Escaping the billable hour model for civil engineering? 2

[proletariat]

If I ever start my own gig, I want to be able to have a fee structure that is based on something other than the billable hour. Therefore, I would have to sell a product.

A traffic impact study is a product. A flood study is a product. A survey is a product. An environmental impact study is a product.

A set of plans or drawings is a product, but it is sold by the hour.

What other civil engineering labor is sold as a product, as opposed to being billed hourly?

 

[bvanhiel]

We are trying to move away from time and materials based quotes and towards a fixed price model for product engineerng services. I think it makes the customer happier to have a fixed price in mind rather than a hourly rate, but it's riskier to quote, since no two jobs are alike.

We handle changes in scope with change orders that add time to the delivery and $$$ to the final bill. This also helps clients understand the effect of changes.

This model is frequently used by industrial design firms that we work closely with, and the upside seems to outweigh the down.

-b

 

[solid7]

We are trying to move away from time and materials based quotes and towards a fixed price model for product engineerng services.

I don't understand how a company can possibly get away from an hourly model. The hours have to fit into the component, somehow. (otherwise, how can you quantify the other factors?) If you have an office, and pay staff, everything - down to the last KW of electricity fits in to the profitability model.

How do you base a business model on an unknown hourly rate? Doesn't that kind of leave you in the dark when it comes to predicting customer conversion? (accepted quotes) I mean, if you're not telling someone upfront how much it costs per hour, you're either gonna screw them, or yourself - or so it seems to me.

I could see charging flat rates, if you were outsourcing your work to a country whose exchange rate was 1/10 of ours. But not doing work in-house.

Say I know how to implement my cad system to produce information in a faster means than than most any one else.

Forgive me for saying this - I mean it with all due respect - but I think that this is a cocky, and dangerous attitude/assumption when you are in business. Competition breeds innovation. What you THINK that you can do faster, better, and cheaper today, will be the "old thing" for your competition tomorrow. Always look to improve, but never count yourself "ahead" of the competition.

It reminds me of what my father used to tell me. He said, "Son, you might think you're tough - but there's always someone out there who can kick your a**" Never were more true words spoken...

The client doesn't know or care I only took a week and the competition is left scratching their head as to how I was able to get the job and blow them away.

The question that you have to ask yourself, is WOULD they care, if they knew that you were charging them a week's wage, when you could do it in a day? I'd rather charge exactly the time that it takes, (with my mark-up component) and ride the wave of referrals that comes with doing the job correct, and in a an expedious fashion.

Being in an engineering field isn't about doing things the fastest - it's about doing things the BEST. If you're going to charge a price, my opinion is that you should charge a premium, but only use the time that it really takes. Your WORK is your reputation - NOT your price.

Clearly stating what your price is, quoting accurately, and ALWAYS sticking to your quote, is what it's all about. I state very clearly to my new customers, that my quotes are set in stone - they only change when the customer changes his requirements. I honestly believe (from experience) that the more visibility that your customer has to your pricing scheme, the better relationship you will have. Yes, quotes take time. But I have won contracts that others have lost, just by providing a line item justification of my time useage.

Your mileage will, undoubtedly, vary. Be careful not to stick yourself in a corner. Once you adopt a pricing strategy, you will gain and/or alienate clientele, based on the change. New schemes are a risk, so weigh the decision carefully, knowing that you may lose clients (and may not gain new ones) in the process.


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CAD design engineering services - Catia V4, Catia V5, and CAD Translation. Catia V5 resources - CATBlog.

 

[bvanhiel]

solid7,

We use an hourly rate as a baseline minimum for quoting, but the client ideally never sees the hourly rate. All they see is a fixed fee for the deliverables we've outlined. This gives us incentive to be efficient, because we will be more profitable if we spend fewer hours.

There is the possibility that we have to put extra hours in to cover us if we've underquoted, but it sounds like you'd have to do the same thing:

I state very clearly to my new customers, that my quotes are set in stone - they only change when the customer changes his requirements.

We both have exposure to the downside, the difference is that I also have exposure to the upside. Customers don't seem to mind, as they like having the fixed fee to budget against.

-b

 

[solid7]

We use an hourly rate as a baseline minimum for quoting, but the client ideally never sees the hourly rate.

So this is a matter of semantics, then?

My typical quote would not put an "hourly" figure on the face of paper - rather there would be a price for each deliverable, with a line item description of each sub-task expressed as a percentage of the total time required to do each task, and then, the bottom line.

Is that what you meant?

Customers don't seem to mind, as they like having the fixed fee to budget against.

I have to keep this pricing scheme in place, because I find that customers have a habit of not respecting my time. I used to quote jobs, and stick with my quote no matter what crazy changes people came up with mid-shift - but people tend to think that they absolutely own you when they hire you. They seem to forget that signed purchase orders are legally binding contracts that lock them in to ONLY the services which they ordered. For that reason alone, I would be wary of a fixed pricing scheme. Unless of course, I'm misunderstanding your intent...

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CAD design engineering services - Catia V4, Catia V5, and CAD Translation. Catia V5 resources - CATBlog.

 

[solid7]

Let me drop in 2 clarifications:

1) I'm not in civil engineering, so I fear that I've hijacked this thread.

2) In my previous response, I meant to say "signed purchase orders and/or statements of work are legally binding contracts that lock them in to ONLY the services which they ordered

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CAD design engineering services - Catia V4, Catia V5, and CAD Translation. Catia V5 resources - CATBlog.

 

[ProEDesigner00]

There is another thread that is talking about multipliers to cover the unseen once your hourly requirements are known.

 

[bvanhiel]

solid7,

It sounds like our current quoting practices are very similar. One difference might be that we try adjust the quote for the percieved value to the customer: higher for conceptual engineering tasks, lower for "mundane" drawing tasks. The hourly rate baseline just makes sure we don't lose our shirts.

As for changes... thats what Change Orders are for.

To tie this all back into the original posters question: I think selling "products" rather than hourly services is appealing to both the client and the provider. The difficulty is defining the "product" narrowly enough that you don't get taken advantage of and broadly enough that it is of interest to your clients.

-b

 

[solid7]

One difference might be that we try adjust the quote for the percieved value to the customer: higher for conceptual engineering tasks, lower for "mundane" drawing tasks. The hourly rate baseline just makes sure we don't lose our shirts.

As in a different rate for engineering vs. drafting only? Yes, we do that, also.

As for changes... thats what Change Orders are for.

I don't do change orders. Since I'm not required to maintain any configuration control for anyone, there is no need to internally process engineering change orders. Additionally, this is a great little trick used by some companies to avoid paying you for months, even years. That is, every time you process a change order, it restarts the NET billing cycle. Cutting a new purchase order is my preferred method, because it retains the original deliverable. (a change in deliverable = a change in payment date) Small companies cannot afford to float the bill, based on a large corporate mentality.

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CAD design engineering services - Catia V4, Catia V5, and CAD Translation. Catia V5 resources - CATBlog.

 

[bvanhiel]

As in a different rate for engineering vs. drafting only? Yes, we do that, also.

Not a different rate, but an adjustment in the final fee based on the percieved value. We have essentially the same group of engineers doing either task, so we don't have a different rate for drafting vs. conceptualization. Our goal is to write a quote based on the value of services to the customer, rather than our costs. Our costs can't be ignored, but the customer isn't purchasing our time. They want our work product.

By Change Order, I'm referring to changes to proposal, not an ECO. Many, if not most of our projects involve customer motivated changes. We've never had a problem getting paid.

-b

 

[solid7]

Not a different rate, but an adjustment in the final fee based on the percieved value.

Yes, I understand. It's just a little cat and mouse game. Any way you slice it, the bottom line is always the same, and they don't need to know how much hourly you charge. It doesn't matter how you arrive at the bottom line - it is what it is.

So what do you tell them (out of curiosity) when they ask you for an hourly rate?

By Change Order, I'm referring to changes to proposal, not an ECO.

Many, if not most of our projects involve customer motivated changes. We've never had a problem getting paid.

I don't take chances. I HAVE had problems getting paid in the past, and I vowed never to let it happen again. The running P.O. was the first leak that I plugged. If you haven't had any problems, I envy you - but at the same time, I found that there are legal challenges if you find yourself with a customer who feels that they're on a different plane than you are. (that is, that they should make money, but you shouldn't) The P.O. and NET billing terms are as much legalese as they are accounting practices, and can be argued articulately within that framework.

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CAD design engineering services - Catia V4, Catia V5, and CAD Translation. Catia V5 resources - CATBlog.

 

[bvanhiel]

So what do you tell them (out of curiosity) when they ask you for an hourly rate?

At the moment we give a range. We're still figuring out how to manage that part smoothly.

-b

 

[newbieExec]

bvanhie ~ interesting post. I am preparing for our retreat and was searching the web for this discussion. Can you share what you mean by "you don't have a different rate fro drafting vs. conceptualization". Are you saying you quote you average billable hourly fee to you client and then determine how to make money by who you throw on the project. In the end, if I am averaging $120 an hour for billable hour - I guess I should be able to figure out how to put people against that an manage my marings my managing my hourly cost of the individual assigned.

Is that were you are going with this and that way the customer doesn't need to see your labor rates?

 

[bvanhiel]

Can you share what you mean by "you don't have a different rate fro drafting vs. conceptualization"

Our projects are realtively small, a handfull of engineers working on a project for 6-9 months. Typically the same engineer that is acting as project manager ends up detailing some of the drawings at the end of the project. That engineer costs us the same whether he's managing the project or detailing the drawings.

I think the basic idea is that we're trying to be more market driven than cost driven. Ideally we could charge the customer what they're willing to pay for services rather than basing our fees on what it costs us to produce. It's like the old saw about the engineer and the chalk mark. You're not paying for time, you're paying for experience.

-b

 

[newbieExec]

Thanks and I do like the old saying.

 

[RDK]

I generally quote work based on the time at my unit rate and then offer a slight discount for a fixed price contract.

This way since I am usually slightly high on my estimate of time I get paid the rate and if I can find a quicker way then I come out ahead.

If it takes me longer then all I lose is my time since I only have myself to worry about.

This approach may not work for a larger firm and for very complex work.


Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[newbieExec]

Yea Rick ~ I understand that for a sole practice - but when you have over 50 engineers to pay every two weeks, none of them want to work for free and take the loss personally - the Company takes it.

Thanks

 

[ProEDesigner00]

Solid7

I am not certain of your familiarity of Pro/ENGINEER. Not very many people due to "maintnence" of the process used to do what I previously wrote about worth the time, or even know this ability exists. I have met very few people that know of this ability in this program, those that do know has had in their past employment with PTC.

It does not take short cuts in that it subtracks from the quality of the work it just automates what you would otherwise sit and make the mouse clicks on anyway. Thus if any part of the manual labor that can be automated then your rate can be substantially less but not as low as someone who is just throat cutting.

I agree inpart what your saying. The work is your selling card. It has to be impeccable.

 

[solid7]

ProEDesigner00:

I don't mean any disrespect in any way, when I say this - but in my particular discipline, I've enjoyed assignments with companies, who I am sure have on staff the VERY best that exist. Why? Because they are business partners with the software company. That being said, I would never have been able to start my own business, had I not worked for some of these companies. There is simply no way that a small company can provide the same skillset as a large company, if for no other reason than the available tools in the toolbox.

To bring this point home, I would simply say that you never know what cards are being held, by whom, until you lay yours down. The fastest way to "up the ante", is just to show your stuff. Sooner or later, someone else will. Who is to say that your competition aren't saying the same thing that you're saying, or doing what you've described?

I once fancied myself a "top gun" of sorts. Now, I laugh at myself. There are some processes that are distinctly mine, to be sure - but it would only take someone else a matter of time - and the proper incentive ($) to figure it out.

I don't mean to bring you down. Just be careful with your approach. What I do (well) in 10 hours, would take someone else a week to do. Do I then, charge a week's wages? Absolutely not. I've developed the process, my customer knows it, and they consistently reward me for it. (at a very premium price, but less hours) But the knowledge is there for someone else to develop the process, whether it's common or not.

Good luck to you.

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CAD design engineering services - Catia V4, Catia V5, and CAD Translation. Catia V5 resources - CATBlog.

 

[DRC1]

Just a few random coments. I have done both methods of charging. I now work design build and raely bill engineering, although much of my time is in design. The billable hour model is poular because often the scope is difficult to firmly establish untilyou start engineering, and then you or the client may add or subtract from the scope, change concepts etc. With the billable hour model you are covered. Other items such as septic systems for developers, you can generally build a proposal and have apretty good idea of the time it takes. If you are working fixed fee and everyone else is billable hour, you can get a lot of interest, because you are budgetable. You can also make a little more money than billable hours. At least that was my experience. However, you need to clearly define the scope, and proposals and change orders will suck up time.
I guess my answer to your orginal question is do flat fee for very well defined scopes you feel you can accurately estimate. Do billable hours for everything else. I wwould suggest doing billable hours to start and prepareing a budget just to see how well you do estimate your time. Remember on your own you will have a lot more responsibilities and less support than you do now. However being your own game is very rewarding. Good luck.

 

[ProEDesigner00]

Solid7

I do understand what your saying. My brothers company thinks the same way. The do what your talking about they charge a premium for very good work done in a very reasonable time. Their specialty is Class A surfacing. they do it very well and do it very quickly. their clients complain about the rate but keep coming back for the quality in a short time.

That in a rounded way is what I am doing with my specialty.

I think as I look at this that you and I are on the same line of thought but talking in rounds that miss each other.

I am tired and going to bed for now.