How much is a day’s work worth?
When the client’s needs become clear over time, the daily rate is the most appropriate solution. But how do you determine it?
Ah, how nice it would be to bill at a fixed price! A set price for a specific deliverable. It would be simple: a negotiation between me and my future client, one that takes into account their ability and willingness to pay, based largely on the expected ROI.
But there’s a challenge: when working with a client, their needs become clearer or are discovered as the work progresses. Whether I’m helping them build a product or transform their organization, it’s actually impossible to specify in advance, in sufficient detail, exactly what they need, and therefore to discuss pricing with them with any confidence. The tasks I set for myself on behalf of my client are often defined on a weekly basis, but even more so on a daily or half-day basis, with constant adjustments.
This is why time-and-materials billing and the daily rate were invented. Instead of purchasing a deliverable and a guaranteed result, the client purchases time and a best-efforts commitment, namely, the provision of expertise for a certain period. This is the most common and appropriate arrangement in the IT industry (whether for salaried employees or contractors), because software development involves risks that only the client can bear.
From there, there are two types of people: those who don’t question things and those who do 🙂 A first question, already mentioned, would be “Is what I’m doing for this client the right thing?” The question that interests me here is the following: “Is my client getting their money’s worth?”
The major challenge we face is that added value isn’t a linear function of time. The most obvious example: some days, you’re more efficient than ever: you break through barriers, brush off uncertainty, and make significant progress on your projects. On those days, you’re probably underpaid. But those days are often offset by others when you get nothing done, because your time is fragmented by a thousand unforeseen events, because you’re exhausted, or because the project you’ve identified still needs a little more time to mature. On those days, you might actually be overpaid. The value produced cannot, therefore, be assessed on a daily basis, as this would risk being erratic.
And that’s just how it is; everyone knows it. We apply a single daily rate to this because we don’t know how to do it any other way. We’re not going to measure everything or put everything in a contract. At this stage, the system works because you’re bound to your client by trust. The client knows you’re committed to helping them, they can see that things are moving forward overall, and that’s precisely the point of a best-efforts commitment like time and materials.
But even assuming your productivity is constant, there’s still a challenge here. You’re probably familiar with this saying: “It took me 10 years to learn how to do this in 10 minutes; pay me for the 10 years, not the 10 minutes.” This phrase says a lot in just a few words. It clearly states that it’s the value that needs to be assessed, not the time required to produce it. But it also implies that the value of time depends on a person’s experience and expertise. In reality, however, the daily rate of someone with 10 years of experience is not 10 times that of someone with 1 year of experience. The function experience -> dailyRate is therefore highly concave, meaning that experience is not compensated at its true value under time-and-materials billing.
In other words, putting a price on time is an unsolvable problem. But what the calculation cannot resolve, the market resolves with ease: the price stems from the client’s willingness to pay. And this willingness is based precisely on what we have just described: their assessment of your experience and productivity.
Once again, a fixed-price contract would resolve certain issues, because it precisely defines the expected deliverable on the one hand, but above all because its valuation is generally based on a ROI calculation: I spend X, but that allows me to gain Y (or prevents me from losing Z). Example: the modularization of IT systems. In other words, the fixed price is more closely tied to value (what the service delivers) than a daily rate, which remains essentially a cost.
My workaround, when working on a time-and-materials basis, is to set small, clear goals for myself, so that I can approach each day telling myself, “You must make significant progress on these two issues.” This amounts to creating mini-fixed-price packages within a time-and-materials engagement. I usually succeed in doing this, and I know that I have truly worked in my client’s best interest.
As you can see, these few lines do not provide an answer but rather explore what a daily rate entails. They highlight the following paradox: what would allow me to bill in the fairest way—a fixed price—is precisely unavailable where value is most difficult to pin down: the support I offer my clients in situations of high uncertainty.