Hourly vs. Fixed Pricing – Which One to Choose?

Work isn’t free. Well, for the most part. It should be common sense that if you do work for a client, eventually you’ll get paid for it. No matter how much it is in the end, it is often a question of how you charge your client, or on what basis you do it.

There’s a lot of dispute about what’s the right way to charge, and doing it wrong can lead to unwanted situations between you and your clients. In this article, I’m going into the most common ways to charge and how to make them work successfully for you.

Getting Paid By The Hour

This should be a no-brainer. You work a certain amount of time and get paid for the time spent working. This usually means keeping a time sheet and billing your client the result of (hours x hourly rate).

It clearly has advantages. You get paid for what you’re actually doing in terms of time spent on a specific project. This kind of charging surely is in favor of you, the freelancer, since you also get paid for those extra hours you put in.

What this means for your client is that they usually get a bill and a time sheet by the end of the month and have to pay for whatever you charge. It also means a higher risk when it comes to cost calculation. It’s not easy controlling hourly work from the client’s financial point of view. It’s also tempting to add some hours here and there for extra profit. The latter is, of course, a matter of trust, and it’s up to you to raise the bar here by always billing only the time you really spent working.

What some clients also like to argue about is the work that constitutes a work hour. Do you have to subtract small talk with people on the team? What about a short break by the water cooler? Getting a coffee? The list adds up. Don’t get me wrong, I have nothing against working for an hourly rate, especially when I’m working on-site as additional manpower. In that situation, it’s the working time that really counts. A project has to get done, and your brain, energy and skills are required to finish it. The problem is that it’s not always goal-oriented. It’s easy to slack, and your payment isn’t bound (mostly) to something finished. If the project gets out of control, then you’re in the same boat as the rest of the team: you have to put in extra hours. That’s a punishment by itself, but then again, you get paid for it.

Fixed Pricing

Fixed pricing simply means you charge your client for finishing a specific task or project, no matter how much time, energy, paper or sweat you invested. The price is usually agreed on up-front, with a quote for example. When the project is done and your client is satisfied you bill him. That’s the simple story.

In reality, fixed pricing is always a matter of dispute. I know freelancers who even refuse to work on projects based on fixed pricing. They have their reasons I guess, and when you’re only working as manpower on-site this might not even be an issue to think about. But if you prefer working on a project basis, then you’ll have to deal with it sooner or later. But let’s start from the beginning.

It all begins with a client having a need for something, a new logo, a new website, a new tool for his intranet, you get the gist. I won’t go into the details of how the client got to you, since this has already been done in other postings. You both settle for what has to be done. It’s always a good idea to throw in a basic timeline and an estimate so that your client knows what he’s up to. The important thing is to specify what has to be done and what the finish line is. Otherwise, it will be harder to settle when you can bill the client. You heard the stories, I heard the stories: A client wouldn’t pay because in his opinion a task wasn’t because of.

If you agree on what’s to be done before signing anything it’s easier to avoid situations like this. Work costs money, you know it, and your client knows (or at least should know) it too. Fixed pricing projects usually involve more paperwork, but in situations where the client isn’t willing to pay, it’s important to have it, especially if the worst case happens, and you have to settle the issue in court. I haven’t been in a situation like this, but a friend of mine has, and besides the time it costs a lot of energy and is in general frustrating. Of course, you shouldn’t treat your clients as criminals, if questions come up explain why you’re doing it. Trust is a matter of transparency. If you don’t trust a client, you shouldn’t do business with them, which is also true if the client doesn’t trust you.

So how do you get the pricing right? There’s no right answer here, and you won’t get it right the first time. It doesn’t matter if you’re offering your service to multiple clients for the same price (e.g. designing a logo) or if you’re creating something based on custom requirements. You need a baseline, and that baseline for me is based on the time I estimated. I look at the requirements or specifications and determine what to do and how much time I’m going to need to finish the tasks. That’s the tricky part, and it’s important that you track how much time you needed in the end. That way you can refine your estimates over time. In the beginning, you might be tempted to calculate some extra days for security. I’m not going to advise you on that, I just know the temptation, and I did it too. If you do it, don’t let it turn into a habit. If you do, at least be honest with your clients. Make it clear to them, how the price adds up. And if you’re really honest, and love your clients, you won’t charge them for the time you didn’t need. But I’ll get to that later.

A big issue is longer-running projects. Developing something over a time frame of six months or more isn’t easy to estimate as a whole up-front. If it’s possible try to agree on milestones. A milestone is defined by a specific set of features. After you reach a milestone you agree on the next one. Why the effort you’re asking? It’s simple, it reduces risk on both sides. Your client can react to schedule slips at an earlier point in time, even if that means not doing any more business with you. The same goes for you, the contractor. Identifying possible schedule slips earlier reduces your risk of investing a lot more time than you originally estimated. The milestone way of doing fixed-price projects is usually a good idea even for projects shorter than six months.

From the last two paragraphs, you can come to a conclusion: The risk is on your side. And it is. It’s your responsibility to make correct estimates, track the time you needed, and specify what needs to be done. There are nice clients out there who are happy to pay you when you’re done, but there are clients who don’t, so I’d rather be on the safe side.

Writing down what needs to be done also gives your clients more transparency, especially if they’re not sure yet about the specifics. If that’s the case you can always start by offering to write a specification on which you build the next step. You let your client sign off the specification as final, and start working on the real thing. But this brings up new questions. What if your client changes his mind over time, or a specific feature doesn’t turn out that use and must be implemented differently? That part is totally up to you. Requirements change over time, that’s part of the game, especially in the world of software development. If a client needs extra features, then it’s no big deal to charge him extra for them. If it’s just small things that won’t take much time, but will make your client happy, then it’s up to you to put in a little extra time, especially if there might be follow-up projects in the pipeline.

Fixed pricing has a lot of pros and cons and for good reason. As I said, you won’t get it right the first time, but there’s no reason to fear this kind of payment. You’ll get better at estimating if you keep track of the time you needed and try to incorporate that in future estimates. Over time your pricing will close in on the work you invest in.

The Honesty Model

There is a way you can have the somewhat best of both worlds. You offer your client a specific amount of days to finish a task or project. The baseline is the same as for a fixed-price project, you need requirements and you need to agree on what needs to get done. Based on this you do your estimation which you present to your client. In the end, you only charge him for the time you really needed. If it turns out you needed less time than estimated your client pays less, and you can move on to the next project. Of course, if your working schedule slips you’d still have to work overtime to finish the task or project. But this way it’s a little easier and more transparent to calculate on some days to reduce the risk. If you don’t need them, your client doesn’t need to pay for them. In all the financial risk is calculatable for your client. However long it takes you to finish the project (hopefully on time) your client knows what he’ll have to pay and runs the chance of even paying less for the same outcome. You, on the other hand, can move on to the next client and earn money on a different project.

Do The Right Thing

So now you’re asking: What pricing model should I use? That’s totally up to you and how your client would like to settle it. When I’m working as added manpower at a client’s site, I usually opt for payment by the hour. Around here it’s the normal way to handle these kinds of work and is agreed upon by headhunters and clients in general. Purely considering the time spent working it’s the fairest payment model for you.

For end-to-end projects, I usually opt for the third model, if the client agrees with it. A purely fixed price is the last resort.

There’s no general rule on which payment model to pick in what particular situation. You’ll have to find out what works for you and your clients. Fixed pricing is nothing to be afraid of. If you want to do end-to-end projects it’s usually the way to go, so you might as well become friends with it, and find your own way to handle it. If you take care of the things I mentioned, there’s usually nothing to worry about. After all, you love your clients and they love you.

Andreas Hoff

Writing has always been my favorite thing even after holding a degree in Business Administration. I write about business trends, marketing strategies and startup productivity and help businesses grow.

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