How to Pay a Consultancy if You’re Not Paying by the Hour
What should you pay someone who doesn’t have an hourly rate?
First, a brief story to get us going:
Me: I don’t have an hourly rate.
Client: Why not?
Me: Because I don’t want to lie to you about how long this job is going to take.
Client: How very honest of you.
Pay them what you think the job is worth.
Here’s an example: the deadbolt on the front door of our house broke in the locked position. I could have left the door locked forever. We have two other doors. But, how would I then explain to someone who is standing on the front porch ringing the doorbell that no, I’m not refusing to open the door, I just want them to go through the garage as if we’re old friends?
How much was the locksmith worth to me? Probably $200 worth of long-term hassle, embarrassment, and inconvenience.
How much did I pay? For the knowledge, time, and equipment: $375. The time cost two hours at $100 an hour!
You’ve heard the old story of the mechanical engineer who shows up to fix the machine, bangs it with a hammer to get it working and invoices the client for $210: hammer $10, knowing where to hit the thing $200.
So, okay, in some cases we’re paying for knowledge.
I’m a consultant. I know my knowledge is worth a lot. But, I still don’t charge an hourly rate. Why not? Because dictating how I spend my time is worth a lot more to me than any hourly rate could define. Instead, we bill a monthly engagement fee. It’s a rate that equals the total value of the project to the client, divided among the resources I’ve dedicated to it, split into equal monthly billing periods.
The monthly engagement rate is made up of four factors: 1. The Statement of Work and the project’s parameters; 2. The resources I dedicate, 3. Travel and materials, and 4. Margin.
Every project begins with a Statement of Work (SOW). The SOW, agreed upon by both CRC and the client, defines what work will be done, how long the project is estimated to last, and what work products the client expects to be delivered by CRC. With a detailed SOW, we at CRC then determine what resources will be necessary to complete the job and how much those resources will cost.
I assign my resources by percentage. If my writer is dedicated 50% to this project then 50% of her salary will be paid by the project. If my researcher is in 75%, then 75% of her salary will be paid by the project. I don’t disclose salaries or percentages because there is no reason to have clients trying to do the math. The project had a value they disclosed. I’m working within their budget.
Travel and materials are items frequently billed a la carte in consultancies.
They’ll submit travel reimbursement and the client has to pay despite having no control over airline fares, hotel expenses, or rental car usage. Sure, there are some reasonable expectations, but the travel budget for projects sometimes appears lopsided to the project costs. Why not just use locals? Or teleconference?
When we build a plan, we work out our travel expectations – say one or two trips per month, two or three days per visit – and estimate the cost. Flight + hotel + food and beverage may amount to $1000 per consultant. We’ll build that into the monthly rate. If our estimates are off, that’s our problem, not the client’s. We’ll take care of it.
We build margin on top of the cost.
Margin allows Clemson Road Creative to have a little bit extra for the unseen costs like organizing the work, recruiting additional consultants, hiring graphic designers, and revising products to meet client needs without surprising the client with extra charges. When a project stalls or client resources are difficult to engage, we still have payroll to meet. We work until the project is completed, no matter what extra work is discovered along the way.
At CRC, we practice fair and honest pricing. That’s why we don’t think hourly rates are applicable. Hourly rates don’t explain how they’re calculated. They’re arbitrarily assigned with undefined results for the client. What’s worse is when hourly rates for the consultant don’t match what the consultant is actually getting paid.
As CRC is not funded, every dollar of the monthly engagement fee goes to bills and salaries. We work. We get paid. We pay our bills. Done, done, and done.
We’re transparent about pricing insofar as we want our clients to be able to predict the cost of doing business with us. We’ll demonstrate return on that investment with results.
If you missed my rant on hourly billing, click here.
If you are wondering how on Earth to pay individuals without hourly billing, click here.