The Ethical Way To Bill As A Consultant
Hourly? Flat-rate? Retainer?
This post first appeared on my personal blog Strategic Altruism on Substack.
You’ve wrestled with your rates, how much you should charge, and how you should charge. If you’re like me, you’ve also accidentally discounted your services by either solving problems for free, or by working extra hours beyond the original scope of a project. After over a decade of failing at this, here’s a definitive, ethical way to bill as a consultant.
And if we’re being honest, I didn’t invent this idea. The first (and still the best) articulation of blended-hourly rates is by David C. Baker. So you might just want to stop reading this post and just go read his first to see if it’s what you’re looking for. Back in the day, he used to write a blog called Recourses. He’s since changed the name of his firm and the New York Times now calls him “the expert’s expert.”
How is Hourly Billing Unethical?
It incentivizes the contractor to take more time or bill more than they should, and it incentivizes the client to pressure the contractor into working faster.
This is a poorly designed system. Straightforward.
You should both be focused on doing the best work possible — not looking at the clock.
One of the problems with holding this opinion is that most clients are not used to billing any other way. They’ll be very confused by the word “unethical” and “poorly designed system” because this is the way they’ve always done things and nothing bad has happened yet.
Plus, if you provide them with a flat rate or “day” rate, they’ll need or want to divide it by the time on the project so they can set an hourly rate to the work. Sometimes this is necessary so they can benchmark you against other offers, but most of the time this is because they just don’t understand what their project is actually worth and they don’t have another way to measure work.
Another common response from a client after hearing this is: “okay, well then how do you suggest we move forward?”
Some Alternatives to Hourly Billing
Retainer
Sometimes the work you’re doing is based less on the direct output you’re providing and it’s more about being available for support, emergencies, or spontaneous discussions that require your deep expertise.
In this case, you may consider a retainer relationship.
In a retainer relationship, you’re both saying:
“We both agree that I’ll need to be available to work with you for ~x hours per month. Since the work is fluid and doesn’t really have a clear ending, we won’t try to nitpick precisely how many hours are left in our gas tank. We’ll just say that we know some months will be a little less than x hours and some months will go a little over. This will allow us to use the expertise of the consultant without feeling like we’ll go over time when we need it most.”
A retainer can also work as a base on which other statements of work can be built. You may be on a retainer because your client wants to buy out your schedule, in order to avoid having the consultant balance multiple clients at once. Depending on the need, you may find that the retainer fee is worth it to the client because they know that you’ll be available when they call — even if you’re not directly producing work during that time.
Flat-Rate Project
You already know what it means to charge a flat-rate for a project. The client and the consultant choose a scope of work and a timeline. After that, they both agree on what that work is worth to the client. That’s your flat-rate fee.
A flat-rate is a form of what’s known as “value” pricing.
Coined in his book “Pricing Creativity,” author Blair Enns defines Value-Pricing loosely as uncovering the estimated or perceived value of a product or service to a client.
This wiki article is a good place to start if you’re curious about the term.
Enns also has a wealth of resources for value-pricing, including the critically important “value conversation,” which is arguably the most important conversation between the client and the contractor.
He’s already written about how to have that conversation and discover value from a project so I won’t try to take that on in this post.
Hopefully, this has made enough of a little crack in the old paradigm you’ve had in your head or in your business that you’re willing to try a new approach.
The Benefits of Value-Pricing
I can only speak for myself here, but personally, changing my approach from hourly billing to value-pricing has afforded me:
- Less stressful work.
- Wildly better margins.
- More focus on what I’m doing.
- Higher-quality outputs.
How To Explain It In Plain Language
For starters, take a look at the exact language I use at the beginning of my Master of Services Agreement (MSA) for every contract I take on:
Language from a live Master of Services Agreement.
Quick aside about contracts:
If you’ve never heard of an MSA, it’s basically the platform on which the Statement of Work (SOW) is built. The MSA has all the high-level details, like what to do if there’s a disagreement or who belongs what Intellectual Property. It also outlines how payment should work. The SOW should have the specific pay schedule, but the MSA should have the terms of payment. Basically, anything that’s standard for every client you work with should be in the MSA. Anything that is specific to a client or to a new project should be in the SOW.
Does This Mean I Shouldn’t Track My Time?
Absolutely not. You should absolutely track your time, but understand the purpose is very different. You’re tracking your time to monitor your organizational efficiency.
If performance is low on a project, you can check to see if it’s being neglected. If you’re putting in the work but the project isn’t on pace, you have an efficiency issue.
Use your time tracker as a diagnostic tool, not as the heart that pumps the blood of the business.
I use Toggl to track my time but there are many other options out there and I have no affiliations.
Other Resources For Consultants:
- Free MSA Template
- Free SOW Template
- Hourly Billing by David C. Baker (previously Recourses). This is the resource that first put this idea in my head and helped me make the switch.
- All of these documents are located in my personal VAULT of resources. It’s a public Google Drive that I share with people who are trying to do good things in the world. I made it for you, so share, steal, copy, do whatever you need to do.
Thanks for reading.
If you feel like something was missing from this post, just comment in below and we can either have a conversation or I can update the post with edits. This is intended to be a resource for you and for others, so consider sharing it with someone who needs to hear this.
