The Value of Your Time vs. Your Contribution
One of the most important lessons I learned as an entrepreneur is that you always get paid on your value and not on your time. Getting paid for your time will make you money and is tempting, but the problem is it does not scale. There are only so many hours in a day, so your growth is limited.
Getting Paid for Value
Getting paid for value will make you rich. When you get paid for value, as your value increases, you get paid more for doing less. So it actually scales. In contracting language, this means you always want FFP (firm fixed price) contracts and not LOE (level of effort).
Why Many Still Bill Hourly
Now, you might say, if this is so obvious, why do many people bill hourly? The answer is simple: it is less risky. With an LOE, you are paid for what you work, so this is hourly. So if you work an hour, you get paid for an hour, regardless of what gets done. While it is less scalable and you make less money, it is low risk.
The Advantage of Fixed-Price Contracts
With FFP, you agree to a fixed price to deliver something and get paid if you deliver, regardless of how many hours you work. This is getting paid on value. But if you are not sure how to do something, FFP can be very risky because if you agree to a fixed price based on x hours and it actually takes you ten times x, then you could lose money. But as your value increases, and you estimate a fixed price based on x hours and can do it in half of x, that is when you get paid more based on your value.
Moving Toward Value-Based Contracts
If you are starting off and cannot take a lot of risk, it is okay to start off with LOE, but your goal should be to get to FFP as soon as possible, since that is the road to riches.