Flat Rate vs Hourly Rate: What Should You Choose?
The difference between a flat rate pay and an hourly rate pay is how you bill the client. For flat rate pay, you’re paid a set price for the job done. In contrast, hourly rate pay is based on the amount of time you work which means you’re paid a set amount for each hour of work.
Whether you’re self-employed or run your small business, there’s a price structure that you need to consider. Each pricing structure has its set of advantages and disadvantages and it’s important to consider which billing method works better for you and the client.
What this article covers:
What Is Flat Rate Pay?
A flat rate pay is when you charge the client a set price for the scope of work that is completed regardless of the number of works required to complete the project. Flat rates are ideal for projects that have finite deliverables, include the time that’s difficult to estimate and have a narrow and well-defined scope of work. The payments can be made at regular intervals based on the work completed.
- To calculate the flat rate, you can calculate the number of hours a project will take to complete and multiply it with your hourly rate.
- In other cases, there’s a set pricing for specific jobs and value of the project may be considerably more than the estimated hours needed to complete it.
- The prices of projects can also be set on perceived value.
The benefit of flat rate billing for clients is that they know the amount that they have to pay for the project beforehand so there is little room for dispute.
What Is an Hourly Fee?
Hourly rate is the price that your charge per hour for a project. To bill clients by the hour, you need to track the number of hours you’ve spent working for the client and bill at the end of the project or an agreed upon cycle.
Charging clients an hourly fee is effective for long-term projects which are prone to changes. It also works best when you work for the client in-house. If you’re working remotely, hourly billing can be challenging. However, hourly rates make it easier for you to account for changes in the project and other variables that you cannot control.
Flat Rate vs Hourly Rate: Pros and Cons
Flat Rate: Pros
- Flat rate or project rates reward freelancers who are efficient and complete the work on time, If you’re quick and finish tasks faster than you estimated, the time you save means more profits for you
- Flat rates are easier for the clients to understand as the clients know up front exactly what they have to pay for. This means you can set the prices based on the scope of work and accommodate the client’s budget for specific projects
- Charging by the hour can be a headache since you will need to keep detailed accounts
Flat Rate: Cons
- If you’re a newbie, it’s difficult to estimate the project rate. Unless the estimate is accurate and the scope never changes, there’s a huge risk of losing money on a project
- Certain clients insist on hourly invoicing
- Flat rates can open you up to negotiating and haggling with clients over prices
- For charging a flat rate, you need a solid portfolio and references that show you are worth the rate
Hourly Rate: Pros
- Billing hourly make it easy to account for variables and changes in projects
- Hourly rates provide a baseline for clients for comparing work
- Hourly rates are best for long-term projects and clients rather than short, sporadic jobs
Hourly Rate: Cons
- It’s difficult to know what you can count towards hourly rates and general expenses. For example, travel time or phone bills. You’ll have to set rates and hours that are consistent
- Hourly rates limit your income as you’re not guaranteed a minimum payment for the project. Moreover, you’re not paid for the value that your project has to the client. For example, a logo design may take just five hours but its value to a business may be higher
There are advantages and disadvantages of both fixed rate and hourly rate. You need to evaluate your preferences as well as the client’s requirements while choosing a billing method. Most freelancers use a mix of hourly and fixed pay rates pricing for different projects.