Reaction: Billing by the Hour

A very common mistake I see among engineers of all stripes is a failure to fully appreciate the value of time—both what it is worth, and how to make your time more valuable.

What I normally see is something like this—I should be making $x/hour, because I have this specific experience, or that specific skill set. This focus on hourly pay, however, is actually counter productive. For instance, I recently ran across an article in a publication for graphic designers and illustrators (a world I have followed since I lived it in many years ago)—

Billing by the hour is the most popular pricing method across the world in most industries. Of course, there are many web designers/developers out there who make a great living by using the hourly billing method, but in my opinion, value-based billing is far better than hourly billing. —Kyle Prinsloo @Web Designer Depot

To begin, what does Kyle mean when he says to “bill by value” rather than billing by the hour? Once, when I went into a lawyers office, I noticed he had a sign on the wall that said, “Lawyers don’t charge by the bullet.” The point the lawyer was making was: he charged based on getting the job done, rather than for spending a certain number of hours on a case. It was not the hours spent that mattered, it was the outcome of the case.

This sort of value based billing can be used in the network engineering consulting world, as well. For instance, if a client comes in and says “I want you to redesign my data center,” you can take a look at the requirements, make a good judgment call on how much time this is going to take, and give the client a price.

Why is it better to bill for value? Kyle lays out three reasons.

It damages your relationship with clients. If you give the client a bad estimate, and end up asking for more money based on the hourly rate, you are making a mess that will be hard to undo in the future. Because of this, most consultants end up just doing per job billing disguised as per hour billing. The client might receive a bill that is lower than the initial estimate, but presenting a bill larger than the initial estimate is always a bad thing.

It removes the incentive to work more efficiently. If you spend time building tools and skills, resulting in the ability to do twice as much work as anyone else, you will end up completing jobs faster, which ultimately saves the client money, but leaves you without any reward (income wise) for the increase in skill set. Many consulting firms attempt to make up by charging a higher price for more highly skilled talent, but this is, at best, an imperfect process. If you bill for value, then you can reap the benefits of increased skills and better tools.

Your income is capped. For the same reasons, charging by the hour caps your income. You cannot every make more than the time you are willing to put into projects multiplied by the hourly pay. You can, again, attempt to offset this by charging more per hour, but this is an imprecise process.

To Kyle’s three reasons—if you are a consulting firm—I would add a fourth: you tend to end up as a body shop. When you sell time as your primary measure of value, rather than expertise, you will always tend to move towards a position of selling as much time as you can, rather than as much expertise as you can.

Okay—this all might make sense for an engineer working at a consulting firm, or for a consulting firm deciding how best to organize their operations. But what does this have to do with the average engineer on a salary? This still relates. I see engineers make two mistakes all the time.

The first is engineers tend to undervalue their time. Engineers tend to sell their time too cheap, worrying more about getting the job done, rather than thinking about how many hours they are spending doing the job. Many folks I know do not think they have done a full week’s work until they have put in 60 hours—simply because the IT world is known for folks who work many long hours. It is much healthier to focus on what you need to do, and how to get it done, rather than how many hours you spend doing it. Don’t undervalue your time.

The second is engineers tend to undervalue their minds. This might seem odd in a field as heavily mental as network engineering and administration, but I see a lot of engineers who just do not have the drive or interest in learning new things, or learning how to do things better and faster. “I have a job, I’m paid well enough, and I just really want to go home and watch television.” You only have a certain number of hours you can sell in your life. Since you cannot sell more hours than exist, the only way to really increase your income is to increase your value per hour.

There are problems with selling by value rather than time, of course—so you need to find ways to balance between these two paradigms, or ways of thinking. But when I look out through the world of network engineering, we are far more focused on selling time, rather than talent.