proletariat

Even though the items you mentioned as being products are set up as lump sum jobs to the client, we still use the billable hour to arrive at that sum. I often set up contracts for civil work as lump sum. I also set up structural jobs as hourly rate sometimes. It is all job and client dependant.

My question to you is: How do you arrive at the fee if you don't know what is costs to produce the product? That is where the hourly billing rate comes into play.

Rik

Estimating lump sum costs using hours is fine.  I think the problem comes when the client is billed in units of hours.

For example:
I bill a client $5000 for a traffic study, lump sum.  I then have the opportunity to find a cheaper traffic counter subcontractor, replace the human traffic counters with technology, make a MS Word template that cuts report generation time down, etc.  You can take advantage of efficiencies under a lump-sum payment.

I bill a client $5000 for 67 hours of work.  If I do the work in 50 hours, I make less.  The only incentive to find efficiencies is to keep my hourly rate comparable to others in the industry.  Furthermore, each person can only generate (hourly rate x daily hours) every day.  You will never exceed a certain daily revenue cap for a person.  Therefore, you must add people to increase revenue and profit.  

See where I'm going with this?

Here's a terrific link to an article that directly addresses your question:

Design Intelligence Article

Surge analysis is a product. I regularly bill a fixed lump sum with hourly rates for additional work.

How do you get recompensed when you save a client millions $$$$s in a coule of hours with a good idea?

I heard of one engineer who didnt charge for the advice given to a senior executive but simply said send me a cheque for what you think it is worth. The next day he received a cheque for $25,000 for a simple suggestion that saved the company a lot more money.

A lot relies on your relationship with the client. Hourly rate basis of billing is a mugs game. It doesnt provide certainty for the client who has budgets etc to handle. Better to give a fat fixed price as this gives certainty and gives you some lee way. On balance I dont make too many mistakes using this approach. I dont starve and have repeat business.. Swings and roundabouts.

proletariat,

If you give a lump sum price of $5000 based on an estimated 67 hours and then only spend 50 hours doing the job, you bill $5000 anyway, keep your mouth shut, and make more, not less.  The client does not need to know the hours your worked for a lump sum price.  If you go over the estimated 67 hours, too bad for you.  You still only bill $5000 unless there is a special reason which was addressed in your proposal or contract.  Taking risk can have its rewards.  I make more money on my lump sum work than on hourly work.

PEinc, you are a master of the obvious.  

However, the original question was - What OTHER civil engineering labor is sold as a product, as opposed to being billed hourly?

It is not a matter of how you want to bill, but what the client is accustomed to seeing. Nevertheless, I had clients telling me that civil/geotechnical fees are such a small percentage of the job cost that even a 33% increase is tollerable.  Clients need fast service, experience, trust and someone who will not nickel and dime on every little redesign. Charge a premium as PEinc said and over time you'll learn to fine tune your estimates.  

If you really need repeat customers give a good ball park number then bill 90% of it and make a point to highlight the estimate vs the actually billed.  By the way, you'll see some clients who bargain, and for those I propose 110% and then give them the 10% bargaining percentage back.  As you can see all clients are different and no single solution will work over time.

Obvious? Apparently not to you or you would not have said that you'd make less money on a lump sum job that you designed for less hours than you estimated.  How do you make less when you expend less labor but still bill the same lump sum price?

All civil enginering design can be "sold as a product" if you take the time to price it up.  For some jobs, it's difficult to determine an accurate and complete scope.  For those jobs, I will work hourly. For most, I try to work lump sum.

The original post presented a question that I too, have had before.  I agree with the posters above about the benefits of billing that way as opposed to an hourly rate.  I realize that most of what I’m saying may be rather obvious to many folks out there…

To me, the idea of billing using a lump sum is more palatable than billing using an hourly rate, because:
1) You can probably make more,
2) It seems easier, and
3) Is more ethical.

1)  As others have mentioned, the hourly rate method may be safer, but more money can actually be made using a lump sum or billing according to the value added.

I find that as I become better at something (and I think most folks are the same when it comes to this), I can do it more quickly AND more accurately.  I know what specific problems I'll need to address the moment the field work is finished based on the project.  If my billable hours truly reflected this efficiency, I would probably be charging $200 to $300 dollars for a typical geotechnical report (not including field work).

If I actually charged that, at least two things would happen; a) I would be beaten (rightfully so) by my engineer peers because it doesn't reflect the "value added" to the project, and b) I would probably be making $10,000 a year or so.

2)  Seems easier:  I can't tell you how much valuable time I waste entering time-spent-on-project hours on my excel timesheet everyday.  Is that the case with everyone here?  Who, truly, uses a stopwatch to accurately record these times either?

If I were on my own, and wanted to make $80,000/year before taxes, why not try to bill out $160,000 (with an assumed multiplier of 2-assuming that's a good multiplier for my circumstances), and then have a goal to try to bring in an average of $3,100 per week throughout the year?

I understand why many companies can't do that; they need the "hours" for each employee for accounting purposes.  But on your own, I think timesheets could be optional, which would be a dream come true.

3)  Fixed cost billing, in the office, is more ethical:  I believe that charging "by the hour" should be avoided where possible.  Perhaps it's ok to do when in the field devoted to a project.

Unfortunately, I still need to report "hours" on the timesheet for fixed cost projects so that management is happy and able to conduct their accounting duties.  So I enter "hours" that will magically line up with the fixed cost given to the client.

The problem with hourly rates in the office is that they are fictitious hours.  I chuckle to myself when I give a document to my manager to review.  They review it in front of me for 3 minutes and we talk about it for 5 minutes.  I get the weekly hours report and find that they charged an hour to the project for that encounter.  Maybe it felt like a lot of work, I don't know.  The amount of work you can accomplish in a true hour, uninterrupted, is sometimes staggering.

You will soon learn, young Jedi, that billable hours are your bread and butter. Took me a while to figure it out too.

Chinese businessman told me once. 20% of your profit comes from 80% of your work., 80% of your profit comes from 20% of your efforts. Apologies to the original philosopher who he no doubtedly stole it from.

Par Ihto, I think.

Cheers

Greg Locock

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips.

Quote (stanier):

 20% of your profit comes from 80% of your work., 80% of your profit comes from 20% of your efforts. Apologies to the original philosopher who he no doubtedly stole it from

It's called the "Pareto analysis".

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

proletariat,

You asked "What OTHER civil work is sold as a product?"

You set up the contract. Set it up as lump sum. Determine your fees however you like. You can do ANY job as lump sum if the client is willing to sign the contract.

You still need some method of determining the lump sum amount. You could just guess or you could use a method to actually determine how much it will cost you to do a project and make a profit. Hmmmm

You may want to be careful describing -- or even thinking about -- your services and submittals as "products." It can expose you to liabilities for which design professionals are not typically covered. You may want to adopt the mindset that your plans, drawings, reports, etc. are "Instruments of Service." In other words, they are tools that help you perform your work.

Just a thought.

Here's a link from the American Institute of Architects, but I think it applies pretty well to us as well.

http://www.aia.org/nwsltr_pm.cfm?pagename=pm_a_transferdocs

geostructor,

Interesting point. I haven't thought of it that way.

Does "lump sum" imply "product"?

"Do not worry about your problems with mathematics, I assure you mine are far greater."   
Albert Einstein
Have you read FAQ731-376 to make the best use of Eng-Tips Forums?

Ashereng,

I don't think of "lump sum" as implying "product". It is simply a set agreed upon fee for a specific scope of work; as opposed to a straight hourly rate agreement.

Rik

I think this is a good post.

General question/comment:

Once you have your CAD, databases, software, and general engineering process down, wouldn't you see billable hors as a blessing? If you're more efficient than your competition then I would think you're ahead.

To make other streams of income that are not hourly I would look into software or patents.On top of those lump sums you could then make more money as an application software engineer supporting and implimenting the software.

I think billable hours rule.

ELE

I think your missing the point.  The efficiencies you learn to impliment are a labor savings on your part, If you then only bill for hours used you cut yourself in the foot.  

Example Given: Say I know how to implement my cad system to produce information in a faster means than than most any one else.  I find an opportunity to bid on a job to produce the same information on this job that the current vendor supplied on the previous jobs they had gotten from this client.  I learn what number I need to beat to win the project. Say my process only takes a week to do.  but I know the competition took 6 weeks to produce the information in a manual way.  so I promise 4 weeks delivery.  In reality I can do the project in a week.  I then get everything ready to deliver in 4 weeks and in the 3 weeks I have left for delivery I go and do something else.  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.

This in fact is a true case in point.  I am learning to do something in Pro/ENGINEER that can cut time in creating required information in an automated way.  I can undercut some of the other vendors of this service and not have to take it overseas to get the job done.

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

Quote:

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.
  

Quote:

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...

Quote:

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.

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:

Quote (solid7):

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

Quote (bvanhiel):

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?

Quote (bvanhiel):

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.

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.

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

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

Quote:

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.

Quote:

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.

Quote (solid7):

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

Quote:

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?

Quote:

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.

Quote (solid7):

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

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?

Quote:

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

Thanks and I do like the old saying.

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
www.kitsonengineering.com

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

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.

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.

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.

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.