Charge by the Hour?

Time Card Machine at Graff-Pinkert.

By Lloyd Graff.

A big topic of conversation these days is “What do you charge per hour?” The hourly rate, either as a wage or a basis to charge clients, has been baked into the economy for decades, but is it the wrong way to measure the value of time?

Adam Davidson, an economics writer for NPR, just published an excellent piece in last Sunday’s New York Times Magazine, entitled “What is an Hour of Your Time Worth?” The subtitle was “The hazards of measuring the economic value of an idea.” Davidson discusses Jason Blumer, an accountant who took over his father’s small accountancy practice in South Carolina and rebelled against the standard practice of billing by the hour. “He realized that the billable hour was undercutting his value — it was his profession’s commodity, suggesting to clients that he and his colleagues were interchangeable containers of finite, measurable units that could be traded for money,” writes Davidson. “Billing by the hour incentivized long boring projects rather than those that required valuable insight that couldn’t (and shouldn’t) be measured in time,” Davidson adds.

The manufacturing world has long been the bastion of the pay by the hour/bill by the hour approach, but it does not have to be that way. In Graff-Pinkert’s machine tool business, we are finding that some of our clients who have the available cash and willingness to risk it these days have leaped out of the hourly rate mentality. They have developed unique products or approaches for the medical or gun world (I know the irony of that) and do not compete for time and material rates.

If you work in a commoditized environment, somebody in China or Vietnam, or Alabama will eventually undercut you.

The stupidity of rote hourly billing was brought home to me this year after we switched our accounting business to a well known, highly respected national accounting firm. The bill tilted up as they tried to understand our business of buying and selling used machinery. I hated the charges, but I could accept that there was a learning curve. But after tax returns had been filed they decided that a mistake had been made on whether to account for a sale in 2012 or 2013. They demanded that we refile our returns. Big new bills ensued–more billable hours, because it had to be correct. The firm would not allow an incorrect return, and of course, we paid.

It infuriated me. Did they add value, or just billable hours?

This was the billable hour world gone mad. The employee who does a lousy job still gets paid.

Before I wrote this piece, I talked about the billable hour syndrome with my lawyer Russ Ethridge, who I gladly pay by the hour because he is client friendly and extremely efficient. He feels penalized by his integrity and efficiency. Billable hours cut both ways. If you have a lawyer like Russ it works for you. If you have an accountant who charges you for the firm’s rigidity you lose.

In the machining or machinery dealer world I live in, you need to find ways to provide value for your clients and yourself. For both parties, I think the hourly rate is becoming obsolete.

Question: Do you prefer to pay for services by the hour or pay a flat fee?

Lloyd Graff is Owner and Chief Space Filler at Today’s Machining World and Graff-Pinkert & Co.

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7 thoughts on “Charge by the Hour?

  1. Randy Lusk

    Interesting thought but wrong question. My customers really don’t care what I charge and hour they want to know what their “cost is” for finished good delivered on time. I need to know what my costs are associated to the way we have quoted the project. Often times the initial plan is less efficient than we imagined and the trick is deciding if we can improve on the initial plan as well as on the initial quoted total. When I find someone to do a project for me I also want to know the total cost. We’ve all had contractors of one kind or another that offered time and material quotes and then realized we should have asked for a fixed price. In efficient or efficient the job is still only worth so much, the slow guy should earn less an hour because he is inefficient, or in my case if I have a multi axis machine I can run lights outs versus the old way of running in three set ups i should make more an hour.

    Randy Lusk

     
    +4
  2. John Bressoud

    The company I work for has never been sucked into the dollar per hour approach, though our cusotmers often ask “what is your hourly rate?” Not because that is what they want to pay, but because they want to be able to compare “expensive” vendors to “cheap” vendors.
    We produce value and quote accordingly.

     
  3. JOL

    I prefer to bill by the hour with a cap of maximum value on the total cost of repair – kind of combining hourly billing with a flat rate feel.

    Flat rate fees are tough if you rely on the diagnostics skills of your customer. Great example is the ‘all my car needs are brake pads and they cost $59 at the parts store.’

    Yet as a trusted ASE certified mechanic when the customer drives in he quickly finds the caliper is froze and as a result chewed up the rotors. Flat rate is what the driver who diagnosed the brake problem would want, $59 just for the pads, yet the garage is going to bill them for everything.

    It proves difficult when working on a used machine to throw out a flat rate for a repair without being on site to evaluate it. Just because the customer thinks it is a simple fix the technician can quickly find general lack of maintenance, with around the clock abuse of the machine chugging out parts using worn tooling, ball screws and bearings can turn into a big repair bill. The service company who gives a flat rate without a thorough evaluation will possibly cut corners so as to still make money at the end of the day.
    Flat rate mechanics know how to cut corners as they only get so much pay at the end of the job and to maximize their paycheck they work quickly to get as many jobs done in a week.
    You get what you pay for and in the case of a $500,000 piece of equipment I would rather it fixed right not fast. Customers negotiating for a flat rate as opposed to agreeing to an hourly charge might end up paying for another service down the road in the near future instead of getting his machine fixed completely the first time.

     
  4. Don

    “China or Vietnam, or Alabama”.

    Nice! You could also say “If you allow the repair to be done on a Cost-Plus Basis, eventually someone in Chicago will screw you”? It has equal validity.

    You know, the view down here isn’t bad at all, unless I’m looking back up your nose at you.

     
  5. Stan Martin

    When I started into this business I did not have a machining background but instead a business degree. I’ve always fought the quoting process based strictly on an hourly rate as the only measure. Every article written about the latest and greatest technology promotes the idea that if you make parts faster you therefore can quote less per part and get more work. In my mind parts should be quoted based on what the market will bear not on how long it takes to make said part. This is why machine shops work for less than plumbers or electricians. They underestimate the intellectual value needed to produce widgets.

    Example. I sold one of our workholding fixtures to a gentleman in Denver, Co. He gave me his shipping address as a neurology center. Confused, I asked him what they needed this item for in his line of work. He said “Oh, this is for my home workshop where I’m trying to learn how to machine parts.” He went on to say how way more complicated machining is than he could ever imagine and how he was struggling to understand 3 and 4 axis machining. This from a Neurologist.

     
  6. Bruce Domer

    I belive that a particular part or service has a specific value. That value may be more or less depending on the living expense of the area. Having said this, a person that does the work should make more money the faster they can make the part or provide the service correctly. The problem is that everyone charges the same fee per hour whether they can get the job done right or not and are fast or slow. The only fair way to pay is per part or service produced. Then the lazy or incompetent will not profit as much as those with enthusiasm, proper skill and/or equipment to do the work quickly and correctly.

     
  7. Dean

    Had a simple walk in job come by because the fellow did not want to stand in front of his South Bend Lathe. It was just some steel sleeves a little under 1/2 dia. OD needed to be +-.0001 for a press fit that was the easy part. No print just samples to match. Customer wanted 2 of a medium length for every short part and 10 parts .805 long then 10 of each oversize. Charged $2.00 each did run off 150 pcs total. I just can not charge enough to set up a Hardinge CHNC2 a drill is always low so you have to shim that up. Dink with this or that set a boaring bar write a program pray you do not crash. This same guy wants me to turn 3 ball screw ends. What happens if I screw 1 or more up? How do you charge enough for that? Thinking welfare would pay more and then I would only have to worry when Jerry comes on.

     

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