Hourly Rates: Are You Selling Time or an Outcome? 1

Monday, March 28th, 2016
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We see a lot of disputes about hourly rates work, but often it isn’t the rate the parties are arguing about – it’s the work.

That is, the argument revolves around what work was done in those hours. Hourly rate work is distinguished by an inherent source of disputes. The party working those hours thinks it is going as fast as it can, or would have if they weren’t slowed down by this, that or the other thing.

The hiring party, meanwhile, is certain that the hours taken are either too long or haven’t reached the objective of the work.

So when thinking about charging hourly rates, it is best to consider what you are charging for: the work itself or an outcome. For instance, if I charge $50 an hour to carry out some cleaning work, then the outcome I am providing to the customer is achieved each hour. That is, things are being cleaned every hour. Now the customer may think that progress is not fast enough but the fact remains that the outcome is being delivered immediately to each area cleaned.

In contrast, consider design work. Designers will often charge an hourly rate, but the difference here is that there is an outcome sitting over the top: the completed design. An architect may charge an hourly rate but the customer actually wants the completed design. Each hour worked does not deliver the client’s outcome, only a tiny part of it.

The seeds of the dispute lie in the fact that the client doesn’t care what is done each hour, only the outcome those hours produce. And if the hours keep stacking up, the parties will fall into dispute because the client thinks they have paid for an outcome that ought to take X number of hours, and the contractor may simply think that he/she is selling their work on an hourly basis and ‘it takes as long as it takes.’

In my view, the mistake is on the part of the contractor. Too often I see quote or offers that show an hourly rate, a lump sum, and a number of hours allowed for. From the client’s point of view, what price have they agreed to pay? The lump sum? The hourly rate for whatever time is needed? Only the hours allowed for? If there is a known outcome the client is after, then use a lump sum and use your best experience to guide you as to how much time to allow for. If the work is of an ongoing nature, then use hourly rates.

For example, civil dayworks are often charged by the hour or day. This is done as neither party really knows how long the work will run. Further, the client’s desired outcome is delivered as the work is actually carried out. There is no overarching deliverable. But no one would accept the installation of a roof be done on hourly rates. The client would insist on a lump sum amount as the client outcome is a completed roof.

In a recent dispute, the roles were reversed. The contractor had offered an hourly rate to dredge a pond. The client accepted that, but then argued about the time it was taking to remove the required volume of spoil. Of course the contractor could not know how much spoil there was and in this case could not come up with a lump sum. This shows the same inherent conflict: the contactor was selling dredging time but the client was buying a dredged pond.

The lesson here is to give careful consideration to how you offer you work and make sure that your client knows that they are buying your time, not a specific and finite outcome. And never show an hourly rate in a lump sum quote unless it is a rate for additional or variation work. Your client will ignore the rate and focus on the lump sum.

The bottom line is to make sure that both parties understand what is being bought and sold.

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  1. Rob Stokes

    I guess this highlights the need for clear communication up front.

    Obviously, where the time required can be reasonably estimated, then a lump sum payment is the best strategy – albeit with the contractor assuming the risk for things running unexpectedly over time. Where this is not the case, an hourly rate is best but both parties should clearly understand how this should work before the contract is signed.