Contractor Day Rates - Is there a Better Way?

So let me get one thing clear right up front. I think Contractors play a valuable role in IT functions delivering solutions to Customers. Like most people in our industry, they are professional, diligent and hard-working.

Having said that, I look at the way we reward contractors and it seems somehow out of kilter with the role they often play. Our approach – agreeing a rate for a ‘professional day’ – is tried and tested. Or rather, it’s simple, easy to administer, and we’ve been paying for these services in this way for ever. But on reflection, does this encourage us to get the best value possible from this expensive resource? And is it offering the Contractor the best possible return for their efforts?

By and large we recruit Contractors for two main reasons: as workload supplementation for our Business-as-usual (BAU) activity, or as specialist resource to deliver a specific ‘ thing’. Much of what I am suggesting here applies more easily to the second of these two contexts i.e. the delivery of something specific. Having said that, I’m sure it could also be looked at in the light of BAU activity.

Let’s assume we hire a plumber into our home to fit a new bathroom suite, and they tell us it will take five days and that’s the effort for which they will charge us. If at the end of those five days the suite is installed but all the taps leak and the toilet doesn’t flush properly, what will we do? We’d expect the plumber to fix these things for the price quoted. If he tells us it will take another three days effort – and therefore cost – to put right, we wouldn’t accept it, would we? Why then do we take a different approach with Contract resource in our professional life?

Well, partly it’s because we are paying them for turning up (the day rate), not for delivering. There is a certain irony here in that we often employ contractors to deliver something specific and then don’t reward them accordingly. More than that, we often compound the problem in two further ways. Firstly we endeavour to incentivise our permanent staff around specific deliverables where this is often inappropriate as they may be more engaged in a more ‘fluid’ and less measurable BAU activity. And secondly, our permanent staff see Contractors doing the same / similar work and raking in more money without any additional pressure or constraint. The second case may be unavoidable where the work is BAU related and hard to break down into specific deliverables, of course. Here the argument for the differential is the same as it has always been: risk, job security etc. – although I would argue that in today’s commercial world this differential is not as great as it once was!

For me, this begs the question about whether or not there is a better way; the possibility to tweak the day rate system to drive more value from what is likely to be the most expensive resource we employ. And if there is, then can we extend these principles beyond the individual contractors to encompass the broader, wider-ranging engagement of Consultancies and Systems Integrators?

The core suggestion is that we explicitly link reward to the deliverable, to getting the job done. Just like we do for the plumber. This would have the immediate benefit of getting a little more skin in the game – the plumber would know for sure that he wasn’t getting paid any more than agreed only when the taps worked properly. Surely this would drive engagement and delivery in a very real way – and in a way that was different from permanent employees, thereby helping to mitigate any sense of injustice they might have against Contractors. For us, it might also help to improve certainty about the cost of getting things done, and aid our ability to hit project budgets.

I would argue that we should consider trying to arrive at some kind of ‘split fee’ approach. Let’s assume that we are paying a Contractor £500 a day. In the new model, we would still pay a day rate – perhaps £400 or £450 – with a ‘bonus’ when the deliverable was produced (the bathroom installed!) which would end up equating to the £500 day rate. That way, if the Contractor delivers as planned, no-one loses out. If they deliver late or deliver a bad product, then we have some comeback against the cost. And – this is important – if they deliver early and/or a ‘better’ product than we had asked for, we need to be able to reward that too i.e. they make more than the averaged £500 a day.  This might get us more hours in our ‘professional day’ and improve engagement and commitment (and in a way that’s harder to achieve with permanent resource?). Win-win!

Of course, it isn’t that simple.

It doesn’t work for all assignments. Where we have contract resource working on operational BAU activity such as support, the deliverables will be harder to define. Whilst there may be some generic targets we might expect them to hit, the simple day rate is probably still the best solution here – at least until we are sophisticated enough to be more specific.

We need to include metrics into the contracts. We have to agree the metric up-front. Some will be simple, binary even: something is either delivered or it isn’t. Then we more in to more quantitative measures: time and cost are the obvious ones in this area. The hardest ones are the qualitative measures. Some you can attempt to be specific about – zero defects, for example – but what about the quality of a document, or the efficacy of a strategy?

We need to agree the outcome. Having agreed the metrics, at the end of the job we need to agree the outcome. The quantitative and binary measures should be easy enough: yes/no, six days instead of five, and so on. The qualitative measures will be harder, especially those that are based upon personal opinion. Your hired resource might think their presentation is top notch, but you don’t. What do you do then? You need to be clear about as many of the metrics as possible at the start of the assignment, and probably leave out anything that could be dangerously contentious – at least for your first time round. You will need to be prepared for the “It wasn’t my fault” argument when things don’t go quite so well, when there are mitigating circumstances outside of the control of the Contractor that impacted their ability to deliver. Here, your integrity and honesty needs to be spot on. If you try and use these kind of graduated rewards as a means of getting a job done on the cheap then shame on you – and the word will spread as to how you operate!

The rewards? I would suggest a simple scale. For example, delivering on time to agreed quality would net a bonus that would work out to equalling the ‘normal’ day rate e.g. the £500. For being late or delivering a poor quality product, then maybe anything from a zero ‘bonus’ up to the day rate i.e. in the £400-499 per day equivalent. For delivering early and/or something of superior quality that exceeds expectation, well, take your pick – but being able to go beyond the £500 average is clearly the ‘carrot’.

Bottom line. Does it work? I have seen examples of fixed contracts where individuals have agreed to deliver a specific ‘thing’ to agreed levels of quality based on it taking them a certain amount of effort (hours or days). That becomes the fee. If they deliver it early, they get paid the same amount – effectively their ‘day rate’ goes up. If they deliver late, clearly the opposite applies. These people were focussed, motivated and delivered; they were engaged and committed. It really was win-win.

So tweaking the system – where appropriate – can work. Certainly it should be something worth thinking about, at least to try and calculate if the additional admin effort up-front will yield sufficient benefits downstream…

-*-

About the author / copyright

Ian Gouge is widely experienced in business-driven Information Technology, culminating in significant achievements majoring on organisational and process change, and with a proven track record in turning around / re-engineering IT functions. He possesses in-depth experience of change, transformation, IT delivery, customer and supplier engagement, and broad International exposure. Also the author of management books on the topics of IT Strategy and Project Management, the impact on IT of e-Business, and the IT Organisation.

This material is copyright of Ian Gouge © 2012. All rights reserved. Any similarity to actual IT or business organisations is entirely coincidental and unintentional.

Any redistribution or reproduction of part or all of the contents in any form is prohibited other than the following:

·         you may print or download to a local hard disk extracts for your personal and non-commercial use only;

·         you may copy the content to individual third parties for their personal and non-commercial use, but only if you acknowledge the author and blog as the source of the material.

You may not, except with express written permission from the author, distribute or commercially exploit the content. Nor may you transmit it or store it in any other website or other form of electronic retrieval system.