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The billable hour is a trap into which more and more of us are falling

timharford.com

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Re: The billable hour is a trap into which more and more of us are falling

#81

Post by nlh »

To build on another commenter's mention of perverse incentives:

I've thought about this a lot. I think, regardless of what we say, at a foundational level humans operate on incentives. Billing by the hour creates the following incentive: The more hours you spend on the project, the more money you earn. Period.

I know our high-level business brains will rationalize this away in our marketing:

"Now my friend, you know it wouldn't make sense for me to over-bill you, because I want you to be a happy client! I will hard and efficiently for you!"

But no matter what words are said, in the back of our lizard brains, we all know that another hour on the project means another [$10|$100|$1000], and that creates a reward system for the person billing.

The only time hourly billing should really be used is when time-based labor itself is the thing being bought and sold -- a retail worker, a security guard, etc. They are being paid for butt-in-seat time. The incentives line up -- the longer they stay butt-in-seat, the more money they earn! (Which is what the buyer wants too.)

I don't have the perfect solution for consultants/knowledge-workers, but something closer to value-based pricing (with appropriate accommodations for bad time estimates, etc.) feels like the right direction.

Re: The billable hour is a trap into which more and more of us are falling

#82

Post by PSNapier »

elevaet wrote: post #74
magicink81 wrote: post #21

Jonathan Stark is a thought leader / coach / writer / blogger etc that has been beating the drum on time-based pricing vs value-based pricing. He helps software engineers and others get off the time-based model and transition to value-based. Here's his website: https://jonathanstark.com/ Here are some interviews where he covers the topic https://www.youtube.com/watch?v=UT32G9wmONg https://www.youtube.com/watch?v=B1b7…

This article hits hard in a lot of ways. Have any of you who work as a freelance programmer managed to get off the hours-based billing treadmill, and onto a value-based system? How do you determine value? When your clients need constant maintenance or small incremental work, do you end up spending a lot of time with estimates? I'm really struggling with this in my own work.

Chris Do's work was my introduction to this concept, perhaps you might find it equally helpful.

This is one of his lectures on value based pricing, but he has a number of them that are informative on the concept in different ways: https://www.youtube.com/watch?v=ivKnj9ffcmE

Re: The billable hour is a trap into which more and more of us are falling

#83

Post by PragmaticPulp »

elevaet wrote: post #74
magicink81 wrote: post #21

Jonathan Stark is a thought leader / coach / writer / blogger etc that has been beating the drum on time-based pricing vs value-based pricing. He helps software engineers and others get off the time-based model and transition to value-based. Here's his website: https://jonathanstark.com/ Here are some interviews where he covers the topic https://www.youtube.com/watch?v=UT32G9wmONg https://www.youtube.com/watch?v=B1b7…

This article hits hard in a lot of ways. Have any of you who work as a freelance programmer managed to get off the hours-based billing treadmill, and onto a value-based system? How do you determine value? When your clients need constant maintenance or small incremental work, do you end up spending a lot of time with estimates? I'm really struggling with this in my own work.

You shouldn’t realistically expect to charge customers according to value delivered to their company. You’re still selling services on an open market, competing against other contractors and their pricing.

Nobody is really interested in handing a services provider more money than necessary to get the job done at market rates, so even value-based bidding ends up coming back around to market rate pricing.

You can always ask, of course, but at the end of the day any rational company is still going to evaluate your proposal against their other bids from other contractors.

Re: The billable hour is a trap into which more and more of us are falling

#84

Post by gomox »

gnicholas wrote: post #27

Another downside of the billable hour: it encourages perverse incentives. I was recently talking with a potential customer in the legal field, and he was interested in my startup's software, which helps people read on screen more quickly/easily. But at one point he turned to me and said "I know one of the senior lawyers is going to ask me if using your software is going to cause the billable volume to go down for the…

This is actually an amazingly perfect example of the old B2B sales mantra "the buyer is not the user". I might steal it!

How long have you been selling your software? If it's new-ish this honest question from the prospect can be life changing for your product positioning and marketing strategy.

Re: The billable hour is a trap into which more and more of us are falling

#85

Post by emeril »

I spent much of my career billing hours though I had no incentive to be more than 75% or so utilized (i.e., 30 hours per week) however the firm had a system where you would be minimally rewarded if you exceeded 100% utilization though it was difficult to guarantee hitting that threshold (e.g., if you were at 110% and the project ended before the end of the quarter and you had a slow week or two, you received zero bonus)

As such, I deliberately worked between 70% and 80% during my years there as it seemed only chumps went for the small bonus

Interestingly, I billed around $400/hour back then and they collected on pretty much all of it though I made about 10-15% of that rate personally...

Re: The billable hour is a trap into which more and more of us are falling

#86

Post by hnuser847 »

MisterBastahrd wrote: post #26
magicink81 wrote: post #21

Jonathan Stark is a thought leader / coach / writer / blogger etc that has been beating the drum on time-based pricing vs value-based pricing. He helps software engineers and others get off the time-based model and transition to value-based. Here's his website: https://jonathanstark.com/ Here are some interviews where he covers the topic https://www.youtube.com/watch?v=UT32G9wmONg https://www.youtube.com/watch?v=B1b7…

My side gig is that I have a few clients who pay me $1K a month for 10 hours of retainer. Most months, I barely put in 3 hours. A few, I might work 12 and I don't charge them because everyone's happy. They realize I have a day job and as such, I'm not going to be immediately available unless I can take a lunch break. A win for everyone.

This sounds like a sweet deal. If you don’t mind me asking, what kind of side work do you do that only takes a few hours a week?

Re: The billable hour is a trap into which more and more of us are falling

#87

Post by jackcosgrove »

elevaet wrote: post #74
magicink81 wrote: post #21

Jonathan Stark is a thought leader / coach / writer / blogger etc that has been beating the drum on time-based pricing vs value-based pricing. He helps software engineers and others get off the time-based model and transition to value-based. Here's his website: https://jonathanstark.com/ Here are some interviews where he covers the topic https://www.youtube.com/watch?v=UT32G9wmONg https://www.youtube.com/watch?v=B1b7…

This article hits hard in a lot of ways. Have any of you who work as a freelance programmer managed to get off the hours-based billing treadmill, and onto a value-based system? How do you determine value? When your clients need constant maintenance or small incremental work, do you end up spending a lot of time with estimates? I'm really struggling with this in my own work.

Fixed bid contracts are riskier than per hour contracts. There is the risk that you underestimate the project and have to work for free. There is also the reward when you overestimate the effort, the client accepts the bid, and then you get paid for doing nothing. The key for being successful with fixed bid contracts is responsible estimation and communicating that to the client.

For maintenance work it's almost always per hour unless you can negotiate a retainer policy. Back when I worked on contracts a not uncommon arrangement was a hybrid approach with the fixed bid deliverable and a pool of maintenance hours on the back end that were essentially options for the client.

Re: The billable hour is a trap into which more and more of us are falling

#88

Post by me_me_mu_mu »

resoluteteeth wrote: post #64
me_me_mu_mu wrote: post #44

Earlier quoted context omitted.

Low key hope in my life time I can see lawyers and other secretary tier professions disappear in favor of open source systems. The only time you’d need a lawyer will be in criminal court otherwise you don’t need to pay someone in six figure debt 800/hr to proof read something. Maybe I’m wrong but I would rather eat dirt than spend time/money on lawyers and other secretary tier professionals who ultimately still make…

Is software development also a secretary tier profession?

not as much as lawyers and accountants imo. they're a necessary relationship but its toxic. the systems in place for software are mostly open whereas the same cannot be said for a lot of legal and financial systems. they're not beginner friendly, and have a big barrier to entry from my experience.

Re: The billable hour is a trap into which more and more of us are falling

#89

Post by em-bee »

elevaet wrote: post #74
magicink81 wrote: post #21

Jonathan Stark is a thought leader / coach / writer / blogger etc that has been beating the drum on time-based pricing vs value-based pricing. He helps software engineers and others get off the time-based model and transition to value-based. Here's his website: https://jonathanstark.com/ Here are some interviews where he covers the topic https://www.youtube.com/watch?v=UT32G9wmONg https://www.youtube.com/watch?v=B1b7…

This article hits hard in a lot of ways. Have any of you who work as a freelance programmer managed to get off the hours-based billing treadmill, and onto a value-based system? How do you determine value? When your clients need constant maintenance or small incremental work, do you end up spending a lot of time with estimates? I'm really struggling with this in my own work.

for maintenance or incremental work i'd offer a retainer.

i did that with one client. i started hourly and eventually once we had a good working relationship suggested to switch to a retainer. i actually let the client pick the fee. he picked the same amount that he had paid in hourly rates before. i figured that if there was more work then i'd renegotiate. but what happened was that my work went down, yet the retainer stayed.

that's the big advantage of a retainer. with hourly you get more if you work more and less if the work is reduced.

with a retainer you don't work more than the limit of the retainer allows, but the less you work, the more you make for the time worked.

Re: The billable hour is a trap into which more and more of us are falling

#90

Post by jimmySixDOF »

I love Tim Harford and both of his podcasts (listed on the site) are brilliant and well worth listening to -- but a lawyer's approach to hourly billing is not the only way to look at it. Take an Engineering firm who bid $100,000 for a scope of work and internally allocates 1000 hours to complete the job drawing from a shared resource pool of 100 full time staff. The PM in that case will need to closely balance productivity as a function of time vs completed scope which is very different from the pay-as-you go perspective of a lawyer. You jealously guard every fraction of those hours and fill them as much as is humanly possible. Not as easy to make the comparison with the Farmer I suppose which was his point in the article, but since this HN discussion is considering the overall concept of billable hours in general this needs to be said.
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