January 21, 2018

The Worst Of Both Worlds

A business owner who provides supply chain quality control equipment asked me about my mission to rid the world of hourly billing.

He said:

I don’t see the problem with hourly billing. We pay many of our service professionals on an hourly basis. We are perfectly happy with it.

My response was:

What about when a service provider blows an estimate and goes way over your budget?

To which he said:

We avoid surprises by always working from a quote which limits the amount we are obligated to spend.

Well, that explained why he sees no problem with hourly billing.

His service providers take all the risk for finishing late, and get none of the reward for finishing early.

I refer to this type of an arrangement as “Hourly, Not To Exceed” and it is the worst of both worlds for the seller.

In fact, I would argue that this sort of arrangement is not really hourly billing, because the maximum spend indicated in the quote functions as a price.

In other words, the buyer knows in advance how much the project will cost. It’s like a fixed bid, but with the added benefit that the actual price might be even lower than the quoted one.

Hourly, Not To Exceed is a terrible financial arrangement for the seller.

Never do it.

Give a fixed price instead. Then at least you have a chance of making a profit by kicking ass and finishing ahead of schedule.