Charging by hour: main drawbacks

Most companies in the consulting industry provide their services by the hour, and customers accept this form of business transaction because they are historically accustomed to paying for services by the hour. Other alternatives simply do not fit into their language.

<<< Checklist: KPIs for decision making in business management >>>

Faced with markets in post-pandemic crisis, inflationary environments, and constant tax changes, consulting work more than ever, from management, must know how to choose the most appropriate form of collection for both parties: company and customers. Otherwise, one of the two will end up hurting or both. The goal of this article is to identify what are the drawbacks of charging by the hour and why the billing by project alternative could add more value to customers.

Disadvantages of charging by the hour

The cost per hour establishes a base price for the amount of time that is dedicated to a specific activity or work to be carried out. This modality makes it possible to determine the amount of work and resources required to achieve a previously stated objective linked to the number of precise consulting hours that are necessary for the professional.

The cost of additional resources or materials may be included in the fee or provided additionally. Now, is this form of payment enough to account for the efforts made for a project if the customer can't have visibility of the actual number of hours worked by the consultants? How do customers know that they are being charged correctly and that they are not being extended the waiting time on purpose to charge more per hour?

Below, we mention the two most common drawbacks that we detect in charging by the hour.

1. Impossibility of measuring the number of hours at the consultancy level.

Part of the measurements of elapsed hours take place in meetings with the customer, the other part is defined through internal work to justify the hours to the customer that ensure, in some way, that they are charging what was executed.

However, this usually never happens and customers have no way of knowing how many hours the company worked on their project. Therefore, it implies a lack of transparency on the part of the consultant because they are charging by the number of hours, according to their criteria and not those of the customer, which does not allow the wills of both parties to be aligned, both of the customers as well as the commercial team.

The customer wants to pay as little as possible and finish the project as soon as possible. And in the case of charging by the hour, suppliers are interested that at the beginning of a standard project they can continue to charge for the hours worked, thus guaranteeing captive customers and that they are at the mercy of what the consultant wants to charge them.

2. Defined scope but not the number of hours the job will take.

In a project, the scope can be defined, but not the time and number of hours, since establishing this metric can be complicated because it is subject to the variability of circumstances.

People do not usually control time precisely and sometimes we cannot prevent things from happening for better or worse. A consultant can say that the job took 500 hours and demand payment for 500 hours. Unless you have a defined clause for the hours and that prevents you from charging beyond a certain limit.

Likewise, this would not make much sense either because it would be the same as working by projects. If it takes longer, you should continue to get paid, which could delay the job. Except that you put together a contract where you make a budget to the customer setting the number of hours that you suppose it will take you to carry out the work, the scope of the milestones to be met, and if you go over that limit you would not have the right to charge extra.

<<< Management area: the importance of a planning tool >>>

Switch to billing by project

To avoid the lack of transparency inherent to charging by the hour and that your customers do not have visibility of the number of hours that consultants use, charging by projects could add more value for the tasks because the number of hours is not being considered but the quality of the work done.

The charge per project is quoted based on the work itself, its scope, complexity, and specific objective to be achieved, establishing an assessment of the entire commercial process that implies the solution to a customer's need. For this reason, charging by project and not by hours brings more value to the customer because it considers each stage of the project as a whole, but at the same time, each milestone is important as a key piece for the objective to be met effectively.

On the other hand, charging by the hour only seeks to protect the interests of the company that performs the service. It can be very profitable at first, but over time customers may feel that the extension of their projects is deliberately delayed, increasing their costs and not adding more value to the service. This leads us to conclude that what is expensive and large does not always imply higher quality.

<<< Business Management: Why do we do what we do? >>>

In a few words, charging by the hour is one of the most used alternatives in the world of consulting to quote their services to customers. However, this form of payment only seeks to be profitable by putting a high price on working hours, but not focusing on the quality of the value proposition to the customer.

Consequently, the customer could feel that the time is worth more than the work itself. Although there are professions that essentially work by the hour and customers are not harmed, at least in consultancy it would be necessary to consider whether it is worth maintaining the hourly charge or migrating to the project charge.