Problems with hourly and project-based pay

Imagine you’re working on an hourly basis. How would you answer these questions?

An idea popped into your head that could improve the company’s financial situation. It came out of nowhere — you weren’t even thinking about it; you were just going about your daily routine. The company doesn’t buy individual ideas; it only pays by the hour. How many hours should the company pay you if you spent 0 hours on this idea?
You’ve been assigned the task of implementing a certain feature. You remember that you’ve already built this feature before and spent 50 hours on it. You reuse that solution in the current project in 10 minutes. Everything works. The task is complete. Should the company pay for 50 hours or for 10 minutes?
With the advent of AI agents, things have gotten even more interesting. You know how to use them effectively and delegate a task to them that would have taken you 10 hours to complete yourself. The agent draws up a plan, you review it, the agent carries it out, and you review it. After a few such iterations, the task is completed in 30 minutes. Should the company pay for 10 hours or for 30 minutes?
You spent 10 hours working on a solution, only to realize that you’d been doing everything wrong all along, and it seems you could have figured this out right from the start and chosen a completely different solution. Should the company pay for that time?

There are two options for the contractor here:

Don’t work with companies that pay by the hour.
Artificially inflate the number of hours in your report.

If you choose the first option, you’ll lose half of your potential clients.
If you want to keep your clients and get paid what you want, you’ll have to choose the second option.

If you use a ready-made solution and complete a task in 30 minutes, write in your report that you spent 50 hours on it. This way, when working remotely, you can juggle 2-4 full-time jobs at the same time. You work 30 hours, report 150 hours, and get paid for 150 hours.

Why am I even talking about reports? Managers at companies that pay by the hour want to see a report detailing where those hours were spent. If you simply say that a task took 50 hours without providing any details, you’ll most likely get questions. But if you come up with a plausible explanation of how you spent your time, an effective manager will open the spreadsheet, see the neatly organized information broken down by the hour, and be satisfied with it.

You can argue all you want that this isn’t fair. But if we look at the real world, it turns out that, in most cases, money is a way to live comfortably. The more you earn, the better you live. Of course, you can choose the honest path and hope that your honesty will be properly recognized and that you’ll get some bonus for it down the line. Are you willing to sacrifice your current income for the sake of a hypothetical future?

To prevent this, companies sometimes use apps that automatically take a screenshot of the screen every 15 minutes and ask workers to fill out a report after every hour worked. This weeds out experienced and confident workers. Only those who clearly have trouble finding work — and are willing to accept almost any conditions — remain. What quality of work will the company get if it chooses this approach?

There’s another way to avoid logging three times as many hours. Just set your hourly rate three times higher. But if you want $300 an hour and someone else wants $100, a company hiring based on price will choose the other person, not you. Even if the company ends up paying that other person the same amount, because he’ll report three times as many hours as he actually worked. In that case, your honesty and higher hourly rate will leave you without a job.

Of course, this doesn’t work with ideas. There’s a belief that ideas are worthless, and that only their implementation has value. So if you come up with a brilliant idea to solve a problem, the company won’t pay you for it. Managers believe that this idea is already included in your billable hours. If your hourly rate is $60 and you spent one minute on the idea, then so be it — you’ll get a whopping $1 for the idea. And you can’t write in a report that you spent dozens of hours coming up with that idea. After all, you didn’t conduct any research. This is often why employees don’t share ideas with management at all — ideas that could actually help the company grow.

If there are so many problems with hourly billing, why not simply agree to pay per project or per task? This solves some problems but creates new ones:

The client must specify the tasks in detail before work begins. What if, after work has started, the client wants to change the requirements or add something? The client will have to renegotiate the terms with the contractor.
The contractor needs to accurately estimate the timeline and price. However, they don’t yet know what challenges will arise during the project. If their estimates are off and the work takes three times as long, what should they do? Try to negotiate new terms or complete the work under the current terms?
Sometimes, estimating a project can take many hours. The client may not agree to these terms, in which case the contractor ends up wasting their time on the estimate.
Different contractors can provide very different estimates for the same project. This depends on the contractor’s experience, the quality of their work, their current workload, and a dozen other factors. How can a client choose the best contractor for a project?

With rare exceptions, I never work on a per-task or per-project basis — neither as a freelancer nor as a client. But I also don’t work on an hourly basis.

I’ve chosen an approach where I’m paid weekly or monthly, with very brief reports or none at all. This works very well for startups with small teams.

When I’m looking for an employee, I discuss their target weekly pay with them. Every few weeks, I assess the value they’ve delivered. I look not only at the tasks they’ve completed, but also at the ideas they’ve proposed, the help they’ve given to other employees, or any other value they’ve added. I don’t care at all how many hours they worked. And I don’t care about their timesheet, because I always know what my employees have been working on.

This approach solves all the problems associated with hourly and project-based billing. But if you’re a contractor, you’ll lose a lot of clients with this approach. The client will ask: what exactly am I paying for? After all, they don’t know what tasks you’ll complete during that period or exactly how many hours you’ll spend on the work. In most cases, they need to see a pretty, detailed report. If you work at a company like this, you have zero leverage over the process. Management works the way it’s always worked and considers its management style to be the right one.

Consider another scenario. A company has agreed with a contractor to pay on a weekly basis, regardless of hours worked. The contractor has been working for several months, has performed well, and the client is very satisfied with their work. But they didn’t work last week. Should the company pay them for that week?