The Great Freelance Debate: Hourly vs. Fixed Rates (Which is Better?)

Time to put the gloves on: today we are discussing a debate that has raged on among freelancers since the beginning of the profession.Hourly vs Fixed

Of all of the topics I’ve covered on freelancing, from pricing mistakes to marketing, this is definitely the topic with the most division, and today we are going to settle this issue, once and for all.

Your opinion will be incredibly important in this post, so make sure that your voice is heard after I’ve presented the evidence.

So, what are the strengths for hourly rates and fixed rates? What are their weaknesses?

Below, I’ll show you the insightful cases made by two prominent freelancers who take opposing sides on the issue, and I’ll add my thoughts on each.

Let’s get this thing started!

The Case for Fixed Rates

There are certainly some amazing benefits that freelancers can only access by charging fixed rates.

When you are getting paid for complete work and not for being “on the clock,” the experience is quite different for both you and the client.

My buddy Tom Ewer, freelance writer and founder of Leaving Work Behind, makes a very well-reasoned argument in this post on how you should structure your rates…

When it comes to deciding how you should price your services, charging by the hour is one of the worst mistakes a
freelancer can make. There are two key reasons for this…

1. It Limits Your Earning Potential

If you charge by the hour, it will only be natural for you to work less efficiently than if you had priced on a per job basis. Tom EwerAnd given that you only have a certain number of hours available in the day, you are essentially capping your maximum earning potential.

You can of course raise your hourly rates, but you will still only have the same number of hours to work with (literally and figuratively).

If on the other hand you price on a per job basis, you are limited only by the speed in which you can complete your work. You will learn to work more productively, and in turn, will earn a higher equivalent hourly rate (and impress clients with your efficient style and quick turnaround).

Tom makes a bold statement here, but from talking with him extensively on Skype, this system seems to work really well for him (note: he is a freelance writer who mainly works on blogging projects & content strategy).

From Tom’s perspective, if you can get a $500 job done in 2 hours, you’ll find yourself at a very respectable rate of $250/hour.

If, however, you agree to hourly pay, you may have a hard time getting a “rate” similar to that, especially if you are new to freelancing and don’t have a lot of previous references or a strong personal brand.

Interestingly, Tom also argues that an hourly rate (while seemingly good for clients in the above example) is actually bad for clients since it clouds their perception of value…

2. It Clouds Your Clients’ Judgement

An hourly rate is a big psychological hurdle for many prospective clients. The same job priced in two different ways can Tom Ewerprovoke wildly different reactions.

Let me explain. Say you’re presented with the opportunity to write a 1,500 word article on a complex and technical topic that you just happen to be well-educated on. Given the nature of the content, the client is happy to pay $150 for the article. He assumes it will take 3 hours, and deems $50 to be a reasonable hourly rate (but you don’t know that).

Consider these two different pricing approaches:

  1. State that the article will cost $150 to produce
  2. State that the article will take you around an hour to produce, and will cost $150

The client would happily accept option 1. He would almost definitely balk at option 2.

It’s simple psychology – the perception of value. Chris Guillebeau touched upon this in The $100 Startup. He paid $50 to a locksmith for an ultra-quick turnaround in an emergency, yet he felt shortchanged by the transaction. Chris remarked on his illogical reasoning:

“…I realized that I secretly wanted him to take longer in getting to me, even though that would have delayed me further. I wanted him to struggle with unlocking my car as part of a major effort, even though that made no sense whatsoever. The locksmith met my need and provided a quick, comprehensive solution to my problem. I was unhappy about our exchange for no good reason.”

Tom makes some solid points here, and his case for the client’s perception of your work is interesting in that I agreed with him (in general) when I evaluated the 4Ps of marketing — it’s far more important to sell on perceived value than anything else.

In the example I mentioned above (finishing a $500 project in 2 hours), the client will almost certainly balk at the idea of paying out $250/hour (not premium clients, but many clients will feel this way).

However, if they are getting $500 worth of value… why should they be mad?

If you like prefer a value-based structure, this copywriting proposal template is a great example of how you can maximize fee presentation.

Why should they want you to work more if you can competently complete a job in less time than expected?

Tom argues that this limiting factor can clog up your time, whereas productive freelancers can benefit from fixed rates by doing great work quickly.

This argument is FAR from over though…

The Case for Hourly Rates

Definitely the most popular pricing option, hourly rates in turn offer some advantages that a fixed pricing structure can never touch.

When you are billed by your time, you control the rate and each hour of your time is now resulting in guaranteed (well, almost guaranteed) coin in your bank account.

Brennan Dunn, founder of Planscope and the author of Double Your Freelancing Rate, takes quite a different view from Tom on the supposed advantages of fixed rates…

Unless the estimate is perfectly accurate and the scope never changes, there is a huge amount of risk for you in fixed bid Brennan Dunnpricing.

Chances are, you assumed a lot of things when preparing an estimate. A long book could be dedicated solely to the art of the estimate (I actually recommend Agile Estimating and Planning).

But these assumptions will often lead us to oversimplify a feature, and then spend a large amount of time getting it to be in line with the client’s expectations.

Conversely, the client likely doesn’t have a clear understanding of exactly what they ordered, and thus will ask for a number of revisions — with each revision taking more of your time and thus cutting further into your profit.

Highly subjective requirements, like design, are most susceptible
to this.

Brennan also makes some great points here, and there is even research that backs up his claims.

For instance, the Kellogg School has published multiple papers that show we are generally very bad at predicting things like “productivity” for our future selves.

So 3 weeks ago when you told yourself that this upcoming project would only take 2 weeks, you were overestimating your ability to produce.

Far more important than that, you have even less control over some of the wacky things that clients can demand midway through a project!

Most freelancers that have been doing this for a while have at least a few crazy clients that they can reference here as evidence.

While you can definitely get lucky with great clients, as I have with people like Ruben and companies like Unbounce, this is hardly the norm: client personalities (and expectations) are all over the place.

It is primarily for this reason that I agree with Brennan over Tom.

(There, now you know where I stand :))

One thing to note here is that Brennan specifically cites web design as an industry where this can be a huge problem, and I think that this is where Tom’s advice may be more tailored to his own work and abilities.

Since I’m involved in content strategy, I’ve found that when it comes to marketing related jobs that involving a lot of writing, clients aren’t as picky since they are usually more concerned about the results over the details.

Tom benefits from this because he is a great writer, so he probably doesn’t run into a lot of clients who ask him to change a ton of things around.

Brennan, however, knows what it’s like for folks like web designers — a project can quickly can quickly turn into “design hell” as clients demand more and more specifics that are way out of line:

Design Hell

(via The Oatmeal)

Brennan continues his case from the client side…

However, the client is also at risk with fixed bid.Brennan Dunn

Especially when you’re working with a smart freelancer. Seasoned freelancers know from experience and frustration that endless series of 26 revisions or scope modifications hurt their income.

Therefore they’ll be more resistant to change and learn to live by the phrase every client dreads to hear: “This is out of scope.”

As a project evolves, it’s often advantageous to the business to change scope. And as a premium freelancer charging a premium rate for our services, we want to over-deliver on value. When we’re locked into a scope of work, this isn’t always possible.

I agree with Brennan here, but less so than above.

I feel like when clients run into the problem, it’s most likely (though not always the case) the they are asking for too much, and thus usually bring the “out of scope” response on themselves.

Again, that’s not universal, but from my experience it is usually a bad estimate on the client’s end that results in this outcome.

This Debate Ends with You!

We’ve seen the evidence, we’ve also seen some compelling arguments from very smart freelancers on both sides of the argument, so now it’s time to hear what you think!

Since this debate will always have different opinions on each side, I only have one question for you today…

As a freelancer, which payment system is the best — hourly or fixed?

Leave a comment below with your thoughts!

(Also, let @TomEwer or @BrennanDunn know that you agree with their points by tweeting it out to them)

I’ll see you down in the comments… 🙂

About Gregory Ciotti


Gregory Ciotti loves small businesses & startups and gets nerdy about behavioral psychology on his blog Sparring Mind.

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Todd F.

My business partner and I have debated this over and over on how to charge. Right now we create quotes based upon the number of hours we think it will take us to do a project and multiply that by our hourly rate. Then that is presented to the potential client. Yes sometimes we do go over our time, but we do not feel its right to charge the client for extra work since they have already signed the contract and paid. Also I live in an area of the country where wages our low and potential clients tend to have sticker shock when the see our hourly rate (< 50 an hour) for our professional work.

Leighton

I personally use a combination of flat and hourly rates, which I think takes advantage of some of the pros of each option. Like you said, Todd, I’ll estimate a large project based on number of estimated hours multiplied by my hourly rate and come up with a flat fee, but then include in the proposal that additional work outside of the original proposal will be billed at my hourly rate. This allows the project scope to be flexible, but also motivates me to work efficiently on the initial project.

Paul Feakins

We do both depending on the project, each approach has its merits and pitfalls!

Gregory Ciotti

@Todd — Very interesting. Admittedly, I generally write things with the perspective of the online freelancer (where location is less of an issue), but I hadn’t considered any inherent advantages or disadvantages for local work.

Erik

I think there is a place for both methods. Also, when billing hourly on client work, you are still making an assumption on how many hours it will take to complete the project, which might be similar in some ways to the fixed rate assumption argument. For updates, and small projects, I think it is best to bill hourly. For larger more complex projects I think a fixed rate makes more sense because clients won’t think about hourly rates if it is not presented to them. In the end there is still an assumption to be made. Hourly rates do carry an unnecessary psychological trigger for the client. Hourly rates force clients to compare the proposed rate with what they think the freelancer should get paid. Fixed rates allow for more flexibility when making changes to an invoice. I use fixed rates for complete projects and hourly for updates and changes outside of the scope. The key is in the time taken to prepare the proposal, the details, summary, description of deliverables and contract. If everything is clear in the proposal and contract, it lowers the risk losing money. Sorry for the rambling but hope some of it makes sense.

Jay Mathis

I use a combination.

If its a project that I am not familiar with or the requirements are not clearly defined, hourly is definitely the way to go. You just know that if the client cannot succinctly define what they want, that you are going to be constantly revising the design/functionality until they settle on what they want. I actually have no problem with clients like this as long that pay are paying on time. You just have to stay on top of them and keep their expectations managed so they are not surprised when they get a big bill.

However, if a project requirements are clearly defined or it is right in my wheelhouse, I prefer a fixed bid. In these cases, I can quote a project at a price I know the client will see value but still way above what it would cost on a hourly basis because of my experience or efficiency with that type of project.

Matt Hoyt

First I would like to thank everyone for adding their thoughts. I am a new freelance web designer and have been scouring the web to figure out which is the best way for me to go. I think I’m going to try Leighton’s suggestion because it gives me the flexibility to accommodate my client more. Since my clients are new and small businesses I think it will help both me and my client get the work we want without getting total sticker shock. And adding to the contract that additional work is charged hourly, the client may be more decisive upfront rather than making multiple revisions later on in the game, but allows me to not work for nothing on any revisions.

Adam McGee

My greatest weakness is estimating my own time. In the past I have billed a flat per project rate and found, once i started tracking my time, that I was constantly going over and consistently lowering my hourly rate. Every project is different and requires different amounts of detail. I find that on an hourly rate I can be more flexible and give the client a better and more well thought out design, instead of focusing on getting the project done before I run out of money, I focus on delivering a quality product that will bring the desired results for my clients.

Corrinda

I also have a hybrid style of rates. Fixed for large projects and hourly for small projects and updates. But in short I’m really charging by the hour because the fixed project rates are based on an hourly estimate. So I’ve been considering pricing my services based not on an hourly rate but on value delivered. Also, I find that with flat rates I can bill in advance which makes collection easier. But as stated above I don’t always estimate correctly on the flat rates and have to eat the costs. On the hourly work I have to do the work then bill and a lot of people drag their feet paying. When someone figures out the right formula for clients and contractors they’re going to be a hero.

Jorge

I evaluate my projects as “one of a kind”, in the sense of the work itself, but also taking into account “that client” and the relation in between.
I normally “win/lose” time in really getting to understand the client needs, then, while building the proposal, i again “win/lose” time detailing the proposal as much as i can… and finally, i always add a sentence along these lines:
“If the items described in these proposal do not correspond, in terms of gender and/or number, or in the need of “upgrades” not mentioned in this proposal, it will be revaluated, to which will be given to an amending budget.”

Roy

Fixed cost works best for me because most of my clients don’t completely understand what a P.O. is; nor do they understand monthly invoicing for time & material. My overhead for explaining how our invoicing system works with each new client — and then doing bill collecting after they don’t pay (because they didn’t understand our invoicing system after they admitted they did), far outweighs the time it takes me to make a change to their circuit schematic.

Also, fixed cost significantly lowers the work load of our book keeper/accountant (who is part time & hourly) — as well as my time as the business owner because I don’t have to constantly hound my employees about the accuracy/completeness of their timesheets! ugh.

I do fixed cost with a very large down payment and bill the remaining balance at certain milestones. If the customer makes subtle changes to the scope then I accommodate them but simply inform the customer that it will push back our delivery date (which buys me more time that I wouldn’t have had otherwise *always a plus 🙂 ) If the scope change is large enough, the customer has always been understanding that it will cost more.

That said, I still keep track of my hours and the hours of my employees internally to use as reference for when I’m bidding new jobs.

Brad Hussey

I kind of work with a Hybrid version of both Fixed Project / Hourly Rate system. I benefit from this because I get the best of both worlds.

For example, if I say a project will be $1,000 — I’ll also note that it will take me 20 hours to complete. With that amount, I take into account the “out-of-scope” tasks that may come out of left-field, and the amount of time it takes for me to estimate a project and communicate with a client throughout the lifespan of the project. I track my hours throughout the project for everything I do (design, development, communication, email, etc.) and I strive to work incredibly efficiently and productively. Perhaps I’ll complete the project in only 10 hours, therefore making $100/hour—which is great, but if I end up actually taking 20 hours to complete the project, I haven’t lost out as I’ve taken into account most of the variables that would make me take the full amount of time.

Essentially, I try and take into account as many of the “out-of-scope” tasks that may be thrown my way, and any other variables that may extend the amount of time I work on the project. I’ve had much success with this system, and it drives me to become more efficient with my time.

Patrick Foley

I’m following the advice of “Million Dollar Consulting” guru Alan Weiss and doing fixed … although he makes a bit of a semantic distinction, calling it “billing based on VALUE.” It’s not a fixed bid for a deliverable – it’s a fee based on the value of the results you’re expected to achieve.

For a web designer, that might be “improved perception for first-time customers when visiting the website, as measured by time on site and return visits” or something like that – as opposed to “new website with the following features.”

I just started doing it this way. It’s pretty terrifying, but it also forces me to focus on creating the highest value for the customer, starting from the earliest parts of the sales process through delivery. I’m pretty sure that will make me a better – more valuable – consultant in the long run … so I’ll probably end up making more money, too. Still scary, though.

Terry

I’ve always been “fixed bid” for project work. Only once or twice has a client been okay with my just billing for straight time–unless we already had a long or trusting working relationship.

Normally, I reserve my “hourly” fees for the out-of-scope stuff–in order to discourage clients from going crazy!

As a graphic/web designer, I’ve been bit in the butt many times by WAAAY underestimating web jobs–especially in the beginning. As I’ve become a better web designer, I’ve become more comfortable charging per page–which, for me, is a kind of hybrid between fixed and hourly. There’s an alchemy to this pricing thing–you just have to get better and better at it.

Steve Wiant

I have gone back and forth with which way is best for years now. I have finally settled on charging a hourly rate for my design work. Any flat rate job I have done, I have lost money either because the scope of the project has changed or I underestimated the time. On top of that, my contracts have to be much more specific about revisions and details to make sure that I stay on track with the flat rate.

By charging hourly, my contracts are simplified because the client can decided if they need or want more changes or to add another page to their website. I don’t have to bother pulling out the contract and pointing out that wasn’t in the initial details, which is no fun for either of us. I disagree that charging you hourly makes you work slower. Unless you are not a honest person, this shouldn’t be the issue. I work quicker if anything because I am more concerned of wasting time and money for the client. Hourly has worked best for me and the client. I am never going back the other way!

Steve Lack

I started out charging fixed rates and found that I was getting burned by “mission creep” and out of scope requests that the client thought should not be out of scope. As I got better at estimating how long web development projects would run I switched to an hourly rate model. I provide an estimate that includes the amount of hours I think the project will take. I let the client know that if it looks like we’re not going to hit that mark I’ll let them know well in advance so we can determine if we need to make changes in the project or increase the budget. I generally over-estimate and am able to deliver the project under budget. I also let the client know that we’re happy to make any changes that they’d like to the scope of the project but those changes will change the estimate of the amount of time it will take to complete the project. I haven’t encountered any resistance from clients about switching from a fixed rate to an hourly rate model and it’s really helped to keep projects on track and to know when they are finished.

Andrew Gray

If the project is over 100 hours, we write a detailed scope document and charge a flat rate. With hourly charges for change orders. If it is under 100 hours, we charge by the hour.

Flat rate small projects are mean the client can just keep asking for changes. Hourly lets you show clients the true cost of their changes.

Kim Crabb

Short but sweet reply: I agree with most of the arguments in the article. I also think it depends on where you’re at as far as experience. I’ve lost a lot of cash on doing fixed-rate jobs as opposed to per-hour (mainly with design work due to the nit-picking of clients). However, on jobs where I’m not as experienced and will be doing a lot of research and troubleshooting, I’m perfectly happy with making a smaller hourly rate overall. What I’m losing in the income to work-outlay ratio, I’m gaining in knowledge. (I’m also a web developer and some technologies are new to me.) I think the smart freelancer incorporates both rate plans. My main reason for loving hourly rates, is that it’s good for a client to know they are paying by the hour so they are less likely to nickle and dime you with a thousand requests.

Darren Farris

I use a fixed price per project. Part of being a designer is selling my value to my clients. (see: Damn Good Advice for People with Talent – George Lois) Billing by the hour gives clients control – of the project and the results. Maybe you’ve heard, “Can’tcha do that logo in an hour…?” Of course you can but what value does that provide?

How often has a business owner said, “I need a new website”, then you discover they have no marketing materials at all and you end up rebranding, or branding the business? With project based fees I can provide a reasonable plan – logo design, imagery, voice, brochure, website, and onward. Then quickly write up a proposal for each item. (thanks bidsketch) Everyone knows what to expect and clients feel well taken care of.

With project based fees, there is no adversarial relationship. Clients always experience value through getting what they paid for. If a project changes, I can always say, “These changes go beyond this project. I understand your desire to add X but let’s get through this project and examine this in more detail after we have the results from what we’re working on right now.” Now I have a reason to call them later and open a new project.

Yes, it does take more research up front but it is always worth it. It’s my job to improve my process, write a good contract, and control scope creep, so I can be profitable.

Businesses reach out to agencies because their internal (hourly) design department don’t have the appropriate time to devote to a design project.

Louise Lalonde-Morin

Hourly or Fixed? It depends 🙂 On the complexity of the job, on the client, on the urgency of the work.

The job:
Low complexity, small job = good time estimation, can be hourly rate
Low complexity, big job = good estimate, fixed rate based on volume metric
High complexity, small job = difficult to estimate time, preferably hourly rate
High complexity, big job = difficult to estimate, fixed rate with possibility of additional charges based on time/volume metrics, additional requests

The client:
Longtime client = good time estimates so fixed rates (eg: monthly fee, per measured action, )
New client = they prefer fixed rate, depends on the job per above
New client with bad attitude = fixed rate with Hell tax factored in
Poor me = just too bad, call your nephew on his school break…
Barter client = beware, no one realizes the time required for web dev. so ensure you are super clear on what you get for what you give..
Premium client = their preference, hourly or fixed.

Urgency of the work
Need it by end of day = fixed rate at high end
No rush = fixed rate at low end since it can be worked on in down time
Normal urgency = depends on the job and the client.

Luana Spinetti

‘Till now, all clients preferred a per-project approach and they pretty much made their price because they were all on very low budgets. But they got me enough experience to seek higher paying clients and push my business forward.

I think I would still charge per-project fees based on a preliminary needs assessment, but anything extra would go by the hour.

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Jody Grenier

I’d have to say it depends on the service being offered! I also have to agree with many of the comments above about using both… fixed for the estimate, hourly beyond scope…

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