Captain’s log, stardate 20210929
A fellow list member and past student wrote in with a headslappingly awesome example of why hourly billing is nuts (shared with permission, name withheld by request):
I recently had a prospect who agreed to move forward on a quote (at a fixed rate with 100% payment due up front - my standard terms). We had the initial prospecting call, kick-off call and were about to start the project.
I then received an email from the person who was in charge of setting up the billing side of things and they stated that:
- They only pay hourly rates, not flat fees
- They don’t hire 1099 contractors (which means I’d be classified as a temp employee, receive a W2, and taxes would be withdrawn from the check on their payment schedule)
So, I had three choices: A) accept, B) counteroffer, or C) walk. I chose B.
The final counter offer was to agree to their terms, but at a higher flat rate (+10%) to compensate for the tax implications, potentially involving my CPA, etc. This was agreed to by my main contact on the team to “make up for the downsides.”
I then broke the flat rate fee into an hourly rate. Now, I could have broken this out in a million ways as logically, this is just digital semantics. For example:
- $5,000 / 2 hours = $2500/hr
- $5,000 / 50 hours = $100/hr
- $5,000 / 100 hours = $50/hr
I chose something I thought was “conceptually” reasonable, around $150/hr.
Here’s the kicker: They came back and said the hourly rate was too high and they were going to do the project internally.
Their response was fascinating. Why would a flat rate be totally fine, yet as soon as it’s broken into a “randomly determined” hourly rate, it is too high?
This, yet again, proves that “hourly billing is nuts” :-)