Why companies shouldn't pay contractors hourly

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It's not that hourly pay is bad, I used to charge hourly too. It was the way I knew and it was how I thought things worked. Now though I believe there is a better way for companies that hire contractors and other businesses that provide services. And once you know of a better way, then that's the path you should try to go on right?

So why is a flat monthly fee for services better for a company that's bringing on some type of contract worker? Quite simply, because you're then paying for the service you needed and not the number of hours it took someone to provide that service.

These are two entirely different things.

In my line of work, sometimes the absolute best thing I can do for a project is sit down with a VP or the CEO and have a difficult discussion to set a project on the right path again. It may take all of 30 minutes, but it may be where a ton of my value came in for a given week.

Compare this with a PM who simply isn't willing to have a difficult discussion. They'll keep "working" on a project, checking their email, writing up documents, and having hallway discussions that are doing absolutely nothing to fix whatever is broken with a project. Yet, they continue to rack up their hours and the customer pays for it.

What if you're paying someone 40 hours per week for work that someone else could do in 20? Maybe you turned that more efficient person down because their hourly rate was 25% higher. Wait - that doesn't make a lot of sense does it?

The other thing that's nice about paying service providers a flat monthly fee is that it allows you to, if the need arises, negotiate a price based on the service you're going to get - not on an hourly rate.

If you pay contractors for some of your projects, instead of asking yourself "what hourly rate am I willing to pay?" try asking "How much am I willing to pay for this service each month?" $10,000? $5,000? $2,000? $500?

Then, try to get someone to provide that service each month for that dollar amount. There's a good chance you'll find that you can get better service and pay less for it by caring more about the results and less about the hours.