The freelance market has been growing steadily since 2020. The number of people working as full-time freelancers has increased by 91%, which is why it is essential to know all possible billing strategies to maintain the competitiveness and profitability of the business.

Typically, people are presented with two options: fixed-rate and hourly billing. As a remote freelancer, you must have wondered which was better. One implied that you were charging based on skill, and the other implied that you were charging based on time spent on a particular project. There was also the matter of figuring out the right amount to charge for the work. Either way, however, the choice you make affects not just your overall income, but also clients’ perception of the work that you can provide. 

To help make the choice clearer let’s take a look at the advantages and disadvantages of using fixed-rate vs hourly billing. By appreciating the benefits and drawbacks of both billing strategies, you will be in a better position to make the right decisions for your business and clients.

An Overview of Billing Methods

1. Fixed-Rate Billing

If you follow a fixed-rate billing strategy, this implies that you have agreed on a particular amount of money for a specific project, regardless of the time it will take to complete it. This is most suitable when the work to be done is well-defined and you’re not expecting the project to undergo major changes.

2. Hourly Billing

Hourly billing, on the other hand, means you’re charging the clients based on the total number of hours spent on that particular project. Thus, this method is effective when the scope of work isn’t specifically defined and is dynamic.

When to Use Each Method

• Fixed-Rate Billing: Suitable for projects that are clearly defined and where project managers can estimate the workloads. It is ideal when the contract presupposes a standard level of output. It is also valuable when the client requires a level of budget consistency.

• Hourly Billing: Best for projects where the demand for resources is unpredictable or projects involving multiple repetitive tasks. This is suitable for use in consultancies, continuous digital marketing initiatives, or innovative development solutions where the terms of reference may transform due to consumers’ responses. This is also beneficial when it is difficult to determine the overall time frame required at the beginning of the project.

To make a more informed decision about which kind of billing system is best for you, let’s compare the pros and cons of each billing strategy.

The Pros of Fixed-Rate Billing

1. Predictability and Budgeting: 

One of the significant advantages of fixed-rate billing is the predictability it offers. As far as the cost is concerned, both the clients and the freelancers have the total picture of the rates, which helps in cost control as well as in planning. 

So when a freelancer estimates that a project will take 50 hours and agrees to a fixed rate with the client, both parties have clear financial expectations. The freelancer knows exactly how much they will be paid and the client can thus budget accordingly without worrying about incurring additional. Unexpected costs. 

Sarah Jameson, Marketing Director at Green Building Elements, notes, “I’ve worked with a lot of freelancers and I have to say I appreciate the simplicity of a fixed rate. What makes fixed rates attractive is that they make financial planning straightforward and reduce the likelihood of billing disputes.”

2. Client Trust and Simplicity: 

Fixed-rate billing simplifies the financial aspect of a project for clients. When clients receive a single, all-inclusive price, it helps build credibility and addresses concerns about possible unexpected charges. 

Clients who have had negative experiences with hourly billing in the past will likely feel more comfortable with fixed price rates because it’s more transparent. It gives clients a clear understanding of cost and increases the likelihood of securing a deal, especially with budget-conscious clients. 

3. Simplified Client Invoicing: 

Fixed-rate projects reduce and regulate invoicing and payment requirements. Freelancers do not have to track time down to the last minute on tasks, and clients do not have to analyze every item on timesheets. This minimizes paperwork so freelancers can concentrate on the job instead of itemizing their billings.

4. Increased Potential for Profitability:

Fixed-rate billing can also lead to more profitability for freelancers who are efficient with their time and resources. 

Let’s say a freelancer works fast and can complete a project in less time than the industry standard, they are still guaranteed to receive the same, agreed-upon fixed rate, even if it takes them less time to complete it. 

5. Encourages Detailed Project Scoping: 

Fixed-rate billing requires freelancers to clearly define the scope of work, time frame, and deliverables to avoid misunderstandings and scope creep. This necessity often leads to better project management and more effective communication with clients.

6. Attractive for Budget-Conscious Clients: 

Clients with tight budgets often prefer fixed-rate billing because it provides certainty about the total cost of a project, eliminating the risk of unexpected charges. This predictability makes fixed-rate billing appealing to small businesses and startups that need to adhere strictly to their budgets.

The Cons of Fixed-Rate Billing

1. Risk of Underestimating Time: 

With fixed-rate billing, you can potentially underestimate the time required to complete a project. If you misjudge the complexity or the scope of work, you may end up investing more hours than anticipated without additional compensation. 

Jason Hennessey, Founder at Hennessey Digital, explains, “We had a project where the project scope expanded significantly, and because we were on a fixed-rate contract, we ended up absorbing a lot of extra work without additional compensation. This taught us the importance of clearly defining the scope and setting boundaries.”

2. Limited Flexibility: 

The fixed rates of billing are rigid and become extremely complex when it comes to making alterations to the project being worked on without having to change the billing contracts in place. This can be undesirable when communicating with clients and if the latter wishes to add an extra function or change the layout halfway through the project.

3. Pressure to Deliver Quickly: 

There is often pressure to deliver the project within the agreed fixed rate, which might lead freelancers to rush their work to stay within budget. This rush can compromise the quality of the final product. You might have to cut corners on a fixed-rate project to meet the deadline, which could affect your work’s overall quality and client satisfaction.

4. Limited Compensation for Extra Effort: 

Freelancers may find themselves putting in extra effort without additional pay if the project ends up being more time-consuming than initially estimated. 

For instance, a software developer might agree to a fixed rate for a new app feature but then face unexpected coding challenges. The additional time spent resolving these issues would not be compensated, which would impact the developer’s overall earnings. 

5. Inflexibility in Long-Term Projects: 

Performance specifications as a characteristic of requirements in long-term projects are not fixed over time. Often such arrangements require constant redefinition or modification of the basic contract that may take much time and possibly place a strain on the client and freelancer’s relationship.

6. Complexity in Pricing Projects: 

Accurately pricing a project on a fixed-rate basis requires a thorough understanding of the project requirements and potential risks. For newer freelancers who may not have enough experience to foresee all possible complications, this complexity can be particularly challenging and lead to financial loss or frustration and burnout. 

The Pros of Hourly Billing

1. Compensation for Unpredictable Workloads: 

With hourly billing freelancers are compensated for all the hours they work, which ensures fair payment for the time and effort invested, particularly in complex or evolving projects. This method is beneficial when project requirements are unclear or likely to change. 

When the scope or timeline of a project is uncertain at the outset, hourly billing provides flexibility and ensures you are compensated for all the time you spend on additional tasks as they arise. As the project progresses and new requirements emerge, hourly billing acts as a safety net, covering any unforeseen increases in workload.

2. Ideal for Discovery and Planning Phases: 

Hourly billing is well-suited for projects that begin with a discovery or planning phase where the full scope is not yet defined. During these phases, the project needs to be explored and understood in depth, making it challenging to estimate a fixed price accurately. 

3. Easier to Manage Ongoing Work: 

For long-term or ongoing projects, hourly billing can simplify the management of continuous work. It allows freelancers to bill clients for incremental tasks and adjustments as they occur. 

4. Aligns with Agile Project Management: 

Since projects are broken down into smaller tasks completed in iterative cycles in agile project management, hourly billing fits well. Tasks and deliverables are developed in sprints, and hours can be logged accordingly. 

The Cons of Hourly Billing

1. Potential Client Discomfort with Unpredictable Costs: 

Clients may be hesitant to agree to hourly billing due to the unpredictability of final costs. This uncertainty can lead to discomfort or resistance from clients who prefer to know the total expenditure upfront. 

Startups and small businesses are more likely to feel this discomfort. They usually have tight budgets which makes them shy away from hourly billing because they cannot accurately predict how much the final invoice will be. This unpredictability can make it harder to secure projects with budget-conscious clients if you charge by the hour.

2. Administrative Overhead Costs: 

Freelancers need to invest significant time and effort in tracking and recording hours accurately. This administrative task can be burdensome and reduce the time available for actual work. 

As a freelancer, you might spend several hours each week just logging time and managing invoices instead of focusing on the task at hand. Detailed time logs are necessary to justify hours billed, which can lead to disputes if clients challenge the accuracy or necessity of billed hours. 

3. Pressure to Fill Billable Hours: 

As a freelancer, you may feel pressured to fill billable hours to maximize earnings. This can result in you taking on more work than you can handle effectively. It can lead to an imbalance between work and personal life, as you might sacrifice downtime to increase your billable hours. 

This pressure can lead to burnout and decreased job satisfaction, impacting your quality of work and overall well-being. Over time, consistently working long hours without adequate breaks can affect mental health and reduce enthusiasm for the work, ultimately harming both you and your clients.

Factors Remote Freelancers Should Consider When Choosing a Billing Method

The nature of the project, client preferences, industry standards, and your working style will help you decide a billing method best suited for your services. 

Check out how these factors can influence which billing method you adopt below: 

1. Project Duration: 

For short-term projects with a clear scope, fixed-rate billing is best as it allows you to set a defined price and focus on delivering quickly without tracking hours. 

For instance, a freelance web designer creating a landing page with specific features and a tight deadline will benefit from a fixed-rate approach. This method will streamline the process and ensure that the project is completed efficiently without the need to monitor hours closely. 

Conversely, long-term projects with evolving requirements might be better suited to hourly billing. A freelance software developer working on an extensive application with regular updates and feature additions would find hourly billing more flexible, accommodating the project’s iterative nature without constant renegotiation.

2. Project Scope: 

If a project’s scope is well-defined and unlikely to change, fixed-rate billing provides clarity and predictability for both you and your client. A graphic designer tasked with creating a logo based on detailed client specifications can confidently use a fixed-rate approach, knowing the parameters are set. 

However, for projects with ambiguous or changing scopes, hourly billing ensures you’re compensated for all the time and effort required as the project evolves. For instance, a freelance consultant developing a business strategy may encounter new insights and shifting goals, making hourly billing more appropriate to cover the extensive research and iterative adjustments needed.

3. Client Comfort Levels: 

Some clients prefer the predictability of fixed rates, while others are more comfortable with hourly billing. Understanding your client’s preferences can help in negotiating a billing method that ensures their comfort and trust. 

Clients with strict budgets, such as non-profit organizations, might lean towards fixed rates to avoid unexpected costs. However, tech startups focusing on innovation and flexibility might favor hourly billing to accommodate the dynamic nature of their projects.

Dominic Monn, Founder at MentorCruise, suggests, “Consider offering a fixed number of hours instead of a fixed price. For instance, if a client has an $800 budget, you could propose a fixed bid for 16 hours of work. You might estimate the project to take 12 hours, but if the full 16 hours are needed, you can request an extension. This will give the client the perception of a fixed bid while managing it through time rather than money.”

4. Predictability of Tasks: 

If your work involves tasks that are highly predictable and repetitive, fixed-rate billing might be more efficient. A freelance copywriter producing a series of blog posts with similar structures and lengths is best suited for fixed-rate pricing as it simplifies the invoicing process. 

However, if your projects often encounter unexpected challenges or require significant problem-solving, hourly billing can ensure you’re fairly compensated for your time. For instance, a freelance data analyst working on complex data sets with variable analysis requirements would find hourly billing more suitable.

5. Competitive Analysis: 

Researching how competitors in your niche price their services can inform your billing method. Aligning with industry standards can make your proposals more competitive. 

For instance, if most freelancers in your field charge hourly, adopting a similar approach can meet client expectations and prevent pricing yourself out of the market. But if the norm is fixed-rate pricing, aligning with this standard can make your services more attractive to potential clients.

6. Industry Norms: 

Some industries have established preferences for billing methods. Consulting and creative industries often lean towards hourly billing due to the variable nature of their work. 

A freelance business consultant advising on strategic initiatives may find hourly billing more appropriate to cover the evolving scope. In contrast, software development and marketing projects might favor fixed rates for well-defined deliverables, such as a marketing agency offering a fixed-rate package for a complete branding overhaul.

7. Risk Tolerance: 

Fixed-rate projects involve a higher risk if the scope changes or unforeseen challenges arise, as you may end up doing more work than initially planned without additional compensation. So if you have a low tolerance for risk, you might prefer hourly billing to ensure you’re paid for all hours worked. 

On the other hand, those willing to take on the challenge of fixed-rate projects can benefit from the potential for higher profitability if they manage the project efficiently and within the initially defined scope.

Taking a Hybrid Approach

In some cases, a hybrid approach combining fixed-rate and hourly billing can simplify matters. This method uses the predictability of fixed rates for certain project components while maintaining the flexibility of hourly billing for aspects that may be more variable.

For example, for language learning app Ling, they use a fixed rate for the development of their core app features, so that the foundational aspects are delivered within a set budget. But, they apply an hourly rate for ongoing updates and the addition of new languages or features, which may require more time and iteration. This helps ensure the quality of the app, while accommodating the dynamic nature of the app development process.

“A hybrid billing approach is often the most practical solution for projects with evolving requirements like ours. We combine fixed-rate and hourly billing to ensure both predictability and flexibility, which helps maintain a positive client relationship while adapting to changing project needs,” explains Simon Bacher, Founder and CEO of Ling.

For example, a project might have a fixed rate for initial design work and an hourly rate for ongoing revisions or additional features. This approach ensures that you and your client are both protected financially while accommodating the dynamic nature of many projects.

Conclusion

Fixed-rate billing offers predictability, simplified invoicing, and the potential for increased profitability through efficiency. However, it comes with risks such as underestimating time, limited flexibility, and the pressure to deliver quickly, which can compromise the quality of work. 

Hourly billing ensures fair compensation for all hours worked and is ideal for projects with unpredictable workloads. Yet, it can lead to client discomfort due to unpredictable costs, lacks incentive for rapid completion, and requires meticulous time tracking, which can be burdensome.

Remote freelancers should consider the nature of the project and their work style. Short-term projects with a clear scope may benefit from fixed-rate billing, while long-term or complex projects with evolving requirements might be better suited to hourly billing. 

Clients should weigh their budget constraints and flexibility needs. A hybrid approach, which combines both fixed-rate and hourly billing can often offer the best of both worlds. 

By carefully evaluating project requirements, client preferences, and industry standards, freelancers and clients can select the billing method that best suits their needs, ensuring a successful and mutually beneficial working relationship.