7 Reasons You Should Charge by the Hour

John Reeve | March 4th, 2008 | , , , , , ,

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 charge by the hour.

    1. 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.
    2. 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.
    3. It encourages 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
    4. 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 implement hourly billing 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.
    5. 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. Hourly billing 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.
    6. It enables billing potential
      There are ways to handle your billing as you become more efficient. First, raise your rates. Hourly billing 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.
    7. 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.

23 Responses to “7 Reasons You Should Charge by the Hour”

  1. Tina Russell says:

    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

  2. Matthew Griffin says:

    Bravo. I think you make a good case. I still disagree, but you’ve held your position well.

  3. Steven Snell says:

    I’m a reader of Matt’s blog, so I found it very interesting to see you present the other view.

  4. Zinni says:

    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.

  5. Jack McDaniel says:

    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.

  6. John Reeve says:

    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.

  7. Joram Oudenaarde says:

    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.

  8. John Reeve says:

    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.

  9. John Reeve says:

    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.


  10. Steve says:

    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!

  11. John Reeve says:

    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.

  12. Yaz Okulu says:

    does anyone knows if there is any other information about this subject in other languages?

  13. Dave Smith says:

    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.

  14. DaveRH says:

    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.

    This is flawed logic. If you have a detailed project outline (which you should always have when billing at a flat rate). You can simply email the client (or call) saying, ” I understand that you need this added to the site before launch, but it wasn’t outlined in the project document (which I’ve attached to this email / sent via email for your convenience. We would be happy to add this feature on, it will cost $XXX more.

  15. Andrea Hill says:

    I agree with you completely. I’ve gone from hourly freelancer to billable resource within an agency, and now I am on the other side of the table and hire freelancers. I still am acutely aware that they’re safer billing hourly, even though obviously fixed-fee contracts would be much easier on me.

  16. Chris Morin says:

    I completely agree with you. I recently changed to hourly billing and it has helped me to avoid being “abused” by overly needy clients, and helped with my cashflow. I estimate the # of hours the project will take but I’m not “stuck” at that $ figure.

  17. Ken says:

    I completely agree with this article. I completely disagree with Matthew Griffin’s article. I have been a victim of being taken advantage of one too many times by clients when charging “flat rate” services. In other words, give your client an estimate, but make it clear that is clearly a quote that is subject to change. Make the best of your time and value, charge by the hour!

  18. Julie says:

    I’m sorry, but anyone who has been taken advantage of by a fixed-rate bid needs to 1) revisit their contract and 2) stand up for themselves and let the client know out-of-scope changes incur an additional cost. We do pretty much *exactly* what Dave Smith wrote about – our billing methods are not one-size-fits-all but rather adapt to fit the project or task. Most of the “reasons” listed in the article for charging by the hour are just flaws in the artist’s contract with their client. I certainly still keep track of my time, because it’s important to know how much time I spend on billable work and how long different tasks take – it makes me a more profitable business and a better estimator (and those “hard to estimate” large projects mentioned above are really just a series of smaller tasks). But flat-rate estimates (and I’m talking about for a defined project here, not updates to infinity and beyond – maintenance contracts should always be hourly) allow me to account for intangible things like the value of the deliverables to the client. We’ve done three projects this year for three different clients that were virtually identical. The first took, let’s say, 40 hours. The other two combined weren’t more than 10 hours, because we were able to apply our learnings from the earlier project to work more efficiently. The end value to each client was the same – why should the last two pay less because we finished it more quickly?

  19. Andrew says:

    All of the points in this article address problems with the professional doing the billing, not the structure. I think it’s a well-made case, but anyone who agrees with what’s written here may need to re-examine how they…

    What Julie said.

  20. John Reeve says:

    Most of the work we do is in custom web application development. Trying to solidify the scope for a flat bid is almost impossible for several reasons. First, the client usually doesn’t have the capacity to visualize the end product in their mind. They have an idea of how it should work. In this case, we’ll charge them a fee to product a detailed spec, because most of what we are doing is business consulting We are helping them adapt their business to an online medium. You can’t just say “build a shopping cart,” because even a shopping cart is unique per client. Second, the project inevitably changes several times before it is completed. Once things start to mold and take shape the client sees what their idea actually looks like and then the changes start rolling in. To try and handle the number of changes through change orders would land us in the same place financially had we started out billing by the hour in the first place.

    Over the last nine years we’ve worked with over 100 clients on more than 300 web projects. Everything ranging from the simplest web site to complex number-crunching web applications. And now we are able to estimate a project bid with extreme precision. And yet we’ve still chosen not to flat bid. Why? Because billing hourly gives us far more control over the client relationship and protects us from the occasional project that somehow finds a way to spin out of control.

    You can be as firm as you’d like with a flat bid, but good luck getting the client to agree on what is out of scope and what is in scope. Even if you have a solid contract and scope there will be disagreements.

  21. Mark Goddard says:

    I think billing by the hour can put clients off. They need to know how much it’s going to cost up front. If you know roughly how long you expect to work on it thats fine, but often your not sure. I suppose hourly billing could be phased in with experience rather than from the get-go.

  22. Barbara Saunders says:

    Billing by the hour presents two serious problems, in my experience. I’m a writer. Many of the people who hire me to write don’t understand writing very well. They don’t like to do it themselves, so things that take them a long time are quick work for me. Turning things around fast runs the risk of creating the perception that I am careless. One experienced project manager at my biggest client told me she holds onto my work for a day or two because her internal customers would assume the work needed rewriting if it came to them too quickly.

    The second problem is that it makes booking and cash flow unpredictable. If I can sell $X,000 in flat rate work, I know my month is covered. I might be working late nights, or I might have some a windfall of time, but I don’t have to worry about money. I’ve had clients send “a big project” only to find that the project took 2 hours. Then I’m stuck, scrambling to fill up time.

  23. Aaron B. says:

    (I know this is an old article, but I just discovered it and found it very useful, so I’ll add my two cents anyway.)

    I think there are some false choices being assumed in some of the comments. I don’t think that billing by the hour means you can’t give the client an estimated cost up front, even a fairly tight one. I don’t think the article is suggesting that you say, “Well, we charge $60/hour, and you’ll find out the total when you get the bill.”

    However you quote the job to the client, you’re going to have to have an hourly rate in your head, and you’re going to have to estimate the hours the job will take. You’re also going to have to give the client an outline of the work that will be done, and it better be fairly specific if you don’t want feature-creep eating up your profits (especially if you’re charging a flat-rate). So you’ve got a detailed estimate of the work to be done, and you’ve figured out for your own purposes how long each item will take, and you have a total cost. So the question is whether you include the hours-per-item breakdown and your hourly rate on the estimate, or whether you keep that information to yourself.

    That’s how I understand the hourly billing system being presented here, anyway. You give the client a detailed work plan and an estimated total, just like you would with a flat rate quote, but you let the client in on how long the individual items will cost, so he can see exactly where his money is going. That could be very helpful. For instance, I have a client who decided to try to save money by not having me monitor status emails from his server, which at the time was part of a bigger flat-rate maintenance contract. Had he known this activity only cost him a couple hours a month, he probably wouldn’t have tried to cut corners there.

    In cases where your expertise allows you to finish work so quickly that your true hourly rate would seem outrageous, I don’t know that it’s necessary for your “hour” to be a real hour. If you’re confident that you can write as much in one hour as an average writer can in two, I don’t think there’s an ethical problem with doubling your hours in your estimate and on your bill. If it bothers you, don’t call them hours, call them “time units” or something. That way the client can still see where the time is going, but he doesn’t have to know how long you’re actually sitting at your desk working.

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John Reeve
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John Reeve

John is a co-founder, web designer and developer at Pelago. His blog posts are inspired by everyday encounters with designers, developers, creatives and small businesses in general. John is an avid reader and road cyclist.
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Jennifer Payne
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Jennifer Payne

Jennifer is the Director of Quality and Efficiency at Pelago. Her blog posts are based largely on her experience working with teams to improve harmony and productivity. Jennifer is a cat person.
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Michael Payne
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Michael Payne

Michael is a co-founder and product architect at Pelago. His contributions stem from experiences managing the development process behind web sites and web-based applications such as Intervals. Michael drives a 1990 Volkswagen Carat with a rebuilt 2.4 liter engine from GoWesty.
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