Should you take hourly or fixed payment?

Should you take hourly or fixed payment?


Should you take hourly or fixed payment?

money stack

Someone has contacted you and expressed interest in your service. It’s your first client! Congratulations!

After understanding what your client wants, it’s time for the hard question, “How much would this cost?”

Freelancer payment methods have several. Here we will go over fixed rate and hourly rate.

How to charge?

Fixed rate v.s. Hourly rate

What it means to charge a fixed rate for a project?

Just like buying a mobile phone, the client gets exactly what is specified upfront with a fixed price.

The process usually goes something like,

  1. Discuss with the client about what needs to be done and take notes
  2. List out all the requirements
  3. Confirm with the client about the scope of the project
  4. Set a deadline for completion of the confirmed scope
  5. Detail everything in a contract
  6. Both party sign the contract
  7. Do the work
  8. Deliver the work
  9. Get paid

Fixed rate model

Pros:

Predictable cost/earning — After the contract is signed, there are no surprise adjustments or new requests added afterwards.

A clear time span for commitment — Because the scope of requirement is fixed, you will know exactly how much time you have to put in.

Client feels more secure — This model is more similar to how consumer buys product, so it’s easier for client to say yes to this kind of model.

Cons:

Harder to adapt to changes — When client’s demand changes, it’s time consuming to spin up a new contract. Or you might accidentally agree to do some “free” work when you don’t feel like going through all that process of writing up a new contract.

Need to define a strict scope — A large chunk of time are spent upfront to discuss about what exactly needed to be done because they needed to be in the contract.

Quotation can’t be 100% accurate — Unless you’re just using template for every single client to produce the work, any new project will have a certain degree of unforeseen obstacles. You will still spend time to overcome them, but it’s not covered in your initial quotation.

Suitable for:

Project that…

Has a clearly defined scope.

You have done the exact same thing before.

Is a popular demand.

Can be completed within three days.


What it means to charge hourly rate for a project?

Your compensation is directly related to the hours that you put in.

The process usually goes something like,

  1. Set a general monthly budget and agree to a hourly rate.
  2. After both parties agreed, sign the contract.
  3. Discuss with the client about what needs to be done and take note
  4. Figure out the first step or first stage. (For software, it’s usually a MVP)
  5. Set a deadline for completion
  6. Do the work
  7. Deliver the work
  8. Client confirms the work
  9. Client request for adjustment or add new request
  10. Repeat step 6 to 8 until client is satisfied or client ran out of budget
  11. Get paid monthly

Hourly Rate Model

Pros:

Flexible for changes — When demands or requirements are changing, there are less friction and less time spent on writing up new contract.

Compensation equals the time put in — Any time spent on the project is tied to a monetary value. Meaning you will be compensated for any new requests. The harder you work to provide value to the client the more harvest you will reap.

Faster to iterate — This is particularly important if your client is a startup. Startup needs to create a cycle for receiving feedbacks for improvement. For software, the end users might react differently than the initial assumption. Adjustments are needed fast.

Cons:

Unpredictable time span — Although flexible, if client has unlimited amount of ideas and budget, this can mean that you are obligated to respond to the client’s request.

Harder for client with small budget to accept — Charging by hourly rate can be scary for some clients.

If you’re more effective with time, wrong hourly rate lowers your earning — As you get more experienced, you will spend less time solving the same problem. Which means, if your initial hourly rate is too low, you are earning less over time.

Suitable for:

Project that…

Requires research and experiment

Is long-term.

Is often pivoting.

Thank you for taking the time to improve yourself. You can get creative with your earning model. For example, you could charge a monthly fee for recurring services. And my experience is based on software development, for other professions this could be different.

Please let me know in the comment section if you agree or disagree and why. I am curious to know other freelancers’ take on this.

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