Reminder: quote prices daily or weekly, not hourly. You're not a furniture mover.
It's fine to benchmark yourself in $/hr, but you should quote project rates or person/day or (even better) person/week rates.
How many hours a day you work has nothing to do with how many "hours a day" (ugh) you bill.
You, in particular, and an impossible consultant to find on the general market. For even the best-capitalized companies in the world, people like you do not exist. They are hiring PCI consultants from body shops to validate new cryptographic protocols. I know this, because I read the reports they give their clients before demolishing those same protocols.
I know a couple other people with the same portfolio of talent. They, too, want to work in sub-day increments. And they do. But they bill project rates, because they can.
You are billing yourself out like a graphic designer. Stop doing that. Or don't, but don't pretend like you're being clever about things for undercharging.
To be clear, if someone calls me up and says "I want you to do 10 minutes of work for me", I'm going to say no. The sort of consulting I most enjoy is where I'm going to be doing 50+ hours in total, spread over many months. It's not project work; it's expert-on-call work, and if I had to quote a project rate every time someone wanted to ask me a quick question, they wouldn't ask quick questions.
In between projects, you make it known that you are a friendly guy, and bending your ear for a few minutes is free. N.b. This is how lawyers will generally work. This is to maintain customer loyalty for the five figure engagements. Plus, since you're doing it out of the goodness of your heart, you have an instant, built-in non-excuse for unavailability.
One thing that I don't like is getting into situations where any one customer expects too large of a fraction of my time: I work for two reasons, making money and new experiences. Perhaps it is because I usually only work for very technically saavy customers, but I find that I learn a lot from my customers and the work that I do.
I was in a situation all last year were I was working over 25 hours a week for a childhood friend's company and although both he and some of his co-workers were wizards, there was a large opportunity cost of not being able to do much work for my other customers.
Since I work remotely and thereby compete with offshore talent I don't charge much for my time ($60/hour) so the experience that I get has a fractionally large value. That is why I don't personally like the idea of weekly or monthly billing. I understand how it might be different for people who work onsite and bill a hefty rate.
Most, if not all customers are in the software business somehow and don't know the first thing about managing software as you said.
I have a recent customer wanting me to babysit a developer in house for him. I told him I don't run daycares and he's free to setup a full development team in-house which I'll completely help with transitioning and then relieve myself.
He didn't write back.
Have you tried raising your rates?
I work almost 95% remotely for multiple clients across North America charging on the higher end of this poll. I get my work through referrals for the most part, but have learnt the art of closing a lead on twitter.
This arrangement doesn't work under all circumstances, but on the rare occasions when I've agreed to commit myself to full-time work with a single client, I've found that it cost me on all three of these measures. It does mean that I've sometimes had to say "no" to potential clients for whom my style isn't a good fit.
I have been working a long time (since early 1970s, but I have almost never worked more than 32 hours/week). While it is easy for me to say since I am financially very stable, I believe it is such a mistake to maximize financial wealth instead of experiences and general lifestyle. Real wealth is mostly family, friends, travel, etc., once one has the material essentials. Based on seeing your open source projects and writing, you may agree with me.
I'm still (yes, still...) working on my PhD, but I'm consulting full time nowadays, and have been for a while.
I do tend to work far too many hours, but it's mostly because I'm enjoying what I'm doing, and am learning as much as I'm doing for clients. That said, I feel very fortunate that I spent a lot of time with my children, and that I have the flexibility to help my wife out and work on other things (e.g., the PhD) along with paying the mortgage and such. We've taken a 10-day family vacation to Europe for the last two summers, as well; travel can indeed be addictive!
I don't think that there's a tension between maximizing profit and family/friends. On the contrary, one of the reasons why I'm interested in the discussion here is that I'd like to make more during the hours that I do consult, so that I can work fewer hours and have more time to work on personal projects, sleep (!), and family, not necessarily in that order.
If a client demands per-hour when you've delivered a per-week quote, tell them "I don't work in hourly increments; if I spent an hour on your project in a day, I can't effectively work for any other client that day, so my minimum billable increment is a person-day". You can do that with weeks, too: "sorry, the tempo of my work is in multi-week projects, and if I work only part of a week for you, I've ruined that week for any other client".
A client that demands a statement of work broken out into hours may be pathological (bear in mind that lots of F-500 companies have idiotic time-tracking software that bills their internal people by hour, and bear in mind that every F-500 company has a "purchasing" department that exists almost entirely as a hazing ritual for outside vendors, and you probably shouldn't blame your actual customer for their purchasing department --- just don't change your terms for them.)
Vendor hazing ritual is a great analogy.
Lol, you just put several years of my life into a clear statement. Entirely the reason I don't do enterprise stuff as much unless I'm dealing with high enough decision makers who can clear the path for me (which is not often enough)
You don't need to go through that whole song and dance. Simply make your hourly rate higher than your daily rate.
Alert clients will prefer to hire you by the day every time. As for the less alert clients, if you are in a kind mood you could tip them off to the savings they'd enjoy if they hired you by the day instead.
Modify your hourly rate upwards depending on just how averse you are to working more than an hour a day even for the least alert and/or deep-pocketed clients.
Incidentally, I'll happily work an hour for people I like (and it never bothers me when people ask). I just don't bill for it.
If they are paying at least your daily rate, why would you mind that your day is shot for your other clients? They are, effectively, hiring you for the entire day and paying what you've determined you deserve for it.
If they are inattentive/crazy enough to actually pay you more than your daily rate for an hour (or any number of hours up to the maximum number of hours you'd work in a day anyway), then that's just pure gravy. Same for the case when it takes you less than a day to do the work you're getting paid at least your daily rate for.
In your original post, you'd said "I can't effectively work for any other client that day, so my minimum billable increment is a person-day" so in recommending the raising of your hourly rate to more than your daily rate, I was going on the assumption that your daily rate would have been sufficient for you to accept the job in the first place.
Of course, if you can't afford to work a day for your new client because of other commitments, you'll either have to refuse the job or raise your rate to the point that it is worthwhile for you after all. Perhaps that's what you were referring to when you cited the 8x daily rate.
(b) Raise your rates.
I don't care what your reason is for charging less. I don't care if money isn't important to you. Try it. Talk less about why you charge this or that. Challenge your own assumptions and try raising your rates.
Case in point: About a year ago, I started to charge on a daily basis for courses that I teach. (Previously, I had just given them my hourly billing rate, and multiplied it out by the number of hours/days in the course, plus for preparation.)
I was pleasantly surprised to discover that this simultaneously decreased pushback and haggling, while increasing the amount that I could charge for a course.
A daily bill rate aligns your incentives with your clients. Instead of scrounging for hours to bill, you estimate how long things are going to take, and get a premium for getting things done quickly. Everybody wins.
I thought it meant that I price my time in 8-hour increments. Which means that if I have to leave early, and put in a 4-hour day, then I only charge them for half of that.
Are you saying that if I bill daily, then I can charge for a full day even when I work only half a day?
I'm all in favor of finding a formula that removes the impression that I'm trying to gouge clients, or that I'm taking advantage of the blank-check aspect of hourly billing.
Of course, at the end of the day, it all comes down to trust. Fortunately, in almost all cases, my clients learn that they can trust me to be aligned with their business interests, and that I'd rather help them to succeed than find new ways to charge them without working. However, if there's a way for me to profit more while simultaneously increasing their trust (or reducing the time it takes to build such trust), then I'm all in favor.
What you do is, quote your client an estimated time to completion for your project in (in order of preference) weeks, days, (or only if required) hours. You have a minimum increment, which could be a week, or could be a day, but shouldn't be an hour.
Then you get the work done as quickly as possible and charge your client using that minimum increment.
But yes, I can very easily see how someone could take advantage of hourly billing.
As for how weekly billing works, I'm afraid that I didn't understand your example. It sounds like I estimate a project as taking two weeks (i.e., 10 days). One week into the project, it looks like it'll take one more week than I originally expected (i.e., a total of three weeks). So I tell the client that it'll now cost them for three weeks of my time. Did I understand you right? And if so, how is this a win?
You do a proposal for a client. You give an honest conservative estimate of how much time it's going to take.
Say it's a Rails CRUD app with no special domain code. Ok, 2 weeks, broken out into 2 billable weeks. The proposal says something like:
Week 1: 5 person/days, $5,000 (Setup, Discovery, Backend)
Week 2: 5 person/days, $5,000 (Front-end, testing, delivery)
TOTAL PRICE: $10,000
This project will be billed on a time/materials basis, starting Monday January 23rd and continuing for 10 contiguous business days through February 3rd. If additional time is required to complete this project, it will be billed at a rate of $1,000 per person day, provided that notice is provided within 1 week of February 3rd.
Presto, a proposal for a project that costs $10,000 billed time/materials at $1k/day (again, lowball figs).
Now, 2 weeks to complete this project is conservative. Also built into every proposal, whether you like it or not, is the collection of moments in every working day where you are not productive. So ask yourself, if I took 100 provigils† and eliminated ALL NON PRODUCTIVE TIME from my schedule for the entire next 2 weeks and completed this project in 7 days instead of 10, who should get that $3,000 of value I just generated?
The answer to that question is "you".
You don't generally want to rig your contracts so that they are padded out with unproductive time the client pays for; that's called "rustproofing" and it's bad business. But at the same time, clients actually value determinism more than they value any single billable day. If the client accepts a project for $10,000, they are going to be way more irritated if the project takes 15 days to finish than they are if you finish in 9 days instead of 10.
You have knobs to turn here too. Say you finish in 9 days instead of 10 because you drug yourself into working 18 hour days. Keep the $1,000. Say instead you finish in 5 days instead of 10 because the project turns out to be way simpler than you expected. Well, in that case, give the client their $5,000 billable week back. Think of this in terms of a minimum billable increment, where you don't credit partial weeks --- if you had to work at all in that week, that week is shot for other clients --- but will credit full weeks.
You see now how it's maybe not in your best interests to have your minimum billable increment be "one hour"?
† Please don't do drugs.
This comes closer to per-project pricing from the client's perspective, which they prefer because they want to know how much they're paying. (As you put it, "deterministic pricing.")
I tend to time-slice my weeks, so I don't think that it would work for me. But it might well work for the people who work for me, who do tend to work complete weeks on projects.
I do have to wonder how Israeli companies would react to this sort of thing. My guess is that they'll do the math, and then complain about the high hourly rate.
But the only way to find out is to try, and you've definitely inspired me to give this system a whirl. Thanks so much for sharing.
We are currently using hourly rates (around 100€/hour (130$/hr)). Rate is quite reasonable for our expertise level in our area. However, I have noticed that it scares smaller customers away.
I honestly don't know which one would be better approach: crude week estimates and price tag of 4000€/week/person, or detailed hourly estimates and 100€/hour/persons. Of course value based rates would be best, but not really possible in most of the iOS projects that we do.
But what's the reasoning behind giving weekly prices, why does it result in better rates? I'm sincerely curious about this.
A $1 discount is ~0.1% of an $800/day bill rate.
A $1 discount is ~0.025% of a $4000/week bill rate.
A $1 discount is ~0.001% of an $8000 project.
In what increment do you want to negotiate your rate? In full percentage points, or in hundredths of a percent?
And what figures do you want to be negotiating in: amounts that are low enough that your client can immediately get their heads around, like $100 vs. $150, or the real amounts their company will pay in the end, like $8000 vs. $7900, where an individual person at the company is less likely to feel like they should have a strong opinion?
Remember this: your clients are not paying you with their own money. It is monopoly money to them. It comes out of a budget, not their own pockets.
(To say nothing of the fact that when you bill hourly, you give your clients tacit permission to ask for your time in hourly increments).
I agree, there are no other industries where a professional will take on the business risk of another party with the exception of legal, and when they do they expect 30% of the case winnings. But for the vast majority of legal they charge for every hour worked. There is no reason for freelancers to work on a project compensation basis, they are shouldering unnecessary risk, that is usually due to the client not understanding development. Per project pricing immediately sets the freelancer up to have to defend against every change that inevitably comes in. Unless it is routine work, I rarely take on custom development work as anything other than an hourly arrangement.
Be careful; project risk and your billing increment are orthogonal concerns.
But in Israel, I've found that anything over $100/hour scares off everyone, including the very largest potential clients. They're used to paying $60/hour for top brass at a consulting firm, which makes it difficult to convince them that my higher rates are worthwhile.
I'm not saying that convincing them is impossible; I've made a living in this way for 15 years now, helped in part by my willingness to negotiate and discount my rates in exchange for long-term agreements. But whereas the US and Europe might have large, wealthy companies with technical needs who don't flinch at $150/hour or even $200/hour, such rates would get you tossed out on your ear in Israel.
That said, I haven't tried charging by the day, and will give it a shot at the next opportunity. I'm very curious to see what happens then.
Working with smaller customers does often mean a more limited budget so you can help them focus on getting the best bang for the buck. Help the customer grow and they'll have more money to spend with you.
The thing you can do with small businesses is pick the winning horses and bet on them. Find the owners that 'get it' while small and help them grow. This might be 1 in every 7-15 customers.
I have a customer I did at $5K project for a complete workflow management. It was a favor to a ex-vp of a company who had opened up his own business. Originally they wanted me to fix PHP bugs for that much but I just rewrote the thing in a few weeks. At the end I realized it was easily 3 or 4 times the cost and I made sure they knew this was it. I resumed my normal billing rate (they had no problems with it) after a problemless launch. They had been trying to build the same system for almost 2 years with someone else and were pretty happy.
4 years later they don't have a budget for me: as in, they spend whatever they want because they've at least added 20,000 sales/customers to their system. While this didn't happen because of my software alone, (they had an excellent manual paper system), helping automate their systemization sure helped them take off.
Do this kind of work not as your primary but maybe 20-30% of your time. It can really be enjoyable to help a good small company grow.
No, I'm a professional, and I expect to be compensated appropriately for my time and effort, just like the lawyers and accountants and other professionals I pay in turn.
I don't understand your unwillingness to accept this way of working. You seem to assume that it will result in a lower total income. I have encountered no evidence that this is how real life works. Maybe it's how the game is played in your particular field and/or your particular location, but it's certainly not universal.
Also, like some others posting here, I do value the ability to work on multiple projects simultaneously. I don't want to commit an entire week of work to a single client on a single project, if that is neither interesting for me nor providing good value to the client.
Also also, I like not being expected to stick around free of charge for another two hours after an 8-hour meeting 100 miles from home because my client wants a quick chat. Indeed, if my clients need me to attend a meeting 100 miles from home, I'll be happy to do so, but they're paying my full consulting rate for the travel time as well. When you're working on a day rate, particularly a relatively high one, it's funny how often your days start to become more like two of my days.
None of the rest of what you said has anything to do with hourly versus daily billing.
I can see the argument for fixed price vs. T&M billing. I guess I just don't see why going as far as daily/weekly billing doesn't net a significant part of the downside (no hard limit on hours vs. compensation, no clear cut-off where clients have no claim on any work I do other than for their project) without necessarily netting much upside.
As I said, perhaps that's the way the game happens to be played in whatever markets you've been working in. I'm certainly not saying you're wrong about your own situation. I'm just suggesting that your comments here are black-and-white but don't necessarily apply to everyone else's situations as well.
If I am billing weekly, but in practice I do 2.5 days of work for each of two clients, do I bill both for the entire week? Most of Thomas's arguments for rounding up in these longer increments on the basis of opportunity cost demonstrably don't apply in this context, because clearly I can use the other time to work for another client. The best outcome I see if someone I'm working for finds out is that I have an unhappy client and probably lose the contract -- which is fair enough, frankly, if I'm billing for a week but only actually working for them for half of that time.
For the avoidance of doubt, I'm not arguing against having a reasonable minimum billing period so clients don't mess you around and so you can manage your time sensibly. I'm just challenging the notion that "hourly" is not a reasonable period for some of us, and pointing out that "daily" or "weekly" can have serious drawbacks too.
For example if you say to me that you charge $500 per hour for three hours of work to secure my system that sounds expensive. But if you say the charge is a total of $2000 to secure my system then I am evaluating if $2000 seems reasonable without regard to what you are charging per hour.
If you don't know whether you'll be in court for 3 hours or all day, you need to charge for a full day. Otherwise, if you estimated 3 hours in court and then back to the office to bill someone else for the next 5, but instead you're stuck waiting for the judge for 6 hours, someone has to make up the difference.
Simplest solution is to just always charge for the full day.
If you can bill $350-$450/hr in groups of 40-80 hours at a time without blinking, please disregard my advice.