Hourly Billing for Hiring Contractors – Inefficient and Harmful

February 22, 2021

Hourly billing is a terrible idea for any business hiring a contractor. Why? For one, it incentivizes the contractor to take longer on projects so they can charge more hours per project. 

Hourly billing also makes negotiations difficult because you have no way of knowing how much work needs to be done before starting the project and paying. In other words, if you aren’t an expert in the job you are hiring, you are taking the contractor’s word for time estimates anyway. You might as well get a fixed cost.

Even if your contractor isn’t offering projecting pricing, ask for it.

If you are hiring contractors, it may feel like you need to know their hourly rate. I would encourage you to rethink this altogether – if you can’t find contractors who charge project prices, nothing stops you from pitching the idea back to contractors. 

Why would you do this? Again, efficiency and cost control. If you have a fixed price from your contractor, then you can budget with 100% accuracy. Your accounting department will thank you later! Plus, the onus for doing the work in a timely and productive manner is on the contractor. 

Below are some statements you never want to hear from your hourly contractors:

“But what if it takes me more time than I think.”

An independent contractor who is new to the idea may have a similar gut reaction. The answer is simple. Price the work so that you solve a problem that allows room for both of us to profit

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If they can’t sell the service for less than the benefit to your business, it isn’t a good deal. If the contractor can’t sell the solution with a healthy budget buffer vs. their hourly rate, it isn’t a good deal. 

“It’s okay this is taking longer, I charge by the hour!”

This is the last thing you want to hear a contracted worked say. While hourly billing may not be a blank check, it is an invitation to this type of attitude. You may feel you are protected because you asked the contractor for a range estimate, but they will come back to you for the money if they go over by a lot. 

If you refuse to meet them at a higher cost, they will become bitter over time – making it challenging to get great work from them in the future. Plus, you don’t want to develop the reputation as a business that treats contractors this way. A clear, value-based project price keeps these dynamics at bay.

The truth is, you probably don’t know how long specific tasks should take – if the work were in your wheelhouse, you would do it. Evaluating independent contractors based on hourly rates, time estimates, and variable costs is a shell game. The real issue is that you have a problem to solve, and you need an expert to solve it. Figure out how expensive your business problem is, and then shop fixed prices that make it a profitable transaction – for both parties.