Should I charge an hourly or flat rate?

This is a topic that I had a hard time trying to figure out when I was starting. I didn’t want to undervalue myself, but I also didn’t want to get any estimates wrong and end up working for less than I should have. A lot of new designers, developers and marketers are in the same boat. Which should you choose? Well that answer is, it’s different for everyone. Sorry. You’ll also find over time that you will start to find which system is the better fit for yourself when you can give accurate estimates on your workload, and also gauge how it affects your sales pitch. But until then, I’ll give you a hand by outlining some of the Risks and Rewards of the different systems.

Flat Rates

Rewards:

• Clients generally feel a lot better knowing the entire cost of the project before moving forward, especially the smaller businesses where the budget is a very finite object. Larger organisations also benefit from this is the work goes through a Project Approval stage with management, as they will have to get a certain budget signed off. This is hard to do with an ‘x’ factor.
• Depending on how the contract works, it may give you extra time to complete the project if competing priorities arise. Generally it is best to have a more flexible timeline for a fixed budget.
• On the flip side, because you already have the fixed price in place, you will be keen to knock it off as soon as possible to allow for new projects. So it acts as the proverbial carrot on the stick. After all the fixed budget for a project is more desirable for a weeks worth or work than 3.
• Knowing exactly how much will be coming in is a great thing for certainty and piece of mind. It also allows you to properly balance your books.
• It is easier to standardise your costs for projects e.g. advertise ‘Websites from $3000’

Risks:

• You must be careful of the client taking advantage of you by pushing for scope creep. You must ensure that this is addressed in your contract or agreement to be calculated in addition to the flat rate.
• I have seen people grossly under quote the project, and then are in the situation where they are working hard on a project that they aren’t properly being paid for. Always ensure that you have estimated the work accordingly and that you not only cover your costs, but have a profit margin and contingency margin added to your quotes.
• Try and arrange this in gates or stages. This is something I do with large corporate engagements as well. Here is a simplified example: Stage 1 is the design, and at the end, when the client signs off on the design, they pay for that portion. Stage 2 can be the Infrastructure or development, at the end of that stage, they then pay for that slice of work etc. So it means that you don;t have the client cancelling 3/4 of the way through the project with you ending up with no cash in your pocket.

Hourly Rates

Rewards:

• You actually get paid for the hours you work. If something takes all night and all weekend, then you can charge accordingly.
• You get to focus on a select number of jobs at a time because you don’t have to juggle the finance vs time aspect of your projects.
• If anything were to happen and the project were canned, then you can still, well within your rights, charge for the work done to date. There is nothing worse than a client cancelling and not seeing aa dime.
• There are a number of tracking tools out there so that the clients can also see your progress and see which hours you invested into the project.
• You don’t have to wait until the end of the project, you can arrange with the client to setup weekly or monthly invoices depending on the duration of the work.
• Clients seem to trust this system a little more as they perceive it as they aren’t being overcharged as bad as when they see a full upfront costing.
• As the work can be billed gradually the business doesn’t always see a big impact financially, and are therefore more prone to extend to further work.
• Clients are generally faster at getting back to you with information or resources.

Risks:

• You have to pay a lot of attention to the hours that you work, and make sure that you rack them in a manner that can be presented to the client if requested
• In some cases the client may disagree with the amount of work put into a particular piece of the work. So keep in mind was to defend the hours you work.
• If you complete a job in 2 hours instead of 2 days, you are paid accordingly.
• This system doesn’t scale well as you progress as a provider, as you become more efficient as a designer/developer etc., you must raise your hourly rate, because technically as you’ll be doing the work quicker, you’ll be receiving less income per job.
• Sometimes seeing a $ amount per hour can frustrate a client. For example: saying that a website will cost $3000 is one thing. Saying it’ll cost $300 per hour for 10 hours will just come across as profiteering.
• Ensure that the client understands that any meetings or support may count as billable time towards the project. Time is money.

Tagged billing, business, freelancer, freelancing