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IS it bad to charge by the hour?

Greetings,

Is it really bad if i am charging my clients by the hour? I am the owner of a small web development company (three people right now) and half a year ago i moved all of our projects on a per hour basis.

And it was really good and things got very simple after this. I have an hourly rate for my clients and the inner hourly rate for the developers (that depend on their skills). And i have a delta of what the company earns of every hour that my developer spends on the client's project.

Everything is very clear with this approach. We have a special tracking software that helps us to track hours in a very convinient way and it also produces reports for our clients.

Now, lately i constantly see people saying that the hourly rate is bad and i can even loose clients because i charge them by the hour. Can this be true?

PS. I am aware that i can earn more if i will charge by the project instead of by the hour. But this is ok with me. I like the fairness that comes with the hour rate -- our clients pay us for the real work that we have done -- no more and no less.

Sergey
Sunday, January 26, 2003

If you charge strictly by the hour consider that if your programmers build libraries of functions and classes you will earn less and less each time they resuse code.

You might want to have a standard charge for reuse of existing code into new projects.

Matthew Lock
Sunday, January 26, 2003

"If you charge strictly by the hour consider that if your programmers build libraries of functions and classes you will earn less and less each time they resuse code."

This point is now clear for me. Thank you.

But what is really bad about it?

If my people only work 5 hours because of the libraries that they can re-use and I charge my client only for 5 hours -- it looks fair for me.

Instead of charging extra for the re-use of the libraries i am thinking of increasing the standard hourly rate. The hourly rate for the client already depends on the developer's skills, because obviously if the developer is very good and solves problems fast, then his hourly rate should be much more then of the beginner developer who is working slow.

So, how about that: if we are using the top developers for the project and we are going to re-use our own library which will also save time, we are charging 50% more for every hour.

Another thing here. What if we are re-using open source libraries/products? It is not fair to charge extra for this, i think. But this WILL decrease the overall time spent on this project and thus we will be paid less.

Sergey
Sunday, January 26, 2003

the key is to not worry too much if it is "bad" and just do whatever you can to make the most money (without being unethical, of course).  If hourly seems to be working out well, don't change anything.

IMO once you get to the point where you lose money hourly because you are reusing old code, it is time to wrap that code up into a "product," charge a license fee for the product, and add hourly customization fees on top of the license fee.

choppy
Sunday, January 26, 2003

My mom always told me to pay window painters by the window and not by the hour.  Some clients for some projects want a fixed price.  If you do hourly charges, I would want an estimate and I would want you to stick by it within reason and good faith.  That's a de facto fixed price.

tk
Sunday, January 26, 2003

If you are fair, your business will flourish.  If you are a money pinching nickel and dimer, you will eventually fail. 

Determine your rates by looking at market rates and competition.  If you are ultra efficient, and take 1/2 the time than the average market would demand, then someone else will be too, eventually.    If you charge less, b/c of your efficieny, word will get around.  Its all about referrals.  Please your customers, and be fair, and you will have more work than you can handle. 

Bella
Sunday, January 26, 2003

tk,

Estimate is not a problem. I always do estimates for every project and ask for some part of the payment upfront especially with a new client.

Usually, we fit in the estimate or even charge less then orginally estimated (because we've spent less hours then planed).

But, if a client wants something extra that was not orinally planned in the beginning of the project, then we can do that to. With an hourly rate, we are not worried about the total project price. I see this as a major benefit of our approach.

Sergey
Sunday, January 26, 2003

I'd stick to the hourly rate, fixed price work frequently gets ugly. On the one hand you need to limit how much you do for the customer to make sure you can still make a profit, on the other the customer wants as much as possible for his original price. This leads to an immediate conflict.

Tony E
Sunday, January 26, 2003

Disaster stories relating to fixed price software development are a dime a dozen. The statistics indicate that most contractors and consultants are best off avoiding fixed price except where the situation *clearly* indicates that you can make a very good rate without a great amount of struggle, or the purpose is to get your foot in the door for further work and the project scope isn't large enough to constitute a big business risk to you.  Usually, neither is the case with most custom work (that's why it's custom.)


What I've found: the level of advance work required to cover yourself in proposing a fixed price on most moderately complex projects is very often in excess of that which the customer will accept or which makes sense for one to invest in a project that you don't even have in hand yet.


Also, I have found that when a client pushes hard for fixed price, they tend to desire a degree of simple minded "compartmentalization" of their problem that is impractical. IE, they want fixed price because they want to play pretend that a messy or ambiguous set of requirements are straighforward, and they want to pass this risk on to some other poor SOB.


Client sophistication is also a factor: at a very small level of client, most clients won't even understand (much less accept) a formal discovery phase.

So, hourly is the prudent choice. Unprofessional? Lawyers and doctors charge by the hour...

Curmudgeon
Sunday, January 26, 2003

Nothing unprofessional about hourly billing but few folks will sign you up for open ended hourly billing.  Certainly your high billing rate reflects all those unbillable hours you spend courting a client, preparing estimates, etc.  Good clients and contractors know what costs they can fix and which they can flex.  I'll give you a fixed cost for delivering a truckload of topsoil, but not for digging a pool in your backyard (until I drill core samples anyway).

Doctors and lawyers vary.  Most doctors (auto mechanics and others) use standard costing methods.  You can get fixed prices for many attourney fees: title searches, wills, closings, incorporations, 501 3c's; litigation is another story.

tk
Sunday, January 26, 2003

As the saying goes, 'If it isn't broken, don't fix it'.

It sounds like you are making money, business is good and you are pleased with your results thus far.  Why the consternation?  It would seem to me that life is good right now, for you. 

Exactly who is saying that hourly billing is a bad idea?  My experience has been that fixed price contracts are a disaster.  I would never recommend this approach to a small software company.  Once I stepped out on my own, three years ago, I promised myself that I would *only* bill hourly.  No exceptions.  So far, so good.  A few potential clients have balked at this policy, but my feeling is that they would have been poor customers in either case.

Just my $0.02.

Chad R. Millen
Monday, January 27, 2003

Heh, I used to work in a few smallish software houses, and the favorite sayting of one of the directors was: "Nothing takes less that a day!".

He meant it too - you want that button 2 pixels to the left, well that's a day.

Seemed to work well enough then....

slarty
Monday, January 27, 2003

Hourly billing works fine as long as you do it fairly.

This means that you keep your client appraised regularly about status so they can see if there needs to be some early feature removal to keep the time within range, or weather they just want to budget more.  Things like that.

When I did freelance, I'd shamelessley steal code from previous projects (and sometimes even toys I wrote for the heck of it for my homepage) and use it in new code for customers.  All of my deals were pretty much handshake deals with payment upon completion.  If you can be trusted, that works out great.

Which worked out OK, because if I can race through the easy stuff, this gives me more time to do the impressive flashy stuff.  So I made the same amount of money, but their site is more impressive.  Since these were small clients, nobody really complained or even cared about what I was doing.  Might work differently for larger projects.

I'd suggest that you go through with scaling hourly rates.  I would race through web development.  All of the sudden, I had people helping who weren't as fast and this led to an annoyed client.

Fixed price contracts for a project really work out well for larger deals where it's actually worth negotiations and estimates and whatnot.  It's not bad to charge by the hour, it just means that you probably don't have multi-million dollar contracts.

w.h.
Monday, January 27, 2003

I bill either hourly, or daily, if my customer wants a daily bill then it's $(hourly * 8) per day. And if I am on a daily rate, I make sure that I only work 8 hour days on average, I am scrupilously honest with my daily charges, if I work 10 hours then they owe me 2, I make sure this is known upfront. Hours are one thing that are non replaceable in a lifetime. I would NEVER consistently give 2 hours of my life away for free.

Been There
Monday, January 27, 2003

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