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Should You Replace Flat-Rate Pricing with Hourly Billing?

By Alyssa Gregory

When you begin to freelance or decide to start a business, your rates and billing strategies are probably one of the first things you think about. You need to know what you will get paid for the work you do.

In some industries, web design and development included, it’s common to see flat-rate “package” pricing for projects. I have done this myself, and I think it’s a good option in some situations. But charging a flat rate for project-based work almost always ends unbalanced, usually resulting in a loss on the part of the provider.

In this post, we’re going to take a look at why some of us choose to provide flat-rate pricing and why changing to an hourly billing model might make more sense.

Why We Provide Flat-Rates Pricing Options

To start, let’s look at why some of us provide flat-rate pricing. Here are some of the most common reasons:

  • It’s easier to seal the deal because clients like knowing what they will pay upfront, and that there will be no unexpected charges or hidden fees.
  • You don’t need to worry about tracking your time (although it’s not a bad idea to still track time, regardless how you bill).
  • Some work — writing, for example — is less time-based because the time it takes to complete varies by the individuals involved.
  • You can outline exactly what the flat-rate package will include to eliminate some of the unknown at the start of a project.
  • You know you will make a certain amount of money, regardless how long the work actually takes you.

Why Some Freelancers Bill Hourly

Now, let’s look at why hourly billing may be a better alternative. Here are some reasons why freelancers and small business owners choose an hourly billing policy.

Hourly billing avoids underpayment and overcharging.

Unless you are exceptionally proficient at providing ballpark estimates that hit the target every time, flat-rate packages ultimately slide in one party’s favor. Either you underestimate the time the work will require and take a loss, or you overestimate and the client pays more than her or she would on an hourly basis.

If you bill hourly, you may provide the same project estimate as you do with flat-rate pricing. The difference is that with an estimate, both sides (should) understand that the estimated cost is based on the assumption of a certain number of hours and that can change if the actual time required changes. In most cases, this means you will get paid what you deserve for the work.

Clients have to pay for scope creep.

Even if you have completed a specific type of project 100 times, unless you’ve worked with the client before on the same type of project, you have no idea what he or she is like to work with. The client has the right to request change after change, ask for portions of the work redone, and decide to scrap it and start over mid-way through, but the client should have to pay for the time you put in to accommodate his or her changes.

Of course no method of billing will ever rid the world of scope creep, but billing hourly can eliminate the temptation to squeeze in one last change, one minor tweak, etc. when there is the expectation that each change will result in additional charges.

You are more likely to get paid.

It’s very common with flat-rate projects to bill the client for a portion upfront with the rest due upon completion. But if the project spans several months, you may go a long time before you receive payment. Hourly billing allows you to bill on a consistent schedule during the term of the project.

Plus, if the project stalls or get canceled, you don’t have to worry about chasing down clients to pay for work you did that they no longer want. And if the client skips out entirely when the project is canceled, you have already received payment for the work you have done so you are not at a total loss.

How Do You Bill for Your Time?

As I stated earlier in the post, I have and do use flat-rate pricing in some situations, although most times, I bill hourly. I’d be interested in to hear if you provide flat rates, bill hourly or do a combination of both, and why.

Stay tuned for my next post about hourly billing and exactly what is considered billable time.

Image credit: forwardcom

  • zmoazeni

    Good breakdown between the two methods. As a developer, I shy away from flat-rate pricing (or fix-bid pricing) and stick with hourly. However I’m surprised how many designers I meet who prefer flat-rates.
    One caution for those billing hourly, I strongly recommend you start and continue to discuss the client’s budget. Billing hourly without a budget in mind can be disastrous for both for the project and the relationship.

  • http://www.mikehealy.com.au cranial-bore

    I think there are a few other facets.
    Suppose you do 35 billable hours per week and after a while you become more skilled and produce faster. A job that would have taken 50 hours before, can now be done in 30. The clients pays 40% less, but you’re limited to earning 35hrs x $rate. Your clients are getting the full benefit of your productivity gain. You risk earning less if your pipeline isn’t full, and even if it is full you won’t earn more than before unless you work longer hours.

    Of course you can increase your hourly rates, but this could create a sticker shock syndrome. It could also be tricky when you do quick low skilled work and the cost seems disproportionate to the value.

    If you quote a fixed price you can share the benefit from your productivity gains with the client (cost could less than before; they get the job faster).

    That’s not to say fixed price quoting is perfect, it’s definitely not.

    • jimmer

      Good point. I remember reading something about this as well in a related book about running your own consultancy/business.

      I think for certain repetitive or common tasks, which you have done many times over and know what you are doing and the effort it will take, then in those cases a fixed price would do good (so you don’t lose out when you complete the work faster as you say).

  • http://www.heinsites.com/ CD Hein

    This is a great post, I really appreciate it!
    I’ve begun my business with flat-rate or “contract” pricing. Part of why I do it is to help keep me focused. I’ve heard and read that there can be a bit more of a temptation to draw out the work if you’re being billed hourly.
    That said, one would have to have less morals than I, conceivably, to do so. LOL
    I just completed a job – very small site – and came in right on my time budget for the price I’d quoted. I was pretty proud of myself. However, I can see how “scope creep” could potentially cause a not-so-welcome dent in profits!
    I’m going to keep this in mind for future contracts. I don’t think there would be anything wrong with me stating that “I expect to be working X number of hours on this project”, and should it go over-time due to customer changes, I would bill out the excess hours at X dollars an hour.
    That would be the best of both worlds, for me. :)

  • NetNerd85

    It is absolutely amazing the amount of times I read articles like this and the authors own biased is clearly shown, no difference here Alyssa ;)

    I really prefer to charge on a project basis but I do both for different situations. My fixed priced projects are determined by a break down of what needs to be done. I can do it very well because I have been tracking my time for ages. I know exactly how long it can take me to do things, even in different moods and at different times of the day. Track, track, track! your time people. Be a master of your own time. (I use paper time sheets at the moment).

    You win some, you lose some. It’s your job to be accurate!

  • TaoistTotty

    I like the idea of hourly billing, but most of my customers are designers and they will only accept a flat-rate.

    This means that I allow for extras in the quote (which usually happen) and may mean the end customer gets charged more than they needed to.

    How do I convince the designers to accept an hourly rate?

  • http://worldwisewebs.com worldwisewebs

    I tend to do both, project dependent. For my standard work, that I have a pretty formulated system, I do piecework and am paid by the job. But when I am approached with a custom coding project with various APIs and interactions to smooth I always do hourly, with an estimate up front.

    Sometimes I have been forced to do a cap on hours to make a sale, but usually this ended up biting me in the end. Now I tend to set an hourly range (4-8 hours) and then I update as I progress through various challenges. Adding a few hours before they have been incurred is always easier than trying to charge for them after the fact. I have found that in general, people do want to pay appropriately for my time, but they often have no idea how long things actually take that they perceive as simple tasks.

    I also have negotiated varied hourly rates depending on the customer and the volume of work they supply me with.

  • abluhm

    I think a hybrid method is the way to go for medium to large projects. Set a fixed base price that will cover the requirements of the project and a certain number of revisions and then include an hourly rate for revisions beyond what was agreed upon.

  • jimmer

    Great article. I always like reading other people’s viewpoints and guidance about billing clients. I like to use a combination of both. I know exactly what people mean when they say “clients like to know what they will be paying upfront”, and that’s why they like a fixed price. But when it comes to designing web sites, or doing any general kind of IT consulting, it can be difficult to accurately estimate the time a project will require. Especially when you deal with certain clients who don’t quite know what they want. I like to quote a ballpark #hours (or a range of hours) in my estimate, and then bill hourly, advising the client that this is subject to change.

    On another note, I wish the web design/freelance industry had a labor rate manual like the auto mechanics at dealerships use.. I can’t recall what the name of that manual is, but it is a standard reference guide which many service shops use that contains the #hours for a variety of jobs. Then the shop uses their own hourly rate applied to that factor of hours. At least this would provide some framework for determining an industry standard labor charge for some common tasks. Or maybe there is something like this out there? I’m not aware of anything like that but if there was, that would be useful.

    Personally I find setting fees to be one of the more frustrating or challenging aspects of running a consulting business. To people outside of your business, they would think this should be easy to do, but it isn’t. You want to be fair to the customer, but also not sell yourself short.

    Thanks for the article!

  • FunkyDUde

    I look at it the same way the print industry does, bill a flat rate for what you know a job will entail (4 pages, image gallery, wordpress, etc). Then state how many sets of revisions you allow, or the scope of the revisions. If the client wants to make a lot of changes have the stipulation that allows you to bill hourly for the extra work.

  • XLCowBoy

    We do both.

    We estimate the amount of hours and bill the client a flat rate. Anything outside the contract spec is charged on a per-hour basis. They know the cost they need to adjust their budget for, and we safeguard ourselves from scope creep.

  • hairybob

    Pricing should be based on value – rather than time or a flat rate (generally based on how much time you think it will take).

    How much value will you deliver for a client? When a multinational gets an ad company to come up with a new brand / logo for them, they don’t ask, aren’t told, and probably aren’t interested in how many hours it took to come up with the concept. In fact, it doesn’t matter if it took 2 months or 15 minutes. It’s how much (perceived) value has been created.

    You need to understand your client and how much (perceived) value you create for them?

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