Anyone who reads the blog knows how little I think about the billable hour.  Until now, I haven’t given very many examples about how we are using "service pricing" in our business.  Here is one way abandoning the billable hour has created "win-win" for us and one client (and yes, I’ve gotten permission from them to post this example on my blog).

First, the basics.  A client has a development zoned for multi-family housing and is currently building about twenty duplexes (forty units) with sixty more ready to go.  Originally, the developer believed that the market existed for selling each duplex to one owner — who would then rent out one side and live in the other, or rent out both sides.  However, economic conditions have made it more profitable to sell each side to different owners — something currently prohibited by local zoning ordinances.

The obvious choice is to turn the development into condominiums.  This allows individual ownership of each duplex side without violating local regulations.  However, because all of the units aren’t yet built, to "condominiumize" all of the duplexes into one large development, the developer will have to do so in phases (as many as twenty).  Each time a new phase is ready, the declaration of condominium (a legal document setting out ownership interests and voting rights among the duplex owners) and the plat will have to be amended.  So far, so good.  However, the developers want the maintenance of each unit to be shared only between the owners of each duplex, and not collectively among all of the units as often happens in a traditional condominum setting.

Normally, we would do the work and bill by the hour.  Since this is a novel kind of project for us, we could easily spend between twenty and fifty hours drafting the first declaration of condominium.  Gaining approval from local and county governments could easily double that investiment of time.  Amending the declarations and plat each time a new phase is ready would likely add five to ten hours again. 

When we laid out the time and cost to our clients, they balked.  Asking them to pay us thousands of dollars for work to prepare the condominium documents was not an option to them, so we proposed a different arrangement.  For $X00.00 per unit (two per duplex), we will do all of the documents necessary to condominiumize the entire development.  We will be paid each time a unit sells (and not before), and do as many phases as are necessary until construction is complete.  The developer bears all the filing and recording fees, but is not out of pocket a single dime for the legal work, and will likely pass the unit fee on to the purchaser of the condominium. 

Now for the best part:  The developer loves the idea.  By eliminating the up-front cost, the developers are able to plow previously-budgeted legal costs into subdivision improvements.  We will make two to three times the amount we would make if billed on an hourly basis, but only if all of the units sell.  And while it may take some time for the development to close, we’ve secured an income stream for the firm for at least two years.  And, we will likely be retained to represent the condominium owner’s association once the requisite number of units have sold.  We’ve been representing other owners associations for a set monthly fee of $X.00 per lot per month.

We love it, the developers love it, and the home buyers will realize significant benefits as well.