Self-employed individuals, freelancers, and small businesses choose an hourly rate or flat rate arrangement to bill clients. Both have pros and cons, so it’s up to the entity to determine which works best for them.
Billing a flat rate doesn’t mean coming up with a number out of thin air. When a business comes up with a fixed rate, it has to consider the following:
- Prices of raw materials or the cost of the resources used in accomplishing the project.
- Expected number of hours used to complete the project.
- The perceived value of the completed work.
Clients usually prefer a fixed rate because it is easier to budget. But the hourly rate works well for long-term arrangements. The structure considers a fixed per-hour rate, which will be multiplied by the total number of hours required to complete the work.
The following are the advantages of a fixed rate:
- More profit for individuals or businesses that complete the project fast.
- Clients prefer a flat-rate payment system because it is easier to understand and track (since there is barely anything to track).
But the downside is:
- When an individual makes a mistake in estimating the project cost, getting the client to agree on a higher rate would be hard.
- A fixed rate is prone to negotiations, as clients understandably want a lower rate.
- It takes a solid portfolio for an individual to command a high flat rate.
For the hourly rate, the advantages are the following:
- While many clients prefer a fixed rate, several also demand hourly invoicing for their system.
- It works for long-term projects because it is easier to account for changes.
But the disadvantages include:
- The hours may be a cause for contention when they are not substantiated.
- Freelancers may limit their income with hourly rates as there is no guaranteed minimum bill.
Billing an hourly rate vs a flat rate depends on what works for an individual or business. There are no hard and fast rules that determine which is better.