Hourly Billing Is OK
- fixed bid, value-priced business consulting is OK
- software consulting billed hourly is also OK
- they are distinct lines of work and expertise
There are three highly-visible people advocating strongly against hourly billing and in favor of value pricing. Jonathan Stark is so jazzed about it that he wrote an e-book on it. Patrick McKenzie and Thomas Ptacek have also written fairly extensively along the same lines.
Problems with Hourly Billing
A lot of the writing I've read and podcasts I've heard on this topic is primarily focused on disparaging hourly billing for its many evils. Jonathan Stark is particularly vehement about this point going so far as to call it his mission to "rid the world" of hourly billing. He's also written an e-book with an insulting and ableist title that I will not be stating here or linking to.
In my research for this article I found a bunch of specific bullet points written on an old HackerNews comment by Thomas Ptacek and responded to each one. That allowed me to get some feelings out and clarify my thoughts but I don't think it's valuable to post, so I'm going to heavily summarize my points/responses here.
The basic takeaway I got from reading these laundry lists of problems with hourly billing is they find it causes a host of behaviors on both sides that are value-distracted. This includes bickering or negotiating small details like the dollar figure per hour, the hours billed on a given invoice, or the quantity of invoices. They claim that it poorly positions you and incentivizes you to book maximum hours.
None of these claims have manifested in my work. I don't negotiate my rate. I never have and no client has ever initiated a negotiation. It goes one of 3 ways. 1. The client ghosts after I first state my rate. So long! 2. The client comments that the rate is high but agrees to pay it and does so happily. 3. The client happily pays it with no comment. That's it.
No client of mine has ever contested an invoice. I send 1-liner invoices every 2 weeks that take the form "I worked N hours at rate X so your total due is Y". There's no breakdown of the hours into tasks.
The Real Message
I think most of the anti-hourly writing has a valuable message but that message has nothing to do with billing whatsoever.
Do value-focused consulting, not pure software development. I think that makes perfect sense. Don't focus exclusively on technical matters. Work with product owners, UX designers, marketing, and executives to discover and clarify clear business wins and laser focus on delivering that value. You can charge more doing this, and it's what I call "software consulting" as opposed to "contract software development" where you are either doing straight staff augmentation or outsourced software development and are walled off from more strategic involvement.
I think some of the concerns about hourly billing are really concerns about software development vs software consulting but are misattributed to a billing/pricing issue.
What about those $20K/week engagements
I think one of the main hooks here is Patrick McKenzie posting highly transparent articles about his big-ticket value-priced consulting engagements. The whole thing smacks of "You could be sipping cocktails on a Caribbean beach" BS a bit but here's what I think the underlying truth is.
There is a totally separate business service here that is what Patrick McKenzie and Jonathan Stark do. It's business consulting. In particular they blend in a lot of technical know-how, but their service offering is fundamentally not in software development. They are basically MBAs who can code for hire. They deal in things like email marketing, copy writing, sales methodologies, A/B testing, sales funnel optimization, SEO, pricing strategy, etc. These are all great and valuable skills and value pricing those engagements sounds great! No objection to that. But my reading of their writing is they claim your average software consultant should aspire to do this, and I disagree. It's a totally different line of work requiring a totally different set of expertise. For me, it would be completely unsatisfying and I suspect many other developers would agree. I like coding and technical work. My consulting has a significant non-technical portion, but at the end of the day I'm still spending a lot of time coding.
Daily rates are fine. I don't consider them fundamentally different from hourly rates and if you are going to work exclusively for 1 client for a period, I recommend them and they should be more lucrative than hourly rates. However, having done 6+ months of daily rate, I prefer hourly personally even though I take home less cash. Basically I prefer to bill 3-5 super-solid productive hours a day and then go about my non-work life without a second thought, and daily billing isn't really compatible with the days when I only have 3 hours in me or I'm blocked waiting for someone else. I can also interleave multiple clients more easily with hourly billing. My ideal workload both from a productivity and satisfaction is two active hourly clients.
When Value Pricing Works for Me
I have or would do value pricing for more well-defined "productized consulting" things I sometimes do. I charge flat value-based rates for training courses, for example. Because I work in software and don't teach the same material that many times without significant content updates, it's not as lucrative as it could be. But teaching the same course a dozen times is also not as rewarding or enjoyable to me personally. I would and have bid out code audits or retainers (slightly separate topic) fixed as well. But currently this is a small minority of my work.
Please Change Your Tone
This is a plea to these authors to change their message and tone. Hourly billing is fine and powers a huge portion of the economy. It's simple, versatile, and resilient. The constant disparagement I read and hear hurts my feelings and makes me angry and frustrated and sad. I feel my lifestyle and that of many of my close family members and friends is being needlessly attacked and portrayed as evil and exploitive when it's actually fine. The world is complex. Calculating the value of work is extremely complex if not impossible in many/most situations. Value pricing is only even remotely possible in a particular subset of relatively straightforward situations.