7 Reasons You Should Charge by the Hour
March 4th, 2008 by John Reeve
Matthew Griffin has posted “7 Reasons You Shouldn’t Charge by the Hour.” Pelago’s experiences and struggles over the last eight years have taught us to avoid flat-rate billing like the plague. Here are 7 reasons why you should bill hourly.
- It’s a long-term, personal investment
Starting and stopping timers is a discipline that takes some practice. Training yourself to track your time effectively gives you and your client invaluable insight into a project, and gives you historical data for estimating future work. Tracking your time also makes you better at managing your time. If you find yourself constantly starting and stopping timers, it is your work habits that are counter-productive, not the timers. Using flat-rate billing to circumvent timers is short-sighted. - It makes clients trust you
If you’ve managed your time well in the past, you should have a solid idea of how much your client is going to spend. If your flat-rate billing is based on a ballpark figure, than neither you or the client really knows how much it is going to cost. You will lose money on projects. - It enourages a better balance of work and personal life
This is especially important if you are a freelancer. How do you know when to stop working? If you are getting paid by the hour, you have plenty of incentive to work faster and smarter; it’s called life. If you bill hourly, you can schedule your workload and manage cashflow better. Scheduling flat-rate projects is more complicated, and will have you up late at night racing to meet deadlines - It lends itself to reliable and predictable website update work
Nobody likes doing updates on ugly sites they didn’t design. Once you’ve launched a web site, it makes sense to bill hourly to maintain the site. Web site maintenance is a dependable income stream for any freelancer or business. Getting paid on time is a struggle. Billing hourly for update work is a great way to regulate cashflow. - It stops feature creep
Unless your flat-rate estimate details every feature to be included, your definition of the project is going to differ from the client’s definition. Flat-rate billing gives you very little contractual backup for saying no to the client. Billing hourly allows you to put a price tag on additional features, encouraging the client to evaluate their requests in financial terms. Often times, their have-to-have features aren’t that crucial at all. - It enables billing potential
There are ways to handle your billing as you become more efficient. First, raise your rates. Billing hourly is a different mindset in that you are being paid for your time and expertise more than you are the finished product. Clients aren’t hiring you because they need a web site, they are hiring you because they need a web site built by you, someone they trust and enjoy working with. Second, it makes sense that projects will go faster as you reuse your existing code library and become better at design. Include a base fee to compensate for your intellectual investment. At this point you should have a strong client list and a good reputation, both good reasons why clients will be willing to pay the base fee to work with you. - It stops clients from abusing you
When you use flat-rate billing, clients will take advantage of you. And then only the client is happy, because they are getting everything they want, and you are growing increasingly frustrated with each change. When you charge by the hour, clients can see every little change on the invoice. The grumbling usually stops immediately once they realize each change was at their request.
It is important to realize you are offering a service, not a product, that is difficult to quantify in terms of value. How do you put a price tag on a web site? You can’t, because every web site is different. There is a reason why IT companies, law firms, PR groups, and other professional service companies all charge by the hour. Billing hourly resolves many of the shortcomings created by the over-simplified practice of flat-rate billing. It takes discipline to manage timers, and using a desktop or web-based time tracking service like Intervals is a necessity. But, the rewards of tracking your time and billing hourly are long-term and certainly worth the effort.
March 4th, 2008 at 10:32 am
I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.
Tina Russell
March 4th, 2008 at 2:53 pm
Bravo. I think you make a good case. I still disagree, but you’ve held your position well.
March 12th, 2008 at 4:22 pm
I’m a reader of Matt’s blog, so I found it very interesting to see you present the other view.
March 12th, 2008 at 6:52 pm
I think that you argued your point pretty well, however I do not agree. Most importantly because billing by the hour can be a really hard thing to do and still make an account of every minute that you spent doing the task. Some clients will also want to see some sort of estimate regardless of whether you work by the hour or not, even if they are the reason that you cannot keep this estimate they still tend to not understand that and will become upset.
Finally and most importantly, billing by the hour tends to favor smaller short projects and tasks that break up your day and make it harder to accomplish large tasks. In my experience, it is these larger tasks that end up being more profitable as long as you are experienced in giving quotes you can keep to.
March 12th, 2008 at 6:53 pm
There are many ways to charge clients. Mostly, I think it comes down to your comfort level and how you work. Here are the reasons why I charge a flat rate:
First, over the last ten years I’ve gotten very good and efficient at what I do (graphic and web design). What took me 20 hours then may only take seven or eight now because of my experience and expertise. (Which you mention in point 6). There is no way I could triple my hourly rate and charge by the hour. Clients would certainly object. Having a base rate just confuses things for most clients.
Second, I always write a project brief detailing what work will be done that the contract references. If the client makes direction changes or adds features they pay more and know they’ll pay more. Clients only take advantage of you when there is a definitive road-map that they’ve signed up for.
Third, all of my clients are given my hourly rate for any revisions / updates in the future.
March 12th, 2008 at 9:27 pm
In our industry we tend to do a lot of custom development that is very hard to estimate with a flat rate. That is why we always ballpark our estimates. We add a 15% margin and then track how it really comes in.
March 13th, 2008 at 4:00 am
I think wether or not you should charge by the hour or not really depends on the client and/or assignment.
In my opinion, it’s best to do something like this:
Make a price, and clearly state what you’ll do for that price. Euro 350,- for making 3 concepts, 4 revisions, including a CD with the vectorfiles (for example). If the client agree with that, stick with it. If for some reason, the client wants to see a 4th concept, 5th revision, or wants you to do more then the initial Euro 350,- covers, either make a new price, or charge by the hour.
If you do it like this, and clearly state that if they want more, they’ll be paying either an x-amount of money per hour, or a new flat price will have to be made. Either way, it will give the client a clear view on what they’ll get for that money, and it benefits the designer in a sense of them knowing what to do in order to get paid. You’re not working more “because you want to do it right” or “because that’s what the client demanded”. You’re working more (if necessary), because the client wants more ánd knows it’ll cost them more.
March 13th, 2008 at 7:06 am
One of the important factors in tracking and billing your time hourly is that it provides you with invaluable data. Billing at a flat rate is fine for doing simple and predictable projects, but it is shortsighted. Larger and more sophisticated projects require more precise estimation. For example, a logo design or a web site layout is any easy project to bid at a flat rate because you know what to expect. However, designing and developing an ecommerce site is more difficult to estimate due to the number of variables involved. Having tracked our time on similar projects in the past, we can accurately estimate an ecommerce project and still bill at an hourly rate.
March 13th, 2008 at 7:08 am
Here is an interview with the CEO of Journyx on the importance of tracking time on your projects. While it applies mostly to larger companies, there are some ideas here that can be applied to small businesses and freelancers.
http://tinyurl.com/ypot9v/
March 17th, 2008 at 8:25 am
I favor charging by the hour also, but find few new clients who would actually consider this. I can imagine how established customers may go for this, especially doing website maintenance, but I cannot imagine new contracts without a solid bid price. Maybe you can enlighten us all and share how you convince (new) clients to do this.
- - Great idea but I fail to see the reality!
March 17th, 2008 at 1:42 pm
The clients are in favor of billing hourly for a few reasons:
1. They can see where all of their money is being spent. Each line item of our estimate becomes a task that we track time against.
2. We are covered in the event of a ‘minor’ change. For example, a week before launching an e-commerce site, the client said “one more thing… we need to enable sales in Canada and the UK… ” What seemed like a minor change at first, quickly became a substantial one as we started hashing out the details. Imagine if we had flat bid it and a week before launch said “no problem! Seems easy enough.” We’d be screwed.
3. Allows us to be the good guys. Instead of just saying “No” and “Out of scope” to additional requests, we are able to provide an accurate estimate for the client. We’ve now given them the option to pay for those additional features.
March 23rd, 2008 at 7:55 pm
does anyone knows if there is any other information about this subject in other languages?
April 1st, 2008 at 1:54 pm
[...] 7 Reasons You Should Charge By the Hour [...]
April 16th, 2008 at 9:35 am
Both Matthew and John have good points. But in my opinion, to be a good project manager, one has to master both methods, and compare.
When approached about a new job, one of the automatic things I have to do is classify the work as either a Project, a Task, or sometimes inbetween.
Project = flat rate; requires a formal estimate (ie, a contract), many tasks involved. Example: Web site redesign
Task = hourly rate; too small to estimate. Example: Web site content updates
Mini-Project: this is the inbetween. Too small for a proposal to be written up, but it needs a ballpark estimate so both parties are on the same page. I might bill this hourly or flat rate; the discrepancy between methods is usually low because the project is small. In the event of scope creep, having an hourly rate to fall back on, is more useful than going back and writing up a “change order” for a nonexistent contract.
Example: design a Web banner ad. I might quote that as “half a day”, which can be viewed as both a flat rate estimate and an hourly concept at the same time… making it easier for the client to accept change than when quoting a dollar amount.
However, the most important point is: ALWAYS TIME THE WORK, even if it’s ultimately billed out using your flat estimate. Timing is not that hard to do, and without that data, collected over years of doing similar jobs, you are flying blind when estimating jobs and paying your team.
June 17th, 2008 at 3:05 pm
June 21st, 2008 at 12:55 pm
July 2nd, 2008 at 4:54 pm
[...] hourly rates, but that is somewhat of a gray area. Following Matt’s article, Intervals posted 7 Reasons You Should Charge by the Hour [...]
August 12th, 2008 at 6:03 am