We don’t sell Time, but …

As mentioned in earlier posts we don’t sell time, as it is typically a poor measure of work effort and work value. If a job is such that every minute of every day is the same year after year, then time may be a useful measure of workload but still not a measure of work value. Moreover if a job is like that, then probably involves making widgets or something similar where items produced can be counted, and such count is a better measure of work done. Of course one person could produce more items per unit time than another, and such production rate would be useful measure of work effort. But what about the work value: is one person’s minute of time worth more than that of others? If talking about widgets, then the revenue available for wages comes from the sale of the widgets: the total revenue is determined by the sale price and the volume (or total count) of items sold. The price is whatever the market is willing to pay for the item.

The Price of Labour

Note that! The price is not the cost of production plus desired profit. No! Price is what the market is willing to pay. If such price is less than the cost of production then the business is not sustainable. If the price doesn’t provide for any profit then little incentive to make the item. But what is the cost of production? A large part of the cost of production is the labour cost. Labour cost is the compromise between the fee labour is willing to work for, and the fee the employer is willing to pay. Here in Australia the compromise is typically set forth in an industrial award, and content of the award is negotiated between employee organisations (unions) and employer organisations, and this negotiation (battle of wills) can take place in an industrial court. However not everyone is covered by an industrial award, but we have now reintroduced a variation of the basic wage, the social wage, in the form of the federal minimum wage. These are minimums and the market may set the wages higher than the minimum.

But what sets a minimum wage. A standardised basket of goods that someone or group of someones, believe is essential or otherwise needed. But this basket can vary in price across the country, and not everyone will want all that is in the basket, they also may need more or less than the quantities allowed for. So whilst it appears that minimum wages, the price of labour is calculated from real things and has a real value, it doesn’t, it is just a number pulled out of a hat, a number people have a desire to receive. Each side to the argument attempts to justify their reasoning for lowering or raising the number which is agreed to: but with or without justification it is just a subjective judgement, an opinion, a desire, something pulled out off a hat.

Selling Time

If sell time then the assumption is:

Price = Work Done (Hours) x Hourly Rate

We can measure the hours, but there is usually some inaccuracy in such measures. Most time sheets use either 1 hour blocks or 15 minute blocks. One place I worked the environmental department had a good trick, go use services of another department for 10 to 15 minutes each day: so over a week they have used 50 to 75 minutes of time. The time sheets collected times, but limited to half hour blocks. So couldn’t record any time for the environmental section each day. The environmental section was apparently more profitable than the other departments. I waited to end of week, and then assigned 1 hour to their projects, allowing for loss of time to my main project. Since I didn’t spend an hour working on their project on the assigned day, the environmental section would complain: but I argued the point and the time to their project got to stay. Really the day of the weeks not relevant, just the total hours worked and the projects worked on. The point is the work done is not an accurate measure, as time throughout the day and week is spent on a multitude of projects and tasks, and it isn’t practical to keep track of all of them. Also whilst it is preferable that time sheets are filled in daily, it is more common that they are filled in weekly or even fortnightly. First, getting the work done is more important than the time sheet, and secondly as indicated earlier it is preferable to adjust daily record of things to properly allocate time to all projects worked on during the week. So we have an estimate of time required before the project, and after the project we still only have an estimate of time used.

What Should the Hourly Charge Out Rate Be

As for the hourly rate, what should that be? One common suggestion is 3 times the desired labour rate of an employee. So if federal minimum wage is $18.93, then the charge out rate would be $56.79. Or if look at the professionals award then for experienced (level 2) rate is $29.85, therefore charge out would be $89.55. Compare this against bookkeepers, accountants and plumbers where fees may between $90 and $120 dollars per hour. Clearly can aim for a higher rate. Looking at payscale Structural Engineer Salary $70,465, for 38 hours x 52 weeks,  so $35.66 /hour and therefore charge out rate would be $106.98 /hour. Where the charge out rate expects to cover other operating costs of the business and to account for billable time lost when actually looking for work.

The alternative is to pick a take home labour rate, reduce hours to allow for non-billable activities such as looking for work and administration, so instead of 38×52=1976 hours, possibly allow 20% loss (395 hours) and reduce to 1581 hours. Also calculate other annual operational expenses, say $15,000 to $30,000 depending on cost of buildings and other plant required. This recovered at hourly rate of $9.49 to $18.98. Whilst salary rate increased to 70465/1581 = 44.57 Thus total charge out rate is 44.57+(9.49 or 18.98) = $54.06 to $63.55.  Which we then compare to:

How much is a structural engineer?

Where get rates $100 to $250 / hour, or flat rates for small projects ranging from $300 to $500.  {should note the article is incorrect it is not the case that all states require structural engineers to be licensed or registered. However I will argue the difference between Associate Technologists and Engineers another day. What ever an engineer thing is, in South Australia there is no constraint on who can design, there is only a constraint where there is a requirement for a certificate of an independent technical expert (then they need to be chartered engineers CP.Eng and more importantly independent of all involvement in  the design.).}

Next compare fees for drafters and architects:

  1. Cost of Hiring a Draftsman
  2. 2018 How Much Does a Drafter Cost?
  3. Architect vs building designer
  4. Is a Drafter Cheaper than an Architect?
  5. How much do architects charge, and why do they charge percentage fees?
  6. The top 6 reasons to not use an architect
  7. Architect vs Draftsperson vs Building Designer – what’s the difference?
  8. Fee MAD-ness (mutually assured destruction): an existential crisis
  9. Fee redemption: A mutually assured future
  10. Architect designs that won’t blow your building budget

So drafters can cost from $90 to $180 / hour, or they may charge $16 to $25 per square metre. Whilst building designers may charge 3-5% of the build costs , and architect 7-10% of the build costs. With extensions quoted as having design/drafting  fees from $2800 to $3900, whilst design of whole house fees from $2500 to $6000. One thing for certain is that architects and engineers typically spend a lot of time complaining that they should be paid more: ignoring that price is what the market is willing to pay: and believing price is cost plus profit.

Fees Unacceptably High

Now these hourly rates are all very nice to have, simply multiply by work done in hours and you have the fee for the job. The problem however is that the total price is typically unreasonably high, and the reason is that time is not worth the high rates every minute of every hour expended on the project. Whilst the extreme values of hourly rates for architects, engineers and drafters are significantly different, the lower end of the range is not. In an architectural or engineering practice, those employed as architects or engineers would typically get paid significantly more than the drafters. But out source the drafting, and go to the marketplace, and the wage relativity imposed by an award, where those with more years of formal education get paid more, is tossed in the bin. Education may help people earn more money, but there is no justification for claiming higher wages just because have higher education. Many architects and engineers, seem to think they have the same value no matter where they work.

For example work for TAFE without teaching credentials. Doesn’t matter, have 4 year degree (B.Eng), therefore superior than teacher with 3 year degree, therefore should get paid more: ignoring that their qualification (B.Eng) is largely irrelevant to the task at hand, and that they don’t otherwise have appropriate qualifications in teaching. Similarly working for a manufacturer, an engineer is staff, and therefore not required, they are not frontline personnel, they can therefore be dispensed with: less value than the frontline personnel. With an engineering consultancy however the engineer is the line personnel, and therefore worth more than staff. Whilst with a drafting bureau the engineer is once again advisory staff and therefore expendable and worth less than the drafters. Worth depends on the value of the work contributed to the organisation. Where you work matters. The specific type of work matters.

Anycase in a consultancy the cost of drafting is likely charged out at a lower rate than the cost of architectural design and less than the cost of engineering. So a project which has a cost of 80% engineering and 20% drafting will cost significantly different than a project which consists of 80% drafting and 20% engineering.

Attempts to Adjust To Market Rate

So my fathers, approach to not selling time was use an hourly rate, and estimated time to determine a fixed fee, and then “gut feeling” reduced the fee or maybe occasionally increased the fee. So price can be formulated as:

Price = Workload[hours] x Hourly Rate x Market Willingness

Where market willingness is typically a price reduction factor.  For example 100 hours, taking the high rate above of $180/hour =  $18,000, which would typically seem too high for the typical private individual with a DIY project. Assuming that the reasonable fee is $2000, then the actual hourly rate drops to $20/hour. Compared to the federal minimum wage and adding minimum value for other costs, the hourly rate is too low and not sustainable (18.93+9.49=$28.42/hour). Therefore take the minimum rate to get a fee of : 28.42×100 = $2842, as expected this is higher than what is considered to be a reasonable fee: but such is just a feeling, an opinion. The new fee is however more easily justified to the ones who have to pay. {NB: I am not recommending the lower fee, if you can get the higher fee then lucky you. The exercise here concerns those who expect the higher fee, and complain they cannot get: they cannot get because they are not operating in the right market and not offering the right thing. To be clear I am not saying sell $18,000 of work for $2000, I am saying sell work worth $2000 for $2000, and don’t do such work if it will cost you more than $2000 to do. Also should note that $180/hour maybe a cost to an employing organisation, but to a sole practitioner it is likely a desire not a cost and they can tolerate a reduction in rate if they can otherwise meet their living costs.}

It should be noted that most people who write about pricing, work in large corporate enterprises or for the government, and have similar clients. These organisations and their clients often have money to burn, especially at the end of the financial tax year. The kind of fees they consider to be reasonable are not reasonable to the population at large, and when it comes to the government, the fees are not acceptable to the taxpayer either. Architects and engineers who complain about low fees, have got too used to playing in the big game, charging percentage fees for high cost projects, and bragging about the value of the projects they win. To start with such percentage fees won’t cover the cost of small projects. Secondly for small projects the cost of the design and documentation is likely greater than the cost of the building:  so it is important than design occurs once, and built many times. Thirdly the effort is not proportional to size but to the complexity. Whilst complexity may increase with size, it does so in steps not continuously. So often the architects and engineers on large projects get familiar with getting high fees for very little effort.

No doubt the fee difference between $18,000 and $2,842 is large. The issue however is justifying the $180/hour and the 100 hours required. How was the time spent, is the person too slow? If the hours can be reduced then the cost can be reduced. But if develop the technology to reduce production time, is that justification for reducing the price below market price? Only reduce the price if the market price is falling: which is likely when new players enter the market using new technology and have no legacy systems to support.

As for the hourly rate. For simplicity assume other costs from $10 to $20/hour, then the labour rate expected is from $160/hour to $170/hour. Is anyone actually worth 8.5 to 9.0 times more than the lowest paid worker? Ignoring the market, I don’t believe that any industrial award should set a wage more than 5 times the federal minimum, and preferably shouldn’t be greater than 2 times greater ($37.86 to $94.65). So if fees over $30 /hour are to be justified then hopefully there are other high operating expenses: and no doubt those expenses are highly variable and not experienced by every supplier. {NB: People can earn more if able to, but no legislation should set high inequities of income.}

It is also to be noted that often engineering is imposed on people, it isn’t something they want, nor necessarily need, there is just legislation which requires the services which often only an engineer can provide. The service so provided is often of highly questionable value. As mentioned for small systems, design the system once, and build many times. The supplier isn’t providing anything that is really engineering: its typically a relatively trivial series of calculations to confirm what everyone already intuitively believes or otherwise knows from experience of the environment all around them. So whilst the series of calculations may take time, the calculations are not highly valued.

On the other hand drawings are valued, but not an excessive amount of time put into producing them. Drawings lack value because often can build without drawings, or build using freehand sketches rather than formal drawings. Drawings can be photocopied and used on multiple projects. Value has to be provided to the individual project.

There are other things to consider, such has risk. Large projects don’t necessarily involve any greater risk than small projects. However the consequences of failure may be more costly.

Engineering Effort

In attempting to get away from selling time, I attempted to make use of the concept of engineering effort presented in the article:

“To Engineer or not? That is the question. By Edward Yannul, pg 27-29 Engineering World Oct/Nov 2005, Volume 15 No. 5”

This article considers the following four factors:

  1. Degree of Change
  2. Technical Challenge
  3. Strictness of Goals
  4. Risk

The problem with this approach is: it reinforced my viewpoint that real engineering takes place at the frontiers of science and technology. The task we are really involved in, is playing technical lawyer demonstrating compliance with regulations: project advocate. To put simply the engineering effort calculated from this approach was always the same, the low end of the scale: none the less it is still a useful approach and something the regulators should look at when they create nonsense legislation for so called “engineers”. However for the task at hand need a more refined method, to give some variation. To do this I used a Renard Series to define a fee scale with a maximum value of $5000 excluding GST, or $5500 with GST. The series being:

Level Fee
0 $55.00
1 $110.00
2 $165.00
3 $220.00
4 $330.00
5 $550.00
6 $880.00
7 $1,375.00
8 $2,200.00
9 $3,465.00
10 $5,500.00

The initial idea being that for a fixed work effort, an increase in complexity results in a higher fee. However for an increase in work effort the fee also needs to increase. So instead the list just becomes a list of standard fees. With price calculated by various methods based on various market rates, and then the nearest standard fee is selected. The standard fees allow defining productised solutions at fixed price, which is the prices assigned to services in the website store.

So currently have:

Price = workload[hours]  x Federal Minimum Rate x Wage Multiplier x Complexity Factor x Risk Factor x Market Factor

Where wage multiplier converts federal minimum wage into rate for a given job function. The complexity factor allows for variation in complexity, risk factor variation in risk, and market factor allows for judgement of what the market is willing to pay. All these factors are a matter of subjective judgement. Additionally project is broken into various tasks which have different labour rates. It’s still essentially a fee based on “gut feeling” judgement of the market, however the costing is based on multiple factors which can balance each other out. Furthermore the price has to come from the fee list, unless the fee is built of component fees taken from the list. For example carports are based on multiples of level 3 fees.

Following the above mentioned article on engineering effort, various approaches have been tried to standardise the values of the various factors used in determining price, but thus far no practical set of values has emerged. Basically the multipliers are individual judgements and are best if they can take on any value, or if have standardised values then need a final factor which can take on any value.

At the end of the day the real market price is unknown, and determining the price is a real world experiment. The approach adopted attempts to refine the build up of the price.

Problems of Averaging

Consider that averages can be problematic. Back around 2005, based on typical carport builders indicating they sell/build around 40 units a month, and only need “engineering” for 10% of the projects, we worked out a fee of $220 for each and every project for a specific builder. If everything was balanced out, then it would cover the more involved projects which would cost closer to $1200. However the builder didn’t put all the projects through, as formal drawings and calculations take too long: we only got the more involved projects and it wasn’t sustainable. But even if the builder wasn’t the problem: the market could be the problem with all the complex projects coming at the start of the process thus business becomes brokes before things start balancing out. Averaging can make prices too high or too low at the wrong time. So averaging cost of different labour rates such as drafting and engineering can cause problems: for example from above drafting $180/hr + engineering $250/hr, typical project 80% drafting: so averaging out 0.8180 + 0.2250 = $194 / hour. But already indicated that $180/hour is too high. {NB: The market looking at comprises individuals on low incomes pursing DIY projects to save money. Or builders and manufacturers just getting started. All of which need something they call engineering.}

Specification of Product

It should be noted that drafting is not design: converting the owners builders sketches and spoken ideas into formal drawings is not design. Most building designers are not worth the fees they charge, they cannot draw and they are not even qualified in technical drawing and have inadequate knowledge of descriptive geometry and trigonometry, and they are poor project managers as well. Can the market sustain the fees the drafters charge? I doubt it, however it is the unskilled drafters who will lose work, rather than building design fees dropping. Some restructuring is required, making it clearer in the market the difference between drafting, design and the thing called “engineering”. Once such is clear then fees will seem more reasonable to both suppliers and buyers alike. {NB: Legislation and granting monopolies is not necessary}

To be clear price is neither cost plus profit nor hourly rate multiplied by time taken. Price is only what the customer is willing to pay. The architects and engineers complaining about declining fees for the most part have no idea what real design and engineering is about. As I have explained elsewhere last years engineer is this years technician. A failure to recognise such will cause problems. The silly form brigade (Queensland & Victoria) and the rubber stamp brigade (USA) do not do engineering. The service they provide typically has low value and is not wanted, the only reason they can potentially charge extortionate fees is they have been granted a monopoly.

“The successful producer of an article sells it for more than it cost him to make, and that’s profit. But the customer buys it only because it is worth more to him than he pays for it, and that’s his profit. No one can long make a profit producing anything unless the customer makes a profit using it. ” [Samuel B. Pettengill]

To change perception of value, we also need to change perception of what it is that people are actually getting. My concern is providing a thing called engineering, which I do not consider to be engineering. I want to provide this thing to enable and empower people, not hold them to ransom and not make them dependent. For the most part the business has operated as equivalent to legal aid but supplying engineering, and without the financial support. Today (01/10/2018) is the 1ooth birthday of Govindappa Venkataswamy the founder of Aravind Eye Hospitals, a group of hospitals which demonstrates that it is more than possible to cut costs, and sustain a business when users name their own price.

The store to this website uses Name Your Price for the software which is on offer, but so far not willing to use such concept for services. The reason is the same reason given for averaging, likely to start with most people opting for zero fee service and go broke before start getting any income. Operating in a different market may experience differently.

So contrary to what appears to be mainstream philosophy: push prices as high as you can get. My aim is to drop industry prices and make this thing called engineering more affordable to people who most need.

One perspective of engineering is that it is the art and science of maximising the benefit from available but otherwise limited resources.

So people with limited resources are in most need of engineering, but engineers groups keep complaining about wanting higher fees. For certain I want higher income, as in I want my income to reach the Federal minimum and then get above it. I have no need for the incomes the complaining engineers are getting, and still less need for the incomes they desire. For me the issue is logistics and finding new markets. The issue is engineering done in existing area, therefore find new area in need of engineering or continue with same area and recognise its no longer engineering.

Technology is simplifying the task and reducing time required. If sell time then prices will drop. New players will use new technology, they will build businesses around the technology and they will ultimately push prices down, they will only retain prices at current levels whilst they build their infrastructure. The infrastructure no longer needs to be buildings on the ground in your local area, they can supply the world from a single building using the internet. Getting the infrastructure is therefore quick, building volume also quick, and quicker still if they lower prices. But whilst computers can collect data and carry out calculations, the activity is not engineering, and the problem is that some engineers do not realise that the service they provide is not engineering, and that they can be replaced by cloud computing.

What then for the price, because with the internet the time is the customer’s time not the suppliers. The biggest time use would be collecting data, the solution will arrive in a few seconds. The time charged for could be access time to the computers but the value of the solution is likely greater than any time based fee. And so we have to conduct an experiment and determine what people are willing to pay. So name your own price isn’t such a huge leap. Or even automated negotiation by computer.

Since we do have industrial awards and there are online job search engines with proposed wages, it is possible to get a rough idea of what the customer is likely able to afford and factor that into the determination and setting of prices. That is if market dominated by those on federal minimum wages then prices need to be low, if market dominated by those on high awards rates of pay then prices can be high. If hours worked is making the fees too high, then the hours have to be reduced. Computers are helping reduce hours worked and eliminate a task which has largely been imposed where it did not previously exist.

So whilst can use hours and hourly pay rates to estimate a price, some adjustment needs to be taken into consideration. Either each hour is charged at a different rate, each hour is reduced in value, or the over all fee is adjusted.

To be more precise price is what the customer is willing to pay and the supplier is willing to accept. If no agreement can be made then there can be no sale.

{NB:  Outsourcing isn’t viable if your charge out rate is 3 to 5 times the employee rate and you don’t have technology to reduce time and improve quality. Would have to charge a lower fee with economy coming from repetition and economy of scale.}

Anycase the basic gist is that various tasks have been assigned fixed fees. These fees cannot be broken down into hourly rates and work effort, because work effort varies and so do hourly rates. For example tasks can be completed faster than originally allowed for and hourly market rates have increased: so the resulting price is unchanged but the components are different.

In terms of naming your own price: never consider other people’s time is worth less than your own. Estimate the hours you think the job will take, and thus calculate the fix fee for the job. Send an enquiry describing your job, and see if I’m willing to accept. Note if you don’t live local (Yorke Peninsula, SA) then you will have to use an escrow service such as CheckVault.

Further Reading:

  1. Pricing strategies: Hourly rates? No thanks!
  2. Pricing strategies: How to price your services
  3. Your next price increase isn’t going to stick. And here’s why…
  4. Fixed-priced Billing vs Hourly Billing
  5. How to price your service
  6. How to Price Your Products
  7. How to Price Business Services
  8. Price Your Product Or Service
  9. Why creating value is the most important way to grow your business
  10. Engineers undervalued in society, report finds
  11. How to set pricing in your marketplace
  12. Increase your worth with value-based pricing
  13. Pricing For Profit
  14. Are You Charging Enough? 5 Tips For Pricing Your Service
  15. Select pricing strategies

 


Revisions:

  1. [30/09/2018]: Original
  2. [01/10/2018]: Added Headings, Made Some corrections. Expanded
  3. [02/10/2018]: Some editing and expansion