Question #19: What Is Project Based Billing Versus Hourly Billing?

Answer: The answer is project based billing bills by the project; hourly billing bills by the hour. Let us explain.

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Project Based Billing Versus Hourly Billing

This is exceptionally relevant for independent professionals who bill by the hour.

The difference is you don’t have to define what an hour is. You’ll have to define how fast you work in that hour or how much you get done, productivity wise, but you don’t have to define what an hour is.

The difficulty with the project-based billing is defining what the project is. When you both decide on what the project is that’s what you charge. If it goes beyond the scope of the project you charge more and you put that in the contract.

Diminishing Return with Hourly Based Billing

Let me give you an example of why this came to be. There’s a diminishing return with hourly based billing, but you must start with hourly based billing.

For example, an attorney bills by the hour. Let’s say an attorney starts at $150 an hour. An attorney just starting out at $150 an hour will not be as efficient as an attorney whose practicing law for a year.

If the attorney is still charging $150 an hour and has been in the legal industry for a year then that attorney is cutting him or herself short, because they’re getting more stuff done, but is billing at the same rate.

They’ve gotten better at what they do, but they're making less money, because they're getting more productive for that hourly time frame.

What does an attorney do? They raise their fees and that’s why a junior partner bills lower than a senior partner. Plus they have less influence at a junior level.

You give your stuff to junior partners to do the grunt work and you're paying them time to think. As you get more wealthy you're spending more time and you're getting paid more to think. I get more to think now than I did 10 years ago. Critical thinking time is what you’ll ultimately get paid for once you get to a very high level.

At hourly based billing, it becomes preventative if you get to a point where I’ve seen many consultants be at $1250 an hour, $700 an hour, even $500 an hour for an attorney. I know attorneys that charge more that’s a lot of money, so even saying hello to someone costs you about a buck.

Hi, that’s a buck. How are you? That’s a buck and a half. How’s your family doing? Whoa, shut up that just cost me three bucks. Let’s get to the thing.

I’m not trying to be funny, I’m being serious $500 an hour just doesn't make sense to me.

How To Start Project Based Billing

How do you start with project based billing? Project based billing is billing for the project so let’s take Spectacular Presentations as an example.

Let’s say Pat and Lorna Shanks came to me and said we want to learn more about project based billing. Rather than having a one-on-one consultation with them I (Alex Mandossian) would teach them during a project.

If this is a project right now then I’m not taking time away from other stuff I’m doing and I’m teaching an entire group versus two people. That would be a good decision to make in fact, I’m doing it.

Secondly, I would tell them to go to project based billing you’d have to have at least a dozen to two dozen hourly clients. Why? Because you have a dozen to two dozen case studies and you have a dozen to two dozen incidents of pain. The reason you go from hourly to project is, because of pain, for you and the client.

The client doesn't want to pay the hourly, he wants to pay it by the project and you don’t want to be paid by the hour, because you're getting underpaid typically. If you're getting overpaid, because you're just starting out then you love hourly.

What would I do for Spectacular Presentations if they're just starting out? I would say you have a dozen clients at per hour. You want to bill at a rate that is comparable to web design, web development and programming.

Comparability where I live and Pat and Lorna Shanks may not like hearing this, but it’s going to be somewhere between $40 and $70 an hour that’s not a lot, but it’s a lot more than zero.

The reason for $40-$70 an hour is, because in web development, although it’s going to have a lot of value to the marketer, Pat and Lorna Shanks have very little to do with the promotion of that.

Even if it were world-class if the marketers didn't have any presence in the marketplace they wouldn’t be making any money from it. Any money the marketer makes is not how project based billing is structured.

Project based billing is not structured on how it’s worth to Pat and Lorna Shanks or whoever the attorney is or whoever it is that’s being hired for the job. It’s not the return on investment that’s called a strategic alliance that’s where you do it for free and get a little piece of the back-end.

It’s like having a patent and getting a royalty. With project based billing you're making it fair for the receiver and to the sender, you as an independent contractor.

Let’s say that you were billing out at $70 for a Spectacular Presentation and let’s say something took six hours times $70. Six times $70 is about $420. If that’s the case, I would charge somewhere between $380 and $450 for that job.

If you did that job once and you got better at it over time then can you see how project based billing would work? If you got better at that job maybe you could charge $400 for that project, but it was only taking you three hours to do.

Giving Yourself a Raise

You would be giving yourself a raise on an hourly basis, but on the project the client is getting what the client wants.

Let’s say you're billing at $500, so no matter how long it takes the project is worth $500. The way you started billing that is by looking at what would be comparable on an hourly basis, not $500 an hour or $50, but somewhere between $40 and $70 in this case. For an attorney it would be $150-$200. It would be what is comparable.

Comparability doesn't mean going to Elance, because if you go to Elance it’s going to be undervalued. You’ll have people doing it for $20-$30 from Eastern block countries or from parts of South America, because they live in parts of the world that don’t have the same level of consumption cost as perhaps we do in the western cultures.

For web mastery I will pay about $65 an hour for web development, for a very good web developer. I’ll pay $75 for programming per hour. If I did that in San Francisco it would maybe be $100, but, because I do it with someone in Virginia it costs less.

That’s the beauty of doing these things if you're dealing with people who are in socioeconomic areas there the cost of living isn’t as much. Marin County and Manhattan are much higher than different parts of the country such as Arkansas or Mississippi.

You want to find high tech people in parts of the country that don’t have the higher cost of living and you get the benefit as a result.

With project based billing, go on what’s comparable, not on Elance, but comparable in your area on an hourly basis. Once you have half a dozen to a dozen case studies for that amount then you can go to the project based billing.

Do Not Focus on the Return On Investment

Project based billing does not focus on the return on investment or the value of what people are going to generate from what you're doing, because that has nothing to do with you. What has to do with you, is you becoming more efficient as an independent contractor for your client.

In looking at the hourly rate, if you get better at what you do and it took you four hours to do something and now it’s taking you two hours, you’ve just gone from $40 an hour to $80 an hour, but you're charging the $40 an hour rate, because it’s billed at the project.

So you get your raise on the project as you get better at it and that’s why it’s a fair system and that’s why many attorneys are going by project. You can’t do project based billing unless you have some level of example to go by.

New Paradigm

That example is by hourly so you use the old paradigm to get to the new paradigm.

Here are the steps again.

1. Figure out what’s comparable by the hour on an hourly basis.
2. Do not over bill it.
3. Do it so people are willing to pay fair market price.

If you have half a dozen or definitely a dozen people who are paying that rate then you know it’s fair. If you're not going to get it by the hour you're certainly not going to get it by the project.

Then go to the project after you’ve assigned the dollar value for the hour and then you’ve raised your price a little bit.

Don’t start at the very beginning, raise your price a little bit. If you started at $40 go to $50, maybe $70 an hour and that becomes your hourly to set the project. Ask yourself how many hours is this project going to take me?

Taking Less Time

If it’s going to take you less time, because you're better at it then you want to get them at the hourly rate that they would have paid, but it would have been at a lower hourly rate not long ago.

You can increase your project billing as well, but you want to make it affordable and at the same time you want to have it assessed based on the hourly. I hope that makes sense. The easiest way to do project billing is with hourly services.

Attorneys are great. CPAs are great. In fact, a lot of CPAs do project billing. If you have a CPA that does your taxes chances are that’s a project billed event. I do project billing with my CPA and with my taxes.

A website can be a project event, but you have to define the scope of the project. Many times clients want a little more and when that happens, you have scope creep then you get the short end of the stick if you're doing project billing.

Define on paper what the project is. Bill based on that and get a yes from them that if you are going beyond the scope of this then it’s going to cost more that’s critical.