Why costing with an hourly rate undervalues your project

Over the years agencies, in particular advertising agencies, have used an hourly rate to charge for the work that they do. Hourly rates are usually based on the employee’s job and a mixture of overheads and profit.

The way some agencies work is to take the amount of time taken at the end of a job and multiply the time by the hourly rate.

The other way to get a cost for a job is to multiply the number of hours we estimate a job will take and times it by the hourly rate.

What this does is to make the hourly rate into a multiplier and time into a commodity, a bag of sugar as I call it. So then you have no differentiation based on your skills and experience, just an hourly rate based on overheads and time based on how long it took the last time you did the job. Of course you can change the hourly rate based on the experience and seniority of the people involved in the project, but it still doesn’t give you the results it should.

Using a bit of algebra I am going to demonstrate why what we have done, as an industry, is undervalue the work that we do, the skills that we have acquired and the experience that we have that makes us all good at what we do.

I know that my oldest daughter, who has in the past questioned why we learn things like algebra at school, will appreciate this, so this one is for you AJ!

Take time (t) and for any given project multiply it by the hourly rate (h) to give you a project cost (p). The first time you work on a specific type of project and I don’t mean when you first leave collage, I mean as a whole, a project or project type that you haven’t done before the amount of time you need to complete the project is determined by the amount of time the project takes (if you have no experience of a type of project the first time you do it will determine the base level of time required).

Obviously consideration will need to be made for the amount of time required to learn any new skills but basically we can say that:

The time taken for project 1 – t=t

But then undertake the same project again the time taken can be expressed as follows:

Project 2 – t=t-x

Where x is the amount of time saved because of your experience.

Undertake the same project again and you can further reduce the amount of time taken due to repetition. The time required for these projects can be expressed as

Project 3 – t=t-x-r

Where r is the time saved due to repetition.

If you use a job costing system, as the basis for collecting time on a project to multiply the time taken by the hourly rate you will only ever charge the time taken, not the net worth of the project.

What I mean by this is why do we charge less for a project because we are better at it and more experienced, rather than the other way around. Again you could argue that the hourly rate is increased to take into account the amount of time we reduce on a project because of the experience that we have, but does it really work?

In reality you are likely to have the project scenario above quite often within the lifetime of a client. Anything that requires repetition or you learn to do quickly or more efficiently, banner ads, emails and simple website changes spring to mind immediately.

The one true question shouldn’t be how long, therefore how much. It should always be what is the commercial value of this project. You could say that the value is the time taken the first time you undertook the project. Maybe as a project it should be more than that as it is worth more to the client than you are charging.

The danger is that we charge based on what we think clients will pay, not what they are worth – my dad would say anything is only worth what someone is prepared to pay for it – but this is kind of short sighted in the fact that in reality you get what you pay for as the adage goes, buy cheap buy twice.

Costing projects is never going to be an exact science but if you only use the time you spend multiplied by the hourly rate you are undervaluing not just what you do, but yourself and the experience you have gained over the years.

So the message is simple, stop basing project costs on an hourly rate and time taken, it’s a starting point, a guide if you will, but it shouldn’t be the be all and end all of the equation. Take into account previous iterations of the same job, look at what you charge other clients, what have you charged in the past. Only that way will you get a better picture of what a job is actually worth.

At the end of the day, when all is said and done, if your client won’t pay the costs you put forward are you prepared to work for a lesser hourly rate, do you reduce the amount of work done, or do you just accept that the commercial value of the project to your client is less than you believe it is?

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1 Comment

  1. Good thoughts there Nic, but there’s also something else to consider – the client paying you first to do something you’ve not done before is actually paying you for you to be able to upskill yourself. That client is paying for something that they don’t get 100% benefit from.

    In an ideal world (which this is far from), you would know that you were going to provide the task x, no y as you’ve used x, times and then divide the total time by y to give you an average and that would be fairest. However, that ain’t going to happen.

    Charging differently for different offerings is what we do – if it’s Development it can be less than SEO or Adwords, which is less than Analytics or Tag Manager because that is so specialised, we have to upskill a lot to offer it and the availability of people knowing how to do it is so limited, particularly here in NZ.

    I agree with the sentiment – it seems unfair that a client wanting something that you’ve never done before has to pay for the privelige rather than the client who wants the same as you’ve done hundreds of time pays less because others have paid for you to gain that experience.

    Just not sure what the realistic alternative is!

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