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How to Prevent Overbilling

From the December 2015 Issue

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Anders Wenngren Anders Wenngren

Overbilling and other kinds of fraud are rampant. But it may be possible to induce vendors, contractors, and employees to become more ethical just by changing how you ask them to account for their work. Focusing on units (hours needed, tasks performed, widgets produced) rather than overall price encourages accountability in providers.

That’s the finding from new research involving university students, online participants, and auto repair garages. Across four studies, people were 26% to 59% less likely to overbill if they were required to report the volume of work completed or projected before stating the amount of money due, rather than the other way around.

In one study, participants were paid for doing sets of numbered tasks. Because their pay was based on their own reporting, everyone had an opportunity to cheat, and many did. But people were less likely to cheat (42% versus 66%), and the average amount of overbilling was lower (55 cents versus $1.38), if they were required to first note the number of tasks completed and then request the amount they were owed.

In another study, one group of mechanics asked to come up with a charge for replacing brake pads and resurfacing rotors was instructed to first provide a cost estimate and then to enumerate the parts and labor needed; another group was instructed to do these things in the reverse order. The second group’s cost estimates were 14% lower, on average, and mechanics in this group projected significantly less labor time—suggesting that at least some mechanics in the first group had engaged in “defensive bolstering,” or fudging the details in hindsight to match the initial cost estimate.

The behavior comes down to what the researchers call “felt accountability”—a sense that someone is carefully monitoring the details. When vendors or employees are asked to specify the units of work or time required for a job, they may feel that the buyer or employer is paying close attention and might ask them to justify the price. And that appears to have a palpable effect on their ethics.

A version of this article appeared in the December 2015 issue (p.26) of Harvard Business Review.