Figuring out your billing rate can greatly impact the ability to build your business. Ideally, you will arrive at an amount at the intersection of the income you need, the market value of your services, and the value you provide a client. Once you calculate your billing rate, you need to decide how to bill—that is, by the hour, by the project, or by a hybrid of those two.
Methods for Determining Your Bill Rate
Three basic methods for deciding on a billing rate are cost-based, market-based, and value-based.
Cost-based rates consider the total cost of your services, including variable costs like labor and taxes and benefits and fixed costs—your overhead. A market-based rate is based on supply and demand and considers your competition. A value-based rate reflects the value you provide to your client and the return on investment in your services. It can be a very profitable billing method, but you must be able to back up the proposed value you sell.
Once you’ve chosen which method you want to go with, you’ll also need to factor in your overall costs (labor, taxes, benefits, and overheads), your billable time (how many hours you are actually available to work), and profits and losses. To determine which type of billing rate is right for you, check out our comprehensive bill rate guide.
1. Hourly Billing
When you bill a client hourly, you track your time (with tasks completed in those time chunks). You send an invoice based on your contractual agreement. You may only list hours spent per general line item and offer more detail if requested or include that detail in the invoice. Hourly billing is best fitted for projects without detailed scopes.
If you are an efficient worker and can complete your tasks on time, hourly billing may be the right choice. Hourly billing is a good fit when there isn’t certainty about a specific timeline or scope going into a project. For example, a client may need to apply your skillset to a variety of tasks and outcomes, or you may fill a team role on a large project. Billing by the hour also gives you more opportunities to connect with your client as you work. You’ll need to update them more frequently on your progress or discuss challenges if they arise. Hourly billing can also be helpful if there is a possibility of scope creep (be sure to have provisions for this in your contract) or if there might be opportunities for add-on work as you get further into the project.
When billing by the hour, you need a reliable method for tracking time so you can bill accurately. Hourly billing can also be a cause for concern for your client, even in cases where they were on board when your work started. Even when you keep detailed records of work done and results produced for time billed, you may end up straining your relationship with the client because the cost of your services ends up higher than they anticipated.
2. Fixed-price Billing
Fixed-price billing is a set price for a project. Typically, fixed-price billing includes defined deliverables and a clear scope of work. Invoicing is submitted and payments are made at agreed-upon milestones.
Fixed-price billing is a great fit for projects that can be well-defined and specifically scoped. In this case, you work with your client to create a clear scope of work and set milestones. It is often easier to stay on budget with fixed-price billing because you can break down invoices into specific deliverables within the larger project. If your client is looking for clarity in what they are paying you and if you are looking for clarity in what you will be paid (and when), fixed-price billing can be a good choice.
Pricing a fixed-priced project requires good estimating and time management skills. You will also need a clear scope of work to quote an accurate price. Unless you include how scope changes will be handled during project execution, you could either lose money, have a conflict with the client, or both. Also, it is a best practice to include an amount to cover contingencies (a percentage of the initial price you calculate) to cover the delays and small deviations common to any project. If you don’t include a contingency amount, you risk losing money.
3. Hybrid Billing
The third approach to billing is the hybrid—a mix of hourly and fixed price. You charge an hourly rate with a “not to exceed” total for the entire scope. Even if you work more hours, you will only bill up to that set total.
Hybrid billing is a good fit when there’s “sort of a scope.” The client knows what needs to be achieved and by when, but there may be some unknowns about how to get there. This is also an effective way to mitigate the negative psychological aspects of hourly billing—the client knows that there is a set maximum that they have committed to pay, so there won’t be any surprises. Another subtle benefit is setting the not-to-exceed amount above your estimation (including contingency), so that you come in below that amount when the project is complete. This can positively impact the relationship with your client, as, in their mind, you’ve delivered without topping out the budget!
The biggest risk with hybrid billing is setting the not-to-exceed amount too low. Failure to include all the possibilities in your time calculations, or to remember to include contingency time into the mix, can lead you to lose money as you end up putting in “free time” to achieve the contracted result.