The value of the right advice: knowing where to tap

Perhaps you’ve heard this tale, which has been around at least a century in various forms. A company’s machine breaks down. An expert was brought in to help fix it. The expert examines the machine, and makes a mark, explaining, ‘this is where the issue is – hit it here with a hammer’. A quick tap, and the machine is back in business. Everyone is happy, until a few days later the invoice arrives for US$10,000. The company owner is shocked and demands an itemized explanation. The revised invoice says, making a mark, US$1 – knowing where to put the mark, US$9,999.

By the job or by the hour, it’s a conundrum. How do you pay for work? Whether you’re a mechanic, plumber, or hey, engineer or contractor, we want the best value. If hourly rates are published, we often use those as a basis of comparison – and some dig in further, saying it shouldn’t take this long to do a certain job.

Whether in the professional services or contracting world, pricing is a balancing act. Your service provider is likely going through their own internal calculus as you are picking apart their quote. All parties should understand the goal, and evaluate the options to agree on the best model for their application.

Whether in the professional services or contracting world, pricing is a balancing act. Your service provider is likely going through their own internal calculus as you are picking apart their quote

The challenge with ‘by the hour’ is just that – it’s by the hour. If you agree on a time and expense (T&E) or materials (T&M) basis, you’re paying for hours. (There’s also an idea of capped T&E, or not-to-exceed [NTE] hours). If you agree on a fixed rate or by the job, you’re paying for deliverables or an outcome. In either case, when viewed strictly through the price lens, both parties may feel sleighted. If it takes more hours than estimated, the client may be frustrated while the service provider is covering their costs. Or the client may not like the hourly rate as different people work on a job. On a not-to-exceed basis, the service provider may feel capped, in the case it takes longer. On a fixed basis, especially if the job goes quickly, the client may feel that they could have gotten a better deal by paying hourly. How do we choose the best mutual method?

I view projects with an eye towards success. What is our desired outcome? What value are we looking for? What level of definition – or certainty – does each party have, and is the access to information balanced, or does one party potentially have more than the other?

Framed in terms of value can help all parties align. (And not ‘value’ in terms of how cheap can we get it?!). An owner/client needs a project done, and they value accordingly. A service provider values their time, and has to balance resources across multiple projects and clients. Going back to the opening tale, the importance is getting the machine fixed. Trying to pay the lowest rate may result in lots of hours of work, but not necessarily the desired result (even though it might be a low rate!). The service provider is probably assigning their resources accordingly based on rate. Do we want lowest rate, lowest amount of hours, or machine fixed the fastest (or perhaps not at all!)? As the client in this case, we know the value of our lost production, and while we may want the lowest cost, we should not let this cloud our decision-making. Still, when the bill comes, it can be hard to swallow the idea that we paid a large amount of money for a short amount of time. However, we can also reframe how we view the bill. Did we get the (agreed-upon) desired result?

Both hourly (T&E/T&M) and fixed/lump sum pricing models offer advantages and disadvantages, both depending on the project as well as the view of the parties involved. There is not one ‘right’ answer, and this is also not to say you should not compare costs. However, by aligning on the desired result, understanding the value of that result, and evaluating the level of definition and information available, we can agree on a model that meets the needs of both parties. Just remember to frame
it accordingly when that bill arrives!

David Ziskind is Managing Partner at Mach Global Advisors. Through innovative solutions, he helps companies sustainably solve their manufacturing infrastructure challenges.This article is republished from the Q3 2024 edition of Protein Production Technology International, the industry's leading resource for alternative proteins. To subscribe to all future editions, please click here