Charging Project Pricing Versus Hourly Rates

Charging Project Pricing Versus Hourly Rates


Want more pricing help? This is day three of our five part series on pricing clients. You can find the rest of the articles on the Pricing Bootcamp splash page

So you’ve met with the client, have the design brief in hand, and you’re ready to sit down to start pricing things out. But wait! Before you get knee deep in the numbers there’s still one more decision to be made. How will you structure the pricing? Will it be hourly or a fixed project rate?

In this edition of the Pricing Bootcamp series, we’ll be discussing the pros and cons of each pricing model. It’s not that one is always better than the other, but it helps to understand which scenarios could benefit from their respective strengths. We’ll start with the hourly rate.

If You Use Hourly Rates…

The first of the two most typical pricing model is the hourly rate. This is the one you’ve probably had the most experience with, especially if you’ve ever worked in retail or a similar paid-by-time job. You get compensated for the time spent on a project, but the total length may not be clear. Hourly rate simplified

Strengths of Hourly Rates

As a freelancer, an hourly rate assures that all time spent working gets compensated. If there is a delay or sudden addition of workload, you don’t need to worry about losing money. It’s very easy to calculate the work versus return.

From the client’s perspective, an hourly rate might give them a finer amount of control of expenses. Progress and total funds can be monitored and adjusted as the project unfolds.

From my own personal experience, tight budget clients tend suggest an hourly structure for just these reasons. This model is also ideal for consulting or other administrative tasks where speed is irrelevant.

Weaknesses of Hourly Rates

With an hour by hour structure your actual timetable is often much more transparent. This isn’t always a bad thing, but it does open up the possibility for scrutiny of your time management. A budget-concerned client may even pressure you to be increasingly more efficient with time if they fear money is getting wasted. As a result, you may find yourself having to justify hours spent on design, back-end work, and other steps along the way.

A hourly rate is flexible in the sense that you are always compensated for your work, but it’s much less flexible in the negotiation stage. By the nature of the model, it may be hard to cut down a price without undervaluing yourself. Let’s say you come to a client with an hourly rate that exceeds what they would be able to pay for their project. Do you tell them to scale back their project scope? Or do you give them a discounted rate?

Efficiency is not always directly rewarded, because it’s easy to lose money simply by being faster than anticipated. If you find yourself blazing through project after project at lower rates,  you’ll have to make some adjustments…

Watch Your Speed

As you become more efficient and finish projects faster, you will need to up your hourly rate. As your value and expertise increases, so should your price tag. Clients may question the high hourly rate, but this is where efficiency is rewarded.
Expertise wins
Twice the cost and half the time is exactly the same as the reverse when it comes to hourly rates. This is where experience works in your favor. The client is happy because you’ve completed the job quickly at the same rate as lower priced competitors, and you walk away with more time to pick up additional projects. Everyone wins.

If a client gets hung up on what they perceive as a high hourly rate, this would be a good point to bring up. You’re not selling them on the price — you’re selling them on your expertise to finish the project quickly and well.


If You Use Project Pricing…

The second pricing model is a fixed price, paid based on the result. This is a little more straightforward than hourly in certain regards — you’re essentially getting paid for the results. Not counting deadlines, the time spent does not matter as long as the end goal is met. Project pricing in simple terms

Strengths of Fixed Project Pricing

With a fixed pricing model set per project, you’re essentially charging a lump sum in order to reach an end goal. There is less of an expectation for time and budget management once the project is underway because the price has already been established. As a result you tend to have more freedom to manage the project without as much pressure to keep time at a minimum.

Weaknesses of Fixed Project Pricing

One of the added bonus of project pricing is that efficiency is not penalized. Payment is based on the result, so completing a project early would not cause a sudden dip in the value. On the other hand, if a project experiences severe delays and workload grows as a result, you’re already locked into a price even if you take longer than would be profitable.

The Choice is Yours

Don’t forget that you have full control of your own pricing structure. This means that you don’t have to commit to one model or the other. Try both! I always hated when articles didn’t give a clear cut direction in the end, but in this case there is no getting around it. This is just food for thought. Nobody can really tell you for certain what model will work better for your business.

Personally I favor the project pricing structure, largely because it allows for more flexible negotiations with less commitment of time. In tomorrow’s article we’ll be taking a look at some of those options when it comes to building quotes.

Want more pricing help? This is day three of our five part series on pricing clients. You can find the rest of the articles on the Pricing Bootcamp splash page

Further Reading

Here are some highlights on pricing conventions from around the internet.

  1. When to Use Project Pricing
  2. Hourly vs. Fixed Pricing
  3. Freelance Rate: Charging Hourly vs. Flat Rates

Posted Wednesday, June 17th, 2009 · Back to Top

SPONSOR

Add Comment

23 Comments 5 Mentions

  1. Montana Flynn Author Editor

    I use a mix of hourly and project based pricing, depending on the client and project. I believe you left out another option: the weekly or monthly recurring fee.

    I use this for clients when they need me to manage their SEO or marketing campaign. I think it is easier for both of us when I give them concrete price rather than an hourly or project based estimate.
    .-= Montana Flynn´s last blog ..Twitter Weekly Updates for 2009-06-12 =-.

    ·

  2. Vince Author Editor

    Nice post. We are in a phase where we are changing our prices and looking for the best solution. I think, as Montana mentioned, a mix of hourly and project pricing might be the best solution, it all depends on the project and the client.

    ·

  3. dee Author Editor

    it would be interesting to have an article on what the average going rates designers charge –
    1) hourly and per project –
    2) a 5 page pure html/css website
    3) and then a 10 page pure basic html/css site

    ·

    • Zach Dunn Author Editor

      @dee

      You’re not alone. One of the big hurdles for freelancers though is this unspoken tension about revealing actual prices. I think you’ll be pleasantly surprised with the plans for one of the posts on Friday, which involves an anonymous survey and a mock project. Hopefully you’ll get your answer.

      ·

  4. Gary Author Editor

    @Zach
    Would be very interested in reading that article! -Something I’m trying to work out as I enter the freelance market following recent graduation, not wanting to put people off but without undervaluing myself and my work!

    ·

  5. Bobby Author Editor

    For freelance projects, I typically use a mix of both. I start with project pricing, but define the parameters VERY clearly. And if the project goes beyond the original scope, I start charging hourly rates.

    ·

  6. Brant Author Editor

    Great article but there are a lot of variables to consider when setting up pricing on a project. Using a mix of hourly and project based pricing is the best. You also need to consider how you rank as a designer, the client you are working with, the region they are from, etc. I think establishing internal base prices for services is best then padding them depending on time lines, clients, how much demand you have, etc.
    .-= Brant´s last blog ..Online Productivity Tools =-.

    ·

  7. liz Author Editor

    I mainly do project pricing, but i always try to track my hours as much as possible, so I know if i made money on the project or not.

    A few months ago I got a new client who prefers to have me bill hourly, cause they just find it to be less restrictive – this process has helped me to better price project prices cause i saw exactly how many hour were charged for this client and exactly what they got out of it.

    ·

  8. Luis Rivera Author Editor

    I think that are not stone writted models, i use a mix of total proyect + hours thats fit perfect, Because the client know how can i work + the total in $$$ and give me the oportunity if the client need more revisions charge more $$$ who was fear, because we dont want to work 1000 and recieve the payment of 100

    ·

  9. FreelancerCrowd Author Editor

    I defiately prefer the “per project” way.
    I guess I just love too much chatting and social networking menawhile.

    ·

  10. Tom Author Editor

    I think charging by the project is the best way. Here’s why. If you charge hourly, from hour one, you are at odds with the client – you’re trying to maximize your income while they’re trying to minimize your hours. Who’s standing over you with a stopwatch making sure you’re not getting paid for a bathroom break? If the client doesn’t trust you, then it may be tricky getting your money.

    On the other hand, charging by the project alleviates these problems – once a price is agreed upon, work can proceed as fast as possible toward a definite end result. It is in the developer’s best interest to focus and get it done ASAP, and it’s in the client’s best interest because they know the definite cost.

    Just my $0.02. I’ve tried both methods and the second felt more fair to me. Luckily, both clients trusted me, so I had no problem collecting payment.

    -Tom

    ·

  11. Brian Author Editor

    It is my view that a predetermined price allows the client to accurately budget for the project. In pricing a project it would be imperative that one would be very specific about the service offering and the extent of it. The project must be clearly defined by the objectives being set out very clearly. Should the contractor Cleary indicate the extent of his offer the client and the contractor have a clear understanding of what is required and or offered with a set price.

    One of the negatives of project pricing is the time one allocates to the quote. The abuse of this information is also a concern; nonetheless it is your brainchild and if it is well presented it will pay dividends over the long term. Good business is not just about today but every day. People who abuse others time and knowledge rarely succeed in the long term. Should you dedicate time to project pricing over time it will offer you a more refined product portfolio. Project pricing should also illuminate shortfalls in your product portfolio and the areas your business will need to allocate recourses so as to allow you to become more competitive.

    Should the quote be clearly laid out this will also give the contractor a better idea of the time and resources it would require. The best contract between two people is not the paper it is written on but that both parties get what they want, a fair price for good work, clearly defined.

    In my opinion a definite price for a definite service is best.

    ·

  12. Ezrad Lionel Author Editor

    I sent a client an invoice for 1000 hrs at 0.03/hr I haven’t heard from him since.

    ·

    • Sam Dunn Author Editor

      @Ezrad Lionel
      I’m baffled as to what kind of job would take you 1000 hours, but you would only be willing to get $30 for.

      ·

  13. Clay S Author Editor

    Great post! Project pricing is our preferred method as well, and I think it works out well for both us and our clients. We’re bound to produce a final deliverable and it also eliminates any guesswork or suspicion on their end, where they worry if we’re charging too many hours, etc. We also try to even avoid charging hourly for support and try to cover that cost with a monthly licensing fee. About a year ago, I wrote a post on our approach to billing and service that you might find interesting: http://www.newmediacampaigns.com/page/when-companies-dont-fear-customer-support-everybody-wins
    .-= Clay S´s last blog ..Moving your script tags: The quickest way to improve site performance =-.

    ·

  14. Bathrobewarrior Author Editor

    Excellent advice! :)
    .-= Bathrobewarrior´s last blog ..Some tips on images for the web =-.

    ·

  15. Jamie Author Editor

    Well, I’m not a freelancer, but here’s how it works at my company: we give clients a quote, which is usually a range (for example, $7500 – $10,000). Then we bill hourly for work, maintaining a spreadsheet that details how we spend the time. When it’s time to bill the client, the project manager usually plays with the spreadsheet a bit depending on a number of factors. For example, if the bottom end of the quote is $7500 but we only bill $5000, he’ll bump it up to within the quote range. If the client is especially difficult, he may also bump it up, and so on.

    So, I think the best solution is a mix of both. Seasoned web developers know how approximately how long a particular project will take. That’s why we give a quote. Then, the client knows the range of the final bill, but they can still get an hour-by-hour breakdown of the work (which clients love to see, in my experience).
    .-= Jamie´s last blog ..I am still alive =-.

    ·

  16. Berthold Author Editor

    Well you started out nicely laying out the pros of hourly rates, but towards the end you became a lot less verbose. I’d like to take the liberty and fill in the blanks:

    Hourly Rates

    #designer
    + you will always get paid for your time on the project
    – your processes are more transparent, inviting the client to call you out on time wasted, even if you didn’t

    #client
    + good control over expenses, can stop you at any time if budget is tight
    – *will* feel the need to control how much time you spent to make sure they get their money’s worth, essentially having to manage you (bad! They will apply their processes to your work, which most likely won’t fit and will lead to conflict)

    Project

    #designer
    + it’s easy to manage, you can be as efficient as you want and make a killing in hourly rates if you’re good
    – unexpected issues are your problem, and may cause you to actually lose money on the project (if it gets too bad, you should renegotiate with the client. Be curteous, they don’t owe you anything. You miscalculated.)

    # client
    + it’s easier to manage. They have a fixed budget and a fixed result.
    – it’s harder for them to understand how the charge breaks down, and unless they a) get told what you do for their money and how long it will take and b) understand what value they get in the website they receive (more customers) they will try and negotiate until they undercut your bare minimum. Be verbose, and don’t give in.

    As mentioned before, ideally you’d want to combine both systems – offer a flat rate but also tell the customer what is included and how they benefit from it all. Your estimates will get better and better with every project that you complete, provided you keep a running record of time spent and compare that vs. the target time for your hourly rate. You will also develop a keen sense on how long different processes should take you, and when you start running over/under budget.

    ·

  17. Brad Maver Author Editor

    Great Post. Very useful information in here. Thanks for sharing!

    ·

  18. Jenni Author Editor

    I usually use the project pricing system with my clients.
    Thank you for your great post.

    ·

  19. Bowen Author Editor

    Highly amusing.

    ·

  20. Louis Vuitton Monogram Multicolore Watercolor Speedy White M95752 Canada Author Editor

    The new Zune browser is surprisingly good, but not as good as the iPod’s. It works well, but isn’t as fast as Safari, and has a clunkier interface. If you occasionally plan on using the web browser that’s not an issue, but if you’re planning to browse the web alot from your PMP then the iPod’s larger screen and better browser may be important.

    ·

  21. Alia Crittendon Author Editor

    This means superb. Exactly how in order to grab livlier in relation to diving

    ·

 

Build Internet by One Mighty Roar. Since 2008.