5 reasons why hourly rate is better than fixed price

Posted: November 08, 2013 Comments

View http://blog.netguru.co/post/55074277381/why-hourly-rate-is-better-than-fixed-price

This dead horse just won’t die, and I don’t have a problem with that. Billing structure is a fantastic conversation to have, especially if you have a stance on it. I’ve spoken a lot about the topic to date, but in my usual format I’d like to respond specifically to the points raised in this article.

Spoiler alert: I do not like hourly billing. Iron to Iron embraces value-based pricing.

When reading opinion pieces on billing structure, it’s arguably most important to determine the vantage point of the author. In this case we get a look into that position from the start:

Five reasons why you should never hire a Web agency to do a fixed-price project for a startup and always use an hourly-rate model or similar

I’m not sure how intentional it was, but the clarification for a startup stuck out to me. More on that later.

The first argument is that you end up with a better project if you’re billing hourly. Always. I spent years working at an agency that billed by the hour and I can confidently say that hourly billing had no effect on the quality of work done. All it did was determine the bottom line on an invoice. In theory ideas like “Give the team you trust a chance to freely pivot and change the direction of the project when you need it.” are wonderful, but I never saw a project where the client wanted to spend money on a team of people freely pivoting without serious accountability.

The next point has to do with a reduction of risk on your (the customer) part. This stance never played itself out well for me because we were constantly telling clients “we are going to need more hours to do that” which was never received well.

The third dig against a fixed-price model assumes that right out of the gate any company that charges a fixed rate is against you from the second you sign their contract. As a service provider I whole-heartedly disagree. The author goes on to defend his statement by declaring that a company with a fixed-price model “wants to do the least possible, as the price is fixed”. What that position fails to take into consideration is that a fixed price inspires you to work as fast as possible, not as little as possible. As the service provider if you’re working hourly doing anything quickly costs you money.

The next point calls out the fact that hourly billing agreements are more simple than fixed price. I agree completely. My rebuttal here revolves around the fact that even when I worked at a company that billed hourly, I was still forced to come up with an estimation of how many hours a project would take. In my experience, just about everyone does it that way which is where it all falls flat for me. If you’re billing hourly, why would you burden yourself with what is essentially a fixed price estimate? I have yet to meet a client that’s willing to openly agree to a project billed hourly with absolutely no concept of how much it’s going to cost at completion. Maybe I’m the minority though.

Finally, hourly billing is called out as being cheaper than fixed price. I feel that’s a bit arbitrary, stating that customers are paying only for the actual work and experience. I somewhat agree to this point, if you’re working on a project with a provider that charges hourly, I would assume if they are good at what they do it would be extremely cheap. But that raises the question: why would someone decrease the cost of their offering as they get better at it? As you get better at something, it takes less time, right? When discussing hourly billing, the logical conclusion to that is you would be charging less as time goes on because you are doing the same quality of work at a more rapid pace. That makes no business sense, so the usual pivot for hourly billing is to charge more. This cycle continues until you raise your rate high enough that people start saying “no”. At that point you’ve found your cap and the cycle continues.

Do I think that companies can survive (and survive well) when billing hourly? Yes. Do I think they could be doing even better if they switched to value based pricing? Yes. While I like talking about this topic with just about anyone, I don’t take it too seriously anymore. It all comes down to company process, culture, and ideals. For me the issue is clear and value based pricing makes way more sense, but I love hearing arguments otherwise.

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