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. 
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.
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. 
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.
Discussion
June 17th, 2009 at 8:47 PM
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
June 18th, 2009 at 3:17 AM
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.
June 18th, 2009 at 5:06 AM
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
June 18th, 2009 at 8:01 AM
@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.
June 18th, 2009 at 11:47 AM
@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!
June 18th, 2009 at 12:50 PM
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.
June 18th, 2009 at 12:52 PM
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.
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June 18th, 2009 at 4:24 PM
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.
June 18th, 2009 at 5:02 PM
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
June 19th, 2009 at 6:31 AM
I defiately prefer the “per project” way.
I guess I just love too much chatting and social networking menawhile.
June 23rd, 2009 at 12:29 AM
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
June 23rd, 2009 at 5:27 AM
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.
June 23rd, 2009 at 7:37 PM
I sent a client an invoice for 1000 hrs at 0.03/hr I haven’t heard from him since.
June 23rd, 2009 at 7:46 PM
@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.
June 29th, 2009 at 12:02 PM
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
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August 1st, 2009 at 11:20 PM
Excellent advice!
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August 8th, 2009 at 1:26 PM
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).
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