Fixed-fee or Hourly?
People can be extremely passionate about how they charge and why they think it’s the best way to get the most value out of their time. There are people on both sides with unshakable points of view. Unfortunately, there are enough pros and cons to each approach and enough variations in each project that it can still feel like a difficult decision.
Once you have the right billing method applied to the right project, you will seem more professional and put you in more control of your cash-flow. Also, as a really great side effect, it can alert you to what types of projects you should be seeking and avoiding. Getting it right is important.
Why you should care
Trust and respect are required to have a client feel comfortable paying you their hard-earned money. When your client feels like you’ve taken the time to understand their needs, the more professional you will seem. When you’re on the right path and making deliberate and meaningful choices, you will be followed.
Making money is great, but making consistent and predictable money is better. Once you’ve identified your value and how you intend to deliver it, the type of clients and projects you need to succeed will reveal themselves. If you’re having trouble, it should be an indicator that you might be working on projects that don’t fit your approach.
When to charge a fixed-fee
When you can see the predictable nature of a project, it should be a clear reason to charge for the entire project. Say, for example, a client has an understood problem with an understood solution and you have a rigid process is in place to accommodate it. There is little reason why a comprehensive estimate can’t be given with a guarantee it will be honored.
This may sound like a typical project, but don’t fool yourself! Getting all the required elements at the same time is more rare than you might think. Most projects have a fully understood problem without a fully understood solution, or the other way around. This will bring unpredictable elements into the picture and make it close to impossible to accurately estimate.
When to charge hourly
If you’re talking to a potential client about a project and it seems to become more and more unclear, you should consider charging hourly. Even if you can clearly define the deliverables and an appropriate timeline, you can’t guarantee that what you’re working on will be what the client wants without constant supervision. Regular communication is important, but after a certian point it’s counterproductive.
In this case above, the client may be looking for help identifying the problems that will inform the plan. This is where you’re deliverables become less valuable and your research, insights, and perspective take the spotlight. Even if you can predict the time and effort it takes to identify a problem, it doesn’t guarantee you’ve solved anything. It may just lead to another question. So don’t charge a fixed-fee for a solution until you know the problem and how to solve it.
Things to watch out for
One of the greatest feelings is getting “in the zone.” When charging hourly, you’re so productive it seems like you’re throwing money away. This is a very valid concern, but charging a fixed-fee will not solve this problem, it will only make the time you spend “out of the zone” the place where you throw away your money.
Another powerful urge, when charging hourly, is to say that what you are doing will “take as long as it takes.” Not knowing how much something will cost can be highly stressful for anyone making an investment. Take the time to estimate parts of the project and do your best to hit them. This will build trust and make it easier for clients to incorporate you into their plans and budgets.
If you or your client aren’t confident in the approach, it’s a good indicator one or both of you isn’t fully understanding the nature of the transaction. When a project is in the grey area between hourly or fixed-fee, take the time to understand what the client needs and, if necessary, split it into two independent projects. Also, if a project is obviously ideal for an hourly approach, but a fixed-fee is demanded (or the other way around), you should be cautious—it’s a sign you may be getting exploited.
Tips and tricks
Always do both. If you’re on a fixed-fee project keep track of your hours so that you can identify the valuable projects and, hopefully, learn how to get more of them. If you’re on an hourly project, estimate as much as possible so you can understand your strengths, use them more, and raise your rates.
No matter what, always try to set delivery dates or deadlines. It may seem obvious on a fixed-fee project, but don’t slack off on the hourly projects. When you can organize your time and effort to match the expectations of the client, you will build a reputation for always getting the job done. This is a great way to augment your value and be an easier choice for people writing the checks.
Always test your value by regularly increasing your rates. It’s not just about making more money, it’s also about learning and growing into new projects where you can make a bigger impact. There are clients who only value a website at $200, and others at $2 million. There are clients who only value a designer’s time at $10 an hour, and others at $250 an hour. Figure out what you want, then figure out how to get there.
In short, if the time you spend figuring things out is what creates the most value for your client, you should charge hourly. On the other hand, if what you’re delivering an understood solution for an understood problem, you should charge a fixed-fee. Anywhere in between is potentially risky business.
Regardless of the method you choose, when the value you deliver has a clear relationship to the nature of the project, you can strengthen your professional relationships while making more money. If you can always show your client that you’re giving more value than you’re charging, you will be seen a good investment and they will come back again and again and again.
Thanks to Josh Porter for editing help.