Entrepreneur - - By Alyssa Gregory

Should You Replace Flat-Rate Pricing with Hourly Billing?

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

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