The advantages of billing hourly / Make sure you track your effective rate

Many blogs and books advise freelancers to bill by a flat fee, so they can sell value versus selling their time. That sounds great. But there is one significant problem with this: The moment you charge a flat fee, you have to be sure you’re not making less than you would be making charging by the hour. It puzzles me that none of these blogs and books ever mention this (or gloss over it in a single sentence). I’ve seen this as one of the key constraints in my profitability, and one of the most potent things to fix.

A flat fee can be very comforting to the client: they can know you’ll do X for them, and it will cost Y. That is wonderful for them. And it’s great to have a client who has clear expectations that stay in line with you. (Of course, if you don’t define what “X” really means, you can get into tons of trouble.)

Any time you charge a flat fee, you had better track every minute of your time on the project—otherwise, you will never know how much you really got paid, in the end. Include phone calls, emails, and anything else you do. Track any expenses incurred so that you can pass those through to your client. At the end, you divide what you got paid by the number of hours it actually took, to see what rate you really made.

Let’s say the effective rate you want to make is $100 an hour. And let’s say you planned on a fixed-fee project taking you no more than 30 hours. Maybe you thought, “oh—there’s no way this will really take me more than 20 hours, but I’ll pad it a bit, just in case”. So you present the client with a fixed fee of $3,000. Now you carefully track your hours on the project. You’re at 28 hours—but you’re sure it’s great, and the client will love it! You turn it in. Your effective rate (if the client pays you now) is $3000 ÷ 28, or $107.14. That’s not bad!

The client says, “oh wait! I thought you said the photos would be cutting edge—these ones seem too normal; can you just change that one little thing for me?” You don’t want to dissapoint them; you remember during one of your many phone conversations, you do recall, they mentioned something about being “cutting edge”; and while it didn’t mean much to you at the time, you don’t want to disappoint them (you now recall the amount of enthusiasm they had when mentioning this). “Sure,” you say. (I find it’s much easier to give in to little requests like this if you’re not changing by the hour—you then get into being paid for what “satisfaction” means to that client, rather than an hour of your time—much easier to get slippery there.)

It turns out that the sourcing, cropping, positioning of the photos takes another 6 hours…. And you have to change the color scheme in a few ways, which means another 4 hours…. All told, this ends up taking you an extra 14 hours (but … you want a happy client!)… We are now at 42 hours. So now, your effective rate is down to: $71.43 an hour.  And $71.43 an hour sounds pretty good—but remember, it has to account for everything to bring you to the life and career you want, so if it dilutes the power of your work hour, that’s still important.

This is a simple example, but it is very easy for a project — especially one that is not well scoped — to go over by 2x, or 3x — yes — 200% or estimated time, or even 300% of estimated time. Now how happy are you that you asked a flat fee?

How many hours are you donating to your client?

Any time your effective rate goes below your target rate, you are essentially donating hours to your client. In the previous example, we ended up donating 12 hours.  But if you’re not careful, you could easily end up donating a lot more than that!

And I know you love your client, but would you rather be donating time to a local charity, or perhaps helping out a friend?

And I don’t really need to mention, that if you weren’t tracking your hours, you have no idea how much money you just donated.

Reasons to charge by the hour instead of by the job

While there are certainly pros and cons either way (and even some interesting hybrids), here is a list of advantages of charging by the hour:

• Every day, I know how much I made for my hour (with a flat fee, I have to wait to the end to figure it out, after the fact).
• It’s rare for projects to go under your estimate (unless you are some kind of crazy cautious estimator; but it’s hard to be super-cautious, because you can end up with bids that sound very high).
• When you’re paid by the hour, the client knows he/she is paying you for every little thing they ask for; so they are much more likely to be judicious; if they are paying a flat fee, they are much more likely to want to “feel satisfied”, or otherwise look to abstract measures; you, in turn, are more likely to fall for just “giving a little more” to make them happy.
• Since flat fee metrics are much more of a pain, it’s less likely you’ll actually do it (especially if you don’t have some sort of accountability partner or group).

In a nutshell, if you charge by the hour, your client has a lot more “skin in the game” about just what they have you do, and how much it’s going to cost. If you manage this expectation closely, you can still break things down into carefully-planned little chunks. You become more like a team, managing the resources and the effort as a team.

Confession: I’ll confess that I’ve done more fixed-fee projects than per-hour projects. But like many of the things I’d like to say on this site, my lessons come more from my mistakes than anything else!

If you are going to charge a flat fee, calculate and report your effective rate (to someone)

If you are going to charge a flat fee, particularly suggest you regularly track your effective rate. I suggest creating some sort of accountability group, or using a coach, as a way to externalizing this accountability, because it’s hard enough to be accountable if the number of billed hours is clear; even less so if there’s no one to give an account to about it.

Consider breaking a flat fee project up into small chunks with clear deadlines (this can help with feature creep, as well)—every week or two weeks, for example—with a price attached to each milestone. This is a good way to help stay on the same page with your client, because it forces more regular accountability, explicit deadlines, and encourages greater communication.

Be honest about your time

Whether per-hour or flat-fee, be sure to include calls, emails, meetings, everything—it’s all time spent working in the service of your client. Don’t fall into the habit of devaluing your time. I currently use Harvest for time tracking and billing. It includes an iPhone app, so I can track things there, and an Apple menu bar app.