Hourly vs. Fixed Pricing
Work isn’t free. Well, for the most part. It should be common sense that if you do work for a client, eventually you’ll get paid for it. No matter how much it is in the end, it is often a question of how you charge your client, or on what basis you do it.
There’s a lot of dispute about what’s the right way to charge, and doing it wrong can lead to unwanted situations between you and your clients. In this article I’m going into the most common ways to charge and how to make them work successfully for you.
Getting Paid By The Hour
This should be a no-brainer. You work a certain amount of time and get paid for the time spent working. This usually means keeping a time-sheet and billing your client the result of (hours x hourly rate).
It clearly has advantages. You get paid for what you’re actually doing in terms of time spent on a specific project. This kind of charging surely is in favor of you, the freelancer, since you also get paid for those extra hours you put in.
What this means for your client is that they usually get a bill and a time-sheet by the end of the month and have to pay for whatever you charge. It also means a higher risk when it comes to cost calculation. It’s not easy controlling hourly work from the client’s financial point of view. It’s also tempting to add some hours here and there for extra profit. The latter is, of course, a matter of trust, and it’s up to you to raise the bar here by always billing only the time you really spent working.
What some clients also like to argue about is the work that constitutes a work-hour. Do you have to substract small talk with people on the team? What about a short break by the water cooler? Getting a coffee? The list adds up. Don’t get me wrong, I have nothing against working for an hourly rate, especially when I’m working on-site as additional man-power. In that situation it’s the working time that really counts. A project has to get done, and your brain, energy and skills are required to finish it. The problem is that it’s not always goal-oriented. It’s easy to slack, and your payment isn’t bound (mostly) to something finished. If the project gets out of control, then you’re in the same boat as the rest of the team: you have to put in extra hours. That’s a punishment by itself, but then again, you get paid for it.
Fixed Pricing
Fixed pricing simply means you charge your client for finishing a specific task or project, no matter how much time, energy, paper or sweat you invested. The price is usually agreed on up-front, with a quote for example. When the project is done and your client is satisfied you bill him. That’s the simple story.
In reality fixed pricing is always a matter of dispute. I know freelancers who even refuse to work on projects based on fixed pricing. They have their reasons I guess, and when you’re only working as man-power on-site this might not even be an issue to think about. But if you prefer working on a project basis, then you’ll have to deal with it sooner or later. But let’s start from the beginning.
It all begins with a client having a need for something, a new logo, a new website, a new tool for his intranet, you get the gist. I won’t go into the details of how the client got to you, since this has already been done in other postings. You both settle for what has to be done. It’s always a good idea to throw in a basic timeline and an estimate so that your client knows what he’s up to. The important thing is to specify what has to be done and what the finish-line is. Otherwise it will be harder to settle when you can bill the client. You heard the stories, I heard the stories: A client wouldn’t pay because in his opinion a task wasn’t because of
If you agree upon what’s to be done before signing anything it’s easier to avoid situations like this. Work costs money, you know it, and your client knows (or at least should know) it too. Fixed pricing projects usually involve more paperwork, but in situations where the client isn’t willing to pay, it’s important to have it, especially if the worst case happens, and you have to settle the issue in court. I haven’t been in a situation like this, but a friend of mine has, and besides time it costs a lot of energy and is in general frustrating. Of course you shouldn’t treat your clients as criminals, if questions come up explain why you’re doing it. Trust is a matter of transparency. If you don’t trust a client, you shouldn’t do business with them, which is also true if the client doesn’t trust you.
So how do you get the pricing right? There’s no right answer here, and you won’t get it right the first time. It doesn’t matter if you’re offering your service to multiple clients for the same price (e.g. designing a logo) or if you’re creating something based on custom requirements. You need a baseline, and that baseline for me is based on the time I estimated. I look at the requirements or specification and determine what’s to do and how much time I’m going to need to finish the tasks. That’s the tricky part, and it’s important that you track how much time you needed in the end. That way you can refine your estimates over time. In the beginning you might be tempted to calculate in some extra days for security. I’m not going to advise you on that, I just know the temptation, and I did it too. If you do it, don’t let it turn into a habit. If you do, at least be honest to your clients. Make it clear to them, how the price adds up. And if you’re really honest, and love your clients, you won’t charge them for the time you didn’t need. But I’ll get to that later.
A big issue is longer-running projects. Developing something over a time-frame of six months or more isn’t easy to estimate as a whole up-front. If it’s possible try to agree on milestones. A milestone is defined by a specific set of features. After you reach a milestone you agree on the next one. Why the effort you’re asking? It’s simple, it reduces risk on both sides. Your client can react to schedule slips at an earlier point in time, even if that means not doing any more business with you. The same goes for you, the contractor. Identifying possible schedule slips earlier reduces your risk of investing a lot more time than you originally estimated. The milestone way of doing fixed-price projects is usually a good idea even for projects shorter than six months.
From the last two paragraphs you can come to a conclusion: The risk is on your side. And it is. It’s your responsibility to make correct estimates, to track the time you needed, and to specify what needs to be done. There are nice clients out there who are happy to pay you when you’re done, but there are clients who don’t, so I’d rather be on the safe side.
Writing down what needs to be done also gives your clients more transparency, especially if they’re not sure yet about the specifics. If that’s the case you can always start by offering to write a specification on which you build the next step. You let your client sign off the specification as final, and start working on the real thing. But this brings up new questions. What if your client changes his mind over time, or a specific feature doesn’t turn out that useful and must be implemented differently? That part is totally up to you. Requirements change over time, that’s part of the game, especially in the world of software development. If a client needs extra features, then it’s no big deal to charge him extra for them. If it’s just small things that won’t take much time, but will make your client happy, then it’s up to you to put in a little extra-time, especially if there might be follow-up projects in the pipeline.
Fixed pricing has a lot of pros and cons, and for good reason. As I said, you won’t get it right the first time, but there’s no reason to fear this kind of payment. You’ll get better at estimating, if you keep track of the time you needed and try to incorporate that in future estimates. Over time your pricing will close in on the work you invest.
The Honesty Model
There is a way you can have the somewhat best of both worlds. You offer your client a specific amount of days to finish a task or project. The baseline is the same as for a fixed-price project, you need requirements and you need to agree on what needs to get done. Based on this you do your estimation which you present to your client. In the end you only charge him for the time you really needed. If it turns out you needed less time than estimated your client pays less, and you can move on to the next project. Of course, if your working schedule slips you’d still have to work overtime to finish the task or project. But this way it’s a little easier and transparent to calculate in some days to reduce the risk. If you don’t need them, your client doesn’t need to pay for them. In all the financial risk is calculateable for your client. However long it takes you to finish the project (hopefully on time) your client knows what he’ll have to pay and runs the chance of even paying less for the same outcome. You, on the other hand, can move on to the next client and earn money on a different project.
Do The Right Thing
So now you’re asking: What pricing model should I use? That’s totally up to you and how your client would like to settle it. When I’m working as added man-power at a client’s site, I usually opt for payment by the hour. Around here it’s the normal way to handle these kinds of work, and is agreed upon by headhunters and clients in general. Purely considering the time spent working it’s the fairest payment model for you.
For end-to-end projects I usually opt for the third model, if the client agrees with it. Purely fixed price is the last resort.
There’s no general rule on which payment model to pick in what particular situation. You’ll have to find out what works for you and your clients. Fixed pricing is nothing to be afraid of. If you want to do end-to-end projects it’s usually the way to go, so you might as well become friends with it, and find your own way to handle it. If you take care of the things I mentioned, there’s usually nothing to worry about. After all, you love your clients and they love you.
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I have been throwing around a model that gives the client a very clear picture of how much they are spending by billing them every Monday. I would start every project with an estimate of time…say 80 hours and they would know the hourly price. Then I would begin production on the site and the next Monday I would send them a bill for the hours worked on that project…automatically generated by my billing software, then with the invoice I would provide a list of what was accomplished and what was still left to do with the project. This gives the client more involvement and allows me a steady income to be able to work on a project and get it done how it needs to be. This also throws the idea of “Sticking to a Scope” out the door because I can simply tell my client that it will take an estimated X number of hours to get that done. This will allow me to add things to the scope without killing the project.
On a side note…for protection I send an updated scope and timeline with each document that is dated so if the client feels like they added something I can ask them to pull up the updated scope with that on it…if it is not on the scope and the client feels like it should be then they can call me and we work it out right there.
I haven’t fully adopted this model yet but I am highly considering it.
Very Nice Article
I rarely charge my customers on an hourly basis. As I have told them, for the software development work I am doing for them, it makes no sense to me to charge them based on how much time it takes me – they don’t care about the TIME, they care about the VALUE. This way, I am motivated to do things in the most efficient way. Instead, we break the effort down into milestones and I bill them at the completion of each milestone. This gives them the opportunity to change direction if things aren’t working out as they expected, and I get paid more regularly than just once at completion.
Thanks for that short and clear comment. Very useful!
Not a bad idea Seth.
Billing is a tricky topic, much as the article describes. I used to do the “good ‘ol boy” method. I’d send a quote, get the client to sign off on it, and then allow for payment prior to release. Boy, was that dumb. Granted 99.99% of clients were fine. Then again, it only takes one to spoil the pot. But you live and learn.
For most projects now I lay out a quote, with the number of hours alloted for each particular task, with a description of what is being done during that time frame. I also lay out a definitive list of what is being provided (the scope).
From there, I total it up, and require a deposit to begin work. Depending on the size of the project, I either break it down into milestones, with a payment due on completion of each one, or just have a final payment prior to release.
For me, I’d prefer hourly. However in my area it just isn’t really feasible most of the time. To protect myself as much as possible though, if I “package together” a project, I have a certain rate for certain types of tasks. If on the rare occasion I can go hourly, I have a different rate for that as well.
In the end, it all seems to balance out.
Something I do do however, is let the client know that if for some reason it takes me longer to accomplish the project (in terms of hours) that as long as they have not modified the requirements I’ll eat the additional time. However, if I take less time, that it will be reflected on their final payment. This has seemed to work out well over the last few years, and it’s pretty much routine now.
I will note that I’m pretty decent on figuring my time to accomplish most tasks, and on a typical project I’m usually not off more than a couple of hours to either side. For example, I know about how long it takes me to mock something up in photoshop, or convert it to a working page template, write the css for it, etc.
In cases where the client has loose requirements, which can lead to trouble very easily, I go hourly.
I use the third example
. Always works best and enables you to develop good relationships with your clients when you say ‘Well actually it took me less time than I quoted, so you only owe me £xxx, instead of £xxx,xx.’ There probably more likely to use you again if they feel they haven’t been screwed over.
First I try to evaluate what timeline the project will have. After discussing job parameters with the client I explain to him that I charge different rates for different tasks. Meetings are lower than creative hours than data entry and so on… By using milestones for projects (even if they are ‘small’) I have a transparent relationship with the client.In the end he gets a detailed report on the hours spent and (if the chance of a follow-up is imminent) a nice discount
Most of them are satisfied with this solution and I have a consistent overview (also for following projects). Still – the estimation of time I’ll spend is a tricky task at the beginning of a new job, especially when the client-need isn’t expressed satisfactory or not clear for him in the beginning (‘I don’t know what will be on there, just make a web-page’).
Why do you use different rates for different services? My partner protests this because he says 1 hour is 1 hour.
I ask out of curiosity. I have contemplated the same, but after a while it became too complex for me to keep track of everything.
Was it harder to estimate your hourly rates because they varied?
) I find certain tasks like data entry to sap my creativity.
How do you estimate one from the other?
And what do you do if you find out your doing per say too much data entry (or something you would rather not be doing)?
Unless you charge more for that (which may be really cool
Just asking because I have toyed with this idea, but couldn’t seem to get it implemented correctly.
Very comprehensive article.
I use both models and sometime hybrid of two. For the short projects, I use hourly model and for long projects fixed-rate model. Even for longer model – the hybrid of two. Upto some predictable scope of the project and milestones, I use fixed-rate model. And if the scope exceeds than the agreed time frame, from there onwards, with mutual agreement with client, I use hourly-rate model.
What I think important is that the client should be timely informed about the incurring cost and discuss about it if time/cost shifts from the agreement.
Cheers,
Rajesh Shakya
http://www.rajeshshakya.com
Another great article. Figuring out what you will be charging your clients is a very important step, and figuring out *how* to charge your clients is as equally important.
Personally, I usually go with a combo of fixed & fixed with possibility of it being cheaper if I finish sooner than expected. Honesty is the key in this game, especially with those clients who seem to come back. It’s easy to say you worked a few extra hours instead of claiming you finished earlier and you’re going to give them a discount, but later down the road you may find yourself working a lot more than you thought and if you have in good with the client you have the possibility of letting them know the situation and if they are willing to dish out for a few extra hours of work.
Just my two cents…
Great article. I take the same approach as Avonelle, although I’m a writer, not a developer. Charging by the project challenges me to be efficient and to help my clients manage their own time. I think this helps everyone get what they want. My clients get what they need, within budget, and I generally know when projects will end. This makes it easier to plan.
I usually charge by the hour for small stuff, production work and fixed pricing on larger projects. With the fixed pricing comes the broken down payemnt model, I make sure that I get 1/2 to a 1/3 up front as a sign that the client really wants to have the work done. If they change their mind, I am covered for my time. This works well with milestones as well, you can break up the payment for specific milestones and make sure that your being paid on longer projects.
Either way, I think it’s important to be transparent and honest with my clients, I want to be approachable if they need to discuss this. I try to be as accurate as possible with estimates and constantly keep the client updated on progress or where we’re at with the project.
I have to say you seem to be coming from a perspective of client always wins and we try and reduce our exposure to getting ripped off or working for peanuts. All the risk is ours. The other thing I guess that is not mentioned is hourly rate, there is a whole can of worms in there. For example an agency might charge 5 times what a freelancers might, and that is because of hidden costs whether it be building space or secretaries to the CEO’s cocaine fund.
For myself, what I charge as an hourly rate if I have a 40-hour week and am on a ciients site is very different to if I do half an hour fixing up someones stylesheets.
As someone above mentioned it is about value not hours or amount of work. I find in the initial discussions I might throw a ballpark out there and they might like it or turn green. We then work to a figure than they feel they want to invest in a website and the scope usually grows from that, what is possible in the budget and what isn’t so we both feel we are getting a fair trade.
Some projects, for larger clients I can charge a lot more on, and some smaller ones less. The smaller ones I have creative autonomy and the larger ones I heaps of paperwork. It seems to balance out in the end. There is ALWAYS a factor of how much can the client afford to pay rather than time taken by standard hourly rate.
What I would be interested in hearing more of is HOW MUCH people charge for thier services, I think there would be a massive difference overall.
Steve,
if you got this impression, that wasn’t my intention. That’s why I outlined the steps I usually take to reduce risk on the part of the freelancer. Value for the client is an important issue for me too, but I want to be able to afford a living as well. How much risk one is willing to take is personal decision, but ensuring a personal outcome is something that should be taken care of no matter what.
As for the hourly rate, you’re right about the can of worms. An agency might charge 5 times more, but it might not be able to create as much value as you as a freelancer do. I think of this more like an edge of being a freelancer, you’re more flexible, you can get more personal, etc.
As you put it yourself, how much you can charge depends on several factors. I do have a standard rate for my hours from which I’m working out a price, but there’s a lot of factors in there, e.g. client size, project size, working environment, development environment, region (in southern Germany you can usually charge 20 EUROs more per hour than say, in Berlin) and of course, the client’s budget. Specialized markets, tools, languages etc. are an additional factor.
Hey Mathias,
Thanks for your reply, I appreciate it and I of course forgot in my original comment to mention that it is an interesting and provoking article, thanks.
I guess I was reacting to a lot of freelancers I meet who feel guilty at billng clients and get walked over. The freelancer has all the risk and the client has little. In my opinion working like like really challenges you to value yourself and your skills and services far more than a regular paycheck. Personally I have no guilt in billing people.
Thanks again.
Steve
I wish I had a partner to help me with billing. His/Her sole job would be to tell me not to undercut my prices. Not sure why, but I feel guilty billing for anything over my cost. That is one reason I rather do hourly, it keeps me from de-flating my costs.
Ugh!
Christopher
http://www.ChristopherHudson.com
Fixed pricing is a great seller because a lot of people want a bottom line price. And yeah, if it’s a lengthy project then work/payment milestones are a must.
And getting a deposit up front can be a great idea for fixed pricing as well. A deposit is a good way to clearly define “Okay, we’re doing this, and we’re starting right now”
You all make wonderful points! How does one get started in knowing an average quote at all? i.e. an average fixed rate of creating a logo, image editing, etc? I’m aware there are no wrong or right answers but I’m very new to this and have potential if my beginning client(s) is/are willing to continue. Is there a ball park average at all on certain projects in a fixed rate setting?
We have found that using tiem to calculate a fixed cost from the time take is a useful way of getting to a price. After initial work it it then a little easier to work out a retainer rate for ongoing work, you can take into account workign with the client, level of support etc. after you have worked with them once already.
I generally charge hourly and bill bi-weekly.
1] at the beginning of a project, I give the client an estimate of the hours (and therefore cost) to complete the project. they are made aware that I am charging hourly, so that anything above the estimated # of hours will be billed hourly.
2] during the course of the work, I regularly update them on where we are at in terms of hours, and what is left. I warn them if any delays or changes in scope are likely to affect the # of hours it takes. if they accept this change in cost, we move forward with the changes.
3] invoices are payable within 7 days of receipt. for new clients or slow payers, a deposit (based on a percentage of total # of estimated hours) is required before work can start.
in the rare cases when I do work fixed-rate (and that generally only happens for a] retainers and really large, long-term projects or b] clients who are working with a fixed budget), I always ask for some $ up front. even in the case of fixed-rate pricing, I am still billing based on hours spent. I’m just calculating beforehand how many hours it will take.
I have tried so many different billing methods over the years, and this one is by far the best balance between giving clients something to budget a project with, and giving me assurance that I will be paid for what I do. I am not a bank, willing/able to extend credit to clients for work being done, and that’s what it basically amounts to if I work now and get paid later.
this method also puts the responsibility for scope change squarely where it belongs: with the client. they are made aware, throughout the course of the project, exactly how each change in the plan will affect the price. over time, if the client is a regular, it means that a client learns to rein him/herself in, and it also means they develop a real sense of the value of my time and effort. clients become more efficient, waste less of my time, and have a greater respect for what exactly goes into what I do.
as for “the honesty model”, I think that is a given when working for an hourly rate. we charge for what we did. rarely – rarely will that be less than what was estimated for (clients love to expand projects as they go along), but when it does happen, of course the client is charged for actual hours spent. and in reference to the hints about “time management” and “being forced to work efficiently”, are we seriously sitting here implying that those who charge hourly are going to waste project time? I take exception to the idea that freelancers need to be “made honest” in terms of hours they charge for or how hard/fast they work. something about that really turns me off. we are professionals, not schoolchildren.
if anything, I think the opposite is far more common: giving clients a lot more than they paid for. I think most freelancers are too client-driven, and don’t think enough about protecting their own interests. we habitually under-bid and under-charge. we regularly put in more hours than we bill for, just so we can add that “extra touch” that will wow the client and make the project more portfolio-worthy. we are ridiculously accommodating, and bend over backwards to give the client whatever he/she wants, regardless of how tricky it is to plan, execute and bill for. if anything, we need to learn how to protect our interests and draw fair boundaries around how we work so that our bank accounts and schedules aren’t adversely impacted by the way we work.
I usually charge per project. In fact it slowly becomes a standard in Ireland anyways. The price is based on projected time that will be required to complete work and of course the hourly rate, although I have different rates for different tasks, so the client gets a breakdown. I ALWAYS sign a contract with the client and require 30% upfront, otherwise I do not even start thinking of the project. Also in the contract I have cancellation clause, which states the percentage of the remaining fee (after the upfront) that the client has to pay prior to project cancellation (there are 3 different rates due to different reasons for cancellation). The contract also states that I allow for 2 corrections / revisions, anything above that not due to designers fault will be charge at hourly rate (defined in the contract).
I guess that covers me totally and the client also knows what they are standing on. Then what’s left to do is a good time management on the project …
get me those freelancers contacts. i can hire them and give some work and pay money from my wallet and i will also ask that is it your hourly rate
Hey, this is an old posting, but it provides some very good insight. I have a model similar to Pawel’s above, I usually charge by the project, with the cost averaging out to the number of hours I would put in anyway. However, I do have a clause in the agreement that details the amount of revisions and adjustments the client has so they won’t be stomping you with new ideas or changes every week, expecting to pay the original price. I had to learn that the hard way, but so far this hybrid of sorts has worked out well for me.
Let’s say I charge $20/hr and I quote a project for $400 which is equal to 20 work hours, but I finish in 15. Would it be a smart thing to just ask for the actual price? Should I tell the client that it’s the way I price and if I go over 20 hours should I charge for the quote or continue charging?
@Adrian I think that if you’re charging flat rate, you’re taking on the risk. If you take on the risk, you should also be able to accept the benefits. Some jobs you will be eating the extra hours, some jobs there might be some hours left; it will balance itself out. It might be a good PR move to charge less than you’ve quoted, but the client has agreed to the price and they see it as being worth what you quoted. Charge the full amount unless you need to grease the wheels.
I agree with Luke’s sentiments.
The article is very good — I only take exception to the statement that “if you love your clients, you won’t charge them for the time you didn’t need.” The whole point of a fixed-price job is that you guarantee the work no matter how long it ends up taking you. We all know how quickly work can become much more difficult than originally anticipated. Even experienced freelancers can get caught badly underestimating required time. If you “eat the hours” every time the job goes OVER the estimated time, yet you lower your price whenever you manage to finish UNDER the estimated time, you will soon find that you are working for minimum wage. A client should be willing to accept that a fixed-price bid has to include some safety margin in return for the bottom line guarantee. Otherwise the risk is all unfairly on the freelancer’s side.
You can choose to “eat” some hours in the cause of good will, but it should be done as a favor to a good (or potentially good) client, not out of guilt for the legitimate time a job took. (The only other case where I will not charge for my time is if I feel that I made an error or took an approach that added unnecessary hours.)
Personally, I prefer to give an estimate, but to work hourly. All of my clients pay me that way. Once mutual trust is established it’s the fairest way — and I only work with companies that I share that trust with. Establishing trust with new clients hasn’t been difficult for me because much of my work comes from word of mouth from satisfied clients. And in other cases I can supply many references and endorsements.
Mave’s comments are also very apt. I agree with him that, rather than being dishonest, we freelancers tend to over-deliver and often undervalue our work. Combine that with underbidding in order to get work and neglecting to charge for time spent doing “minor” stuff such as saving files, organizing documents (cleaning up, for example, Photoshop files for delivery), writing substantial explanatory emails, teleconferencing, researching for logo designs, finding stock photos, etc., and you may find yourself having to give up freelancing and going to work at Wal-Mart instead. That’s no way to love your clients — a better way is to ensure your own survival in order to continue producing great work for them. Otherwise you both lose.
Till now I charge basis on project instead of hourly.. though sometime I realize some clients ask for extra effort which require lots of time…and I might be giving it them fore free…. I should reconsider this.. hourly or project basis charge…
hourly charge better for professional and for new developer fixed charge is better.
I am in salary negotiation with a new job at present, who have asked me to give them an indication of what I would like to be paid as an hourly rate. It is an international, European based dental company and I will be employed on a freelance basis, researching and setting the wheels in motion for the possibility of the company establishing a basis here in Cape Town, South Africa – where I live and will operate from. I am a qualified dental surgeon, with 2 other university degrees, but have decided to leave clinical practise for good – so this job suits me quite well. My role will be to contact and establish new connections for the company, who travel around the world, offering dental treatment under general anesthetic to patients with severe dental fears and phobias. I will be responsible for securing the use of a suitable clinic or operating theartre for this purpose, negotiate costs and outlay, hours, etc, but the patient remains the responsibility of the company and in no way is the clinic responsible for anything other than supplying the kitted out room in which to operate. My role will also include the neccessary marketing and advertising of the company and its services, in order to develop a decent patient list for when the team come down to RSA to do their operations. This is a new concept that is doing very well in Europe, UK and USA and is a challenge to bring it to Africa. I will start working a 10 hr week in the beginning, until things start to develop and more time will be needed. What do you think is a fair hourly rate that I can ask them for (in Euro’s) without seeming excessive but also not selling my experience, education, etc short. Please help me ASAP. I need to reply to them tonight still, many thanks in advance!
Could someone comment on the ethical nature of hourly billing? If I bill by the hour, isn’t my objective to maximize billable hours, while my client’s objective is to minimize them? How do you view this conflict? I bill based on the value of the project, and that value is mutually agreed upon before the project commences. I list my accountability, my client’s accountability, and our mutual accountability in the contract. This way, I have leverage if my client chooses to not pull his or her weight on the project.
For those who would say hourly rates protect the contractor/freelancer/consultant, try this scenario on for size: If the results I bring to the table can be completed by me in an hour, and they result in a $10 million gain for my client, why should I only be paid for an hour’s worth of work?
@Russ
That’s simple. Because if the client is going to make $10M off a single hour of your work, then likely it was the idea and not the execution that was the determining factor. Does the UPS person delivering mail to a Fortune 500 deserve more pay than a UPS person delivering to mom and pop? Should it matter if the contents on the package will generate $1B? And conversely, if the project doesn’t make any money, do you work for free?
As an independent service provider, my value is based upon the worth of my skill. Unless I am invested or a partner in the project, the ROI of my work is irrelevant unless something that I do or neglect to do LOWERS the anticipated ROI of the project. If I create faulty navigation or an easily broken ecommerce, for instance.
not much closer to an answer on this… I really have no idea what rate to give as acceptible….HELP!
For those of you that charge on a project basis, but charge less if it took you less time than estimated, do you reveal your hourly rate to the client in the bill along with the breakdown?
Anyone ever had issues with revealing their hourly rate? Do you get pushback from clients if you decide to increase it one day?
I usually charge by the project. My clients like to know exactly how much the project will cost. I also try to productize my services. By charging a flat rate for different services my clients are aware of what the final bill will be, should they upgrade their requirements.
If the project total is small, say under $500, I will ask for all the money up front. Of course I was only able to do this once I had a few projects already in my portfolio. Trust is a big requirement on both sides. If we trust eachother then the amount of paperwork and hastle is greatly reduced.
I don’t turn all my services into products. This will confuse my clients with too much information. I know what my clients will ask before they ask it because others have asked for the same products. I am always ready for a quick answer that shows my clients that they are being treated the same as others and treated fairly. Sometimes I tell them I will charge my hourly rate and other times I quote the job.
Always be prepaired for the occasional client that wants to talk for hours and not get billed for the time. A flat rate may not be cost effective in this case. Consider letting the client know that you don’t have time to chat and would prefer to have the requirements layed out in an email.
Good luck, we are all in this together….
Wow! A comprehensive and informative article.I believe project based charges are best for me…
They work out to be pretty profitable.
This sounds more like ‘how to run a charity’ than a business. Charge the value that y are giving your customer, not the least amount you possible can.
I usually use Price Fixing w/ Upfront Deposit
& Sometimes quarterly payments
I mainly go by fixed pricing, but I always charge an upfront deposit (30% – 50%) – simply by letting them know that my time has to be paid for. The rest will cover the actual work.
This way works for me because I’m immediately compensated up front and I never feel like I’m slaving at a project. In fact, it encourages me to do an excellent job and provide more than expected.
Best of all, my clientele never feel like they’re giving away so much in one transaction.
At the end of the day, if you’re running a business, you cannot be afraid to ask for money. If people enjoy your work and if you educate them on the process, they will feel justified to give you what you ask!
Excellent article with equally excellent comments from everyone. It is a headache sometimes getting billing right. What works for one doesn’t necessarily work for the next guy/gal. I think that it is vital that a deposit of 30% – 50% upfront is required as that shows a commitment on both sides as well as giving more motivation to crack on with the job.
Hourly rate or project rate?? It’s an impossible question to answer and really boils down to the freelancers choice in my opinion.
The main thing is being honest, open, trusted and clear with all clients and not forgetting regular dialogue throughout.
I started out my VA business with a mix of hourly and fixed price clients, but mostly hourly. The balance has recently shifted with more fixed price clients, which suits me fine.
Could I get some advice for the situation I am in? I have been working with a client for many months now. I make him flyers for his events. Usually there are a couple of changes for each flyer (time, date, price, location). It really doesn’t take that long 5-15 min. We originally agreed that I charge hourly and bill him for the hours when it starts to add up to something substantial. In general I charge $50/hour. So, for 2 flyers I will ask for around $25. My client is getting frustrated though that he has to pay for 5-10 minute changes and that another designer (who charges more) would make changes for free. He complains that he doesn’t have a lot of money and I should understand that. Now to me that sounds like I’d be working for free and I can’t afford to do that. His argument is that “it’s only 5 minutes.” Am I missing something? Am I asking too much? Am I being unfair? Thanks for your comments.
Russ is spot on in what he says.
The motto I use, and have also quoted to clients/customers on numerous occassions is ‘I get paid for what I know not neccessarily what I do’
If I were you it would be bye bye time for your client. And once he’s gone there would be zero chance of me working for him again.
@Shira: Sounds like your client considers you a commodity that he should be able to purchase at the lowest market price. Regarding his implication that you should cheapen what you do because he doesn’t have much money, I’d ask if he offers free goods or services to his customers out of empathy. You may want to send this guy packing. It’s a universal law that the clients who beat you down most on price are also the ones who will find the most to complain about.
On another note… If it’s “only 5 minutes,” why doesn’t he do it himself? Chances are he lacks the expertise he needs from you. If you’re good at what you do, it sounds like you may need to do a better job stating clearly the value you bring to the table.
Thanks Russ. I am planning on telling him to take a hike.
Russ is spot on in what he says.
The motto I use, and have also quoted to clients/customers on numerous occassions is ‘I get paid for what I know not neccessarily what I do’
If I were you it would be bye bye time for your client. And once he’s gone there would be zero chance of me working for him again.
Very good insight. Fix priced projects often create dispute for many reasons. Mainly due to underestimation or over estimation of the work.
Suppose there is a project A, if the project is complex enough the service provider will be required to a good effort to estimate the time and material cost. And this effort itself should be chargable. However, in case of hourly pricing you can always skip feasibility stage and twist and mould project at various stages according to client requirement.
Hourly billing is always beneficial for client as he doesn’t need to pay for the time and material invested for feasibility study and on the other hand client has better control over project. Any number of changes will be allowed during the project without any dispute and ultimate product will be up to his expectations.
Hourly billing is always a win win situation for both service provider and client.
What a superb article and, as others have said, what great comments!
I’ll mention my process & then plough into some feedback to other great comments:
My process is typically fixed (in my experience clients hate the uncertainty of hourly, fine for agencies though).
I’ll estimate overall cost to a client (sometimes broken down) based on what I know up front BUT, if we go forward, we’ll need to work through a Discovery phase to clarify requirements, revisit options and produce a firm spec (which details any deviation from estimate). This then leads to firmer costings etc.
I’ll take deposit and % of final project total per phase (or monthly) and final total before go live (if a website).
I’m into honesty but agree with a previous comment that we carry the risk with fixed price so need to realise the fruits if you actually do better than expected (obviously this is within reason).
@robert – different tasks for different rates? Hmmm…surely your time is your time?
@mave – yup. In my experience bad projects end up on the laps of good developers to sort out. Long after the tussle of “how long will this take??” has been agreed (without the developers involvement).
@pawel – would be interested to hear more about your 3 types of project cancellation fees?
@Mario Shamir – great quote at the bottom of your comment! Agree 100%
@sean wood – “‘I get paid for what I know not neccessarily what I do” – spot on!
As much as I try to love fixed pricing projects, I always find myself liked hourly pricing projects more.
For example, I was interested in accepting this job, “looking for someone to do a small fix on my site”, but when I look down below to see the statics, the average bid is around $50 to $200. Can you imagine!? $200 for a “small” fix?
But then again, when I think about it – what kind of things I need to fix? Software problem? Hardware problem? Server got hacked? Now all the sudden $200 sound reasonanble price.
Things like these keeps make me afraid to place a bid on any fixed price jobs. The employers are normally not technical enough to put everything you’ll need to know on the job description anyway. And without realize the true problem by actually digging in the code, I don’t know know how much to bid either.
I don’t know. I feel more comfortable for charging hourly and fixed. In case the job gets complicated, I can always extend my working works to balance it out. Fixed priced jobs makes me feel I’m eating my words back, esspecially I underestimated the difficulty of the thing.
I feel really lucky that I’m not freelancing as my means of living after reading these articles and comments. I have a full-time design position at a great company, which while it doesn’t provide the most exciting work in the world, keeps me stable and financially worry-free. I freelance on my free time to keep my design skills sharp and to do work that I find more challenging/creative. That being said, this discussion is beyond the scope of what I deal with, so I’d like to offer a comment describing what I do in case anyone else out there is in my same position.
I guess I do a hybrid of these methods. I use my hourly rate at my full-time position as a guide for how much I should charge. Since I do all of my work on my free time outside of my 8-5 job, I charge time and a half my hourly rate for most jobs. If there is a time crunch involved (ex: I had someone who needed a design done in 2 hours yesterday!), I charge double. Then following the advice of other articles on this blog, I tell all clients upfront that there are extra charges for major revisions or unforeseen extra work (I usually include 3 minor revisions as part of the cost), which is the only point that I tell them what my hourly rate is.
I do not typically tell my clients what my hourly rate is upfront. (This bothers me for some reason – I guess I don’t like how open-ended that sounds at first.) I instead present quotes as a fixed rate based on how long I think each project will take me; having done this about 3 years now, I can usually tell pretty well how long this will be once we discuss what the client needs. I find most of my freelance work is really small and has so far been by people that have a good amount of trust in me (friends, clients through my previous job), so this is quite easy in my case.
This model has worked for me so far. I will say, though, that when I started out early on, I had people turn me down for work thinking my rates are too high. (These were friends/acquaintances with small projects who quite honestly had no idea what it SHOULD cost them for a quality project and/or had a ridiculously small budget.) I’m getting better at being open and honest about my charges, though.
I hope this helps someone else in a situation similar to mine!
I’ve found a really powerful psychological difference from the client’s perspective when I choose fixed-price billing. A client might scoff at paying an hourly rate that they think is too high. But they rarely question a total fixed price, even if it’s based on that same hourly rate.
I think this depends on the type of job. There are jobs that are suited for fixed price and other for hourly basis.
When there is a certain project with clear requirements and description, or a job that has a standard workflow path then fixed price is the best option.
But for long repeating projects with daily new assignments and requests by the client, with no specific requirements and/or duration, then hourly basis, for completion of each task is the right way to go.
But I agree, creating good relationship and built mutual trust is the most important.