranges. The one constant was the hourly rate.

I’m not sure how many hours I’ve now spent on calls, trying to understand emails, reading through long punch-lists of opaque tasks, and trying to figure out if I had been somehow unclear.

And all of this headache for trying to bring someone business at no profit for myself.

Hourly billing 2, Erik 1.

My new policy would have nipped this right in the bud.

As soon as I saw that first email with the hourly rate, I’d have responded with my own rate.  I’d have also pointed out that he was starting out $100 or $150 in the hole.

I think the rest would have sorted itself out naturally.

Hourly billing 2, Erik 2.

And, for those of you scoring at home, I don’t ever intend to fall behind hourly billing again.

Hourly Rates Do Have a Very Legitimate Use Case

So now I’ve vented my frustration, hopefully made a point with the venting, and had some fun doing it. I’ve also adopted an honest policy wherein I’m going to talk to expensive hourly billing vendors about the issue of time I spend reviewing their hours.

But this still leaves the issue that you could reasonably call me a hypocrite.

I do, after all, run a company with salaried employees.  And what’s a salaried employee, if not an annualized hourly worker?

Oh, and we also have the occasional generalist hourly help at Hit Subscribe. So it might seem like I’m really stepping in it.

But here’s the thing.

There’s a fundamental difference between high-bill rate, specialized experts and employees/generalist hourly workers.  And that difference has to do with risk.

Billing, Cost, Price And Risk

If you want to learn a lot more about this, go follow the aforementioned Jonathan Stark. I’m just going to talk briefly (for me, anyway) about how the way you charge relates to risk, but he talks about this topic in depth.

When you quote a fixed price for a good or service, you assume the risk in providing it (and the reward for doing so efficiently).

Any contractor knows this, mostly because of the dreaded “fixed price” engagement, wherein they take a random guess at how long the labor will take them to complete, pad that guess a bit, and then pray.  But the point is that you fix the price at which you’ll deliver the thing without knowing what it will cost you to deliver it.  Hence the praying.

To get rid of that risk, you change the game.

You fix the cost and declare the price unknowable. You say, “my cost is $100 per hour, and I’ll only work if you guarantee that you’ll pay my costs for me. The price? Pfft, who cares and who could possibly even say?  That’s your problem, sucker dear customer.”

Now, you don’t actually say it this way, of course. You don’t even mean it this way. But it still works that way.

To understand exactly why it works this way, let’s do a grocery shopping exercise where the grocery store billed for its cost, rather than setting a price. See how this feels for you, as the consumer.

Mmm… Hourly Priced Candy Bar

Imagine that you go to the grocery store and just load up your cart with groceries because you made the mistake of grocery shopping while hungry.  One thing did bother you, though. You noticed that all of the price tags had the words “estimated price” on them.

That’s weird, but whatever.

Having dumped everything on the conveyor belt while waiting your turn, you watch with curiosity as the cashier rings up the first item, a candy bar.  Nothing appears on the LCD display at all.

“Excuse me,” you ask, “what’s the price of that candy bar?”

“Who knows,” the tired clerk says with an eye roll. “You’ll get a bill for it in 6-8 weeks.”

Calculating the Price of Your Groceries

Nonplussed, you start looking up this store’s pricing policy on your phone, while the clerk keeps adding item after item to your unknowable, opaque tab.  It turns out that this store externalizes all risk to you, the customer.

Sure they can know what the candy bar cost from the wholesaler.

But they won’t know what electricity and shipping costs were this month until later.  And then of course there’s other concerns as well, like payroll and benefits and, oh, what if God forbid, the power went out for days and the inventory spoiled?

You can’t expect that to be the store’s problem, of course.  And if you happen to get an invoice for a $623 candy bar next month, you have to understand that nobody could have predicted that a Manticore would emerge from the mountains and lay waste to the store.

Dude, there’s no insurance for that, what do you want?!

Nope, you’ve just got to pay the bill.  Or, you can resolve disputes the famous custom app dev way, and, you know, sue each other.

Seem ridiculous?

Something seems easy enough to price.  But the vendor insists there’s no way for you to know the price until weeks or months after you buy the thing.

That’s what it feels like to consume hourly-billed expert services. It feel like someone poking a hole in your wallet and seeing how long you’ll let them siphon money out, before you get angry and call shenanigans.

Sometimes Externalizing Risk Makes Sense for Both Parties

Pricing a candy bar this way is absurd. I would also argue that pricing what should be predictable, expert services this way is absurd. But pricing this way (hourly billing) isn’t always absurd.

When isn’t it?

It makes a lot of sense when you’re hiring generalists for labor, as full time contractors or employees.  To understand why, think about what you’re telling these folks when you hire them:

Hey, I like the cut of your jib. In fact, I like you so much that I want you to hang around indefinitely, doing whatever tasks may come up.

Even I don’t know what I’m going to have you doing in 3 months, let alone what that thing is worth or how much it might cost. No, I’m not paying you for any specific result, expertise, deliverable, good, or service. I’m paying for the right to ask you to do whatever I think is best, indefinitely, for the entirety of the time you devote to work each week.

When you hire people for long term, open-ended, general labor, you’d be kind of a horrible person to demand flat pricing or value-based pricing. What would that even look like?

Alright, I really want you to hang around doing tasks for me indefinitely. What tasks, you ask?

Huh, well, I don’t know yet. But they’d better result in increased profits for my business or I’m not paying you.  Oh, and if I ever forget to give you something to do, I’m not paying you until I get back from my round of golf and figure out your next task.

When you strike a bargain with people where the only thing you can guarantee is monopolizing their time indefinitely, then you have to pay them for the only thing currently understood: their time commitment, retainer-style.

Generalist, Non-Strategic Labor Calls for Hourly Rates

I hope that, at this point, my objection to expert hourly billing is clear. The use case for hourly billing occurs when you want to pay someone for miscellaneous work while retaining all control over the circumstances of their work. Things like:

  • Salaried employment
  • Staff augmentation (really salaried employment with different paperwork).
  • Task rabbit or generalized assistance.
  • Open-ended, indefinite engagements.
  • Completely custom, non-expert labor (including app dev, which, in spite of disproportionately high bill rates, is still just an expensive form of non-expert, generalized labor).

In all of these situations, you have a hiring party looking to commission work, and owning the strategy (and thus also risk and reward).

“I’m going to hire you because I have a plan where I can give you a series of tasks that will improve my business’s profitability.”  The hired party can’t meaningfully participate in the hirer’s pre-existing strategy, and thus shouldn’t have responsibility for the risk (or share much in the reward).

Expert Hourly Billing Isn’t a Thing and We Should Kill it With Fire

But with the expert, everything changes.

If all you do, day in and day out, is file tax returns, review rental agreements, perform SEO audits, etc, clients aren’t hiring you with the idea that they can deploy you indefinitely for some hodgepodge of tasks.

Here be dragons, like this one, when you accept a counter offer.

They’re hiring you for strategy and for services that you are supposed to understand better than they do!  You should understand the pitfalls and opportunities, enabling you to guide them through risk and toward reward, for minimum cost to them.

That is what being an expert means!

So for someone — a self-described expert who charges rates that signal top-shelf value — to throw up their hands like the kid at Dairy Queen or the beleaguered grocery store clerk, and say, “I dunno, but I did the work,” constitutes malpractice from an expert. Or else it constitutes a tacit admission that they’re just kinda fumbling along non-strategically as a laboring resource, waiting for someone to manage their hours.

And from now on if you try to do that to me, I’m going to send you a very expensive bill.  Consider it fair compensation for making me learn enough about your field to handle your strategy for you, act as your supervisor, and, above all, keep close track of your time management skills.

Think me wanting you to to bill you for managing you and demanding you install software that lets me watch you work is degrading? Me too.

So stop begging me to do it via your hourly proposals, and instead learn to price your work like an expert.

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Marco Behler
Guest

Hi Erik, thanks for writing this – it is _SO_ good to hear a sane voice 😉 The whole hourly-billing field has such an interesting dynamic. In Germany, there’s a lot of freelancing (read: staff augmentation) going on in IT projects. Of course, freelancers complain about it all the time, in terms of they do not have a real say in anything the project/company is doing and that they are just a generalist cog, but at the same time they try to consistently max out their monthly “hour” allowance by keeping their seat warm to take home that big, fat… Read more »

Erik Dietrich
Guest
Erik Dietrich

Glad you liked! And I’m with you. The madness of hourly billing is subtle at first, but, like a rotting onion, it becomes more apparent and grotesque with each layer you peel away. I think that’s because, at its core, it creates zero-sum/opposition dynamic between provider and supplier.

Nils
Guest
Nils

I’m one of those Freelancers so I know that dynamic. I can contend myself with being better paid and better treated than salaried employees (who like to complain about that fact). My other choice would be to be employed by one of the staffing agencies at half the gross income and without tax deductions for travel etc.. And yes, I believe this leads to a lot of goldbricking by some Freelancers who just sit out billable hours, but this happens with employees too, especially if they feel/are undervalued. We’re responding to incentives, with the generally low salaries and high cost… Read more »

Mike
Guest

> “When you hire people for long term, open-ended, general labor, you’d be kind of a horrible person to demand flat pricing or value-based pricing. What would that even look like?”

Isn’t that pretty much what Uber is doing? Mind you,… they possibly, maybe, might actually be a “horrible person”.

Loved your initial flight of fantasy, though!

Erik Dietrich
Guest
Erik Dietrich

I don’t honestly know how Uber compensates drivers. But I can definitely say that (without really thinking about it) I’ve completely gravitated away from cabs over the last few years. And, actually, pre-Uber, I used to often take limos to the airport because they’d give me a flat, if higher, rate. Uber’s internal pay issue is Uber’s (and its drivers’) problem, in the sense that they have to contend with aggregate supply and demand. But Uber could double their rates, double their drivers’ rates, be lauded as a good actor, and I still wouldn’t bat an eye at taking Ubers… Read more »

Frank McClung
Guest

This is an excellent, and funny!, article Erik. I’m still trying to get my head around how value pricing plays out in the real world (I’m on Jonathan’s email list). Two scenarios I would like to get your thoughts on: 1. You run an Amazon business making x product. You don’t hire employees to pack and ship, you hire people as independent contractors and then pay them, not by the hour, but by the amount of product packed and shipped. They perform a critical function for your company (shipping your product) with specific expertise (packing and shipping your orders each… Read more »

Erik Dietrich
Guest
Erik Dietrich

Hi Frank. Thanks for the kind words and for stopping by the blog! I do Youtube videos and blog posts where I answer reader questions, so I’m logging both of those for a lengthier treatment at some point. Off the cuff, here’s my take on both: 1. Packing and shipping doesn’t strike me as the sort of thing in which one develops meaningful expertise. In other words (and I could be wrong) I think you’d be as expert in this as it’s possible to be after a few days of training, max. So with that in mind, how I’d price… Read more »

Fred
Guest
Fred

In my experience, the reason for hourly billing is simply because the specifications are often incomplete and/or incorrect. Too many customers will take advantage of a fixed-rate contract and add all manner of tasks which are outside of the scope. And if you don’t make the customer happy then they’ll publicly complain about you. They’ve got you over a barrel and they know it! And how are you supposed to defend yourself against their claims? It’s like the old joke about the reporter asking “so, senator, do you still beat your wife?” You’ve got to be willing to look at… Read more »

Dimitrios Menounos
Guest
Dimitrios Menounos

The problem is that expert type of work caters to tasks that are seldom clearly cut and standardized in nature. If it hadn’t it would probably not be expert but generalized work. So there is a difference with your grocery store candy bar example. An expert is in the bussiness of selling a non commoditized and hopefully high margin service usually on a bespoke manner. He is not however in a partnership. As such the involved risk and the associates cost is your responsibility as also is the reward.

Erik Dietrich
Guest
Erik Dietrich

I’m struggling to wrap my head around the idea that “expert work caters to tasks that are seldom clearly cut and standardized in nature.” My experience is that expert status and never-previously defined deliverables range from orthogonal to inversely related. In other words as I’ve become more expert in domains throughout my career, I’ve defined/refined the deliverables to be increasingly repeatable. Can you elaborate on this? My off the cuff take is to fundamentally disagree with your premise, but I might be missing something. As a counter-example, take writing custom software. That’s something that’s both commodity labor and, by definition,… Read more »