We all love getting paid, right? And as an agency owner, getting paid by the client is a fairly important part of the business. But there’s a potential catch: should you charge an hourly rate or a flat rate for each project?
Both are commonly used pricing strategies, and both are used by agencies to determine their maximum earnings. There are pros and cons to each, and it can be challenging to decide which option to go for.
If you’re an agency owner and not sure about which one to choose, this post will clarify the benefits and drawbacks of each, and enable you to make the best choice for each project.
What is Hourly Billing?
Hourly billing is fairly simple: you charge a base rate for each hour that you spend working on the project. This is the amount you can charge for each billable hour that you or your team spends working on it.
Hourly billing takes into account certain variables that may arise during the course of the project. It’s generally quite flexible, so in case a client wants something more complicated done, hourly billing ensures that you get paid for all the work you put into the deliverables.
Also, in case a client requests a revision or adds something else to the original scope of the project, you’ll always have the option of charging an additional amount.
However, while hourly billing is more flexible than charging a flat rate, there are a few downsides. For starters, you won’t know how much you’re going to get paid until the project is completed.
Secondly, you’ll have to make sure that you track time accurately. In some cases, clients may require you to justify the hours that you’ve spent working on specific items.
They may even ask you to use tools that take screenshots periodically or take webcam shots, which may feel like an invasion of privacy. However, some clients require these extra measures to ensure fairness and accuracy during billing.
Hourly Billing — An Example
A simple example is when a client hires you to conduct a thorough content audit for their site. You quote an hourly fee to the client, and then you start sifting through all the posts they have on your site.
Charging an hourly fee, in this case, makes sense, because you won’t know how many posts there are, or how much work is needed.
You’ll need to work with a content marketing expert to review the pieces, identify those with potential, conduct keyword research, review the work done by their competitors, and then propose changes.
Needless to say, determining the amount of work to be done upfront for a project like this is obviously difficult. That’s why hourly billing is generally the best approach for such a project.
The Pros and Cons of Hourly Billing
- Ensure no effort goes unpaid: As long as you track the hours properly, you’ll be guaranteed payment for all hours worked.
- Flexible pricing: Hourly billing is quite flexible since the amount varies depending on the number of hours worked.
- Easier to land clients: Because the upfront pricing is generally low, hourly billing often seems like a more attractive option for clients.
- Reduce scope creep: Hourly billing prevents scope creep, as you can just charge more for additional work.
- Improve communications: Hourly billing often leads to a more proactive dialogue between agencies and clients.
- It’s difficult to ensure accuracy when tracking hours: When working in distributed teams, it can be difficult to accurately track hours (although Atarim makes tracking time spent on projects massively easier).
- Smaller projects often pay less: For smaller projects that don’t take as long, you’re generally not going to get paid a decent amount.
- Complicated budgeting: This can be an issue if you’re charging a separate hourly rate for different services.
- Complicated calculations: Hourly costs can’t just include employee costs, but all of the costs involved in running your agency (hardware, software, heating, lighting, etc.), making them harder to calculate.
- Clients may underestimate costs: When you charge hourly, there’s a risk that clients may not accurately predict the full costs, resulting in friction later on.
What is Fixed Price Billing?
The second option is for you to charge a fixed price for the project. Also known as flat rate billing, this is fairly easy to explain: a client comes to you and requests a specific service, and you quote them a fixed fee for the entire project.
Unlike hourly billing, where you’re paid for each hour worked, this means you get paid once the final project is delivered, irrespective of the hours you sink into it.
Right off the bat, you can determine that there are a few benefits of the flat rate system: it’s more predictable, both for the service provider and the client. Once the two parties agree on a fee, they don’t have to worry about preparing time-tracking sheets or giving any proof of the behind-the-scenes work carried out.
But, the downside to charging a fixed price is quite clear: it’s often difficult to accurately predict the time and effort you’ll eventually invest into a project. In some cases, if you end up undercharging, you’ll come off feeling dissatisfied after the project ends.
It doesn’t matter if you go above and beyond — the client will still pay you the agreed-upon amount.
Fixed Price Billing — An Example
Let’s assume a client comes to you and wants a website designed for their company. They tell you it’s a simple website with X number of pages. You discuss the specifics, the content, and the timelines, and then give them a flat rate quote.
After the scope of the project has been agreed upon, the two parties sign the contract, and you can start working on the project. Once the website is completed and you’ve satisfied the client’s requirements, you can invoice them the amount.
The Pros and Cons of Fixed Price Billing
- Transparency: Both parties know right from the get-go how much the project is going to cost, ensuring maximum transparency.
- Potential for higher earnings: There’s also potential to earn more, especially if you can get the project completed early. You’ll free up space to take on more work in the same time period, helping you maximize your income.
- Easier to plan for resource allocation: Because it’s predictable, it’s much easier for teams to allocate resources over the course of the project while maintaining profit margins.
- Cost efficient: While you’ll be able to charge for starting projects from scratch, several resources and assets may be reused, which reduces cost inefficiencies and increases margins.
- Risk of being underpaid: If you do not estimate the hours worked properly, there’s a risk that you won’t get paid for any additional work that you end up doing.
- Difficult to create accurate estimates: There’s a lot of calculation involved in accurately estimating the costs of completing a specific project, including the materials, the costs of labor, and other variables.
- Difficulty in getting clients: Some clients may balk at your original cost estimate, and some may even start haggling. This makes fixed price billing slightly more difficult to sell.
- Project control: Assess the amount of control you actually have over the project. If it’s not 95% or so, there’s a risk of scope creep.
Which One Should You Choose?
As mentioned above, this is not easy to decide. It’s never a one-size-fits-all answer. Some projects might be suitable for an hourly fee, while others are better if you go with a fixed price billing.
In some cases, the customer may have a say in this too. Either way, if you’re going with hourly billing, make sure you calculate a suitable rate that includes the costs incurred for both labor and materials.
If you’re charging a fixed rate, make sure you account for all the costs you might incur too, as you can’t just spring an additional invoice on your clients later on.
Use Atarim to Track Time More Effectively and Gain Better Insights into Team Performance
Atarim is one of the best tools that you can use to track time more effectively and gain a better understanding of how each member of the team operates. You’ll have a clear idea about how much time was spent on each task, making it easier for you to bill clients. If you think your billing process can do with some improvements, you may want to read What to Do When Your Billing Process Stinks by Arita Damroze.