The Myth of the Hourly Rate

By Deane Barker on August 22, 2012

Blend has an hourly rate.  It’s $150, for the record.  We have an hourly rate pretty much because we have to have one. Everyone has to have one.

I have no idea if this rate is high or low.  I think there was a survey years ago, but honestly, we don’t keep track of what other firms charge, and we’ve only ever changed our hourly rate once in the history of the company.

That said, I’m going to argue for a minute that the hourly rate in professional services is less than important, especially so when it comes to web development work.  And it’s of extremely limited value when comparing services.

Is a company charging $150/hour twice as expensive than a company charging $75/hour?  Maybe, maybe not, but that distinction has little to do with the numbers.

Yes, $150/hour is twice as expensive if the product is simply one hour of work.  But that’s not really the product, is it?  The work product is what  gets done in one hour of work.  No, wait, that’s not it either.  The true product you are buying is what value the results of that one hour of work provide you.

When evaluating or comparing an hourly rate, you need to consider three questions –

If someone does one hour of work for you, the first question is productivity – how much did they get done?  I’ve often-maintained that Blend has been doing this so long that we’ll do more in one hour of work than most firms will do in two.  Or ten.  Productivity is often a reflection of a firm’s experience and their repeatable process, in addition to them knowing what dead ends to avoid and what work is just not worth doing.

Assuming their productivity is fine, the second question is one of quality – how good is the work they did?  If it’s poorly done, it will likely end up costing you money over the long-term, either in incrementally lost productivity or acutely lost time and expense in downtime and bug chasing.

Assuming productivity and quality are fine, the last question is one of utility – did they help you do the right thing?  If you were making a mistake, did they tell you? Did they suggest a strategic change that made your plan 100% better?  Did they implement the immediate change in such a way that future changes will be easier?  Did they consult for you, and advocate for your success?

It’s effectively impossible to compare hourly rates unless you hold those three factors constant.  Unless you can be sure both companies will provide same productivity, quality, and utility for your specific situation, comparing hourly rates is of extremely limited value.

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Comments

  1. Alas, fixed price is probably best for everyone involved….

    Granted, but many projects simply defy fixed rate pricing. See my other post on project pricing from last week.

  2. I disagree that fixed price is probably best for everyone involved. It can be good, but IMHO it is often counter-productive, especially in creative and advanced business (like web development). The reason is that to sign a fixed price contract you have to very closely specify what should be delivered, which takes time (=money). And the supplier has to add some time (=money) for risk to the fixed price. But as the implementation progresses the client, in my experience, always realizes they made a lot of bad choices, simply because they know more about their actual needs further into the project. So you go to the CR board and spend a lot of time (=money) arguing about those changes and what they will cost and in the process risk causing a lot of friction. It is often better to use an agile approach and work with a supplier that you trust to make good estimations of the time needed and that you work well together with.

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