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Should I charge by the hour or by the project?

Pricing & Services | 0 comments

If you don’t have a good method for pricing freelance work, billing and invoicing can be frustrating and nerve-wracking.

How much do I charge? Am I charging too much or am I leaving money on the table? Should I charge by the hour, or by the project?

Does it matter if I charge by the hour or by the project?

When I first started freelancing, I automatically assumed that I would keep track of my time and then send an invoice with my time and hourly rate. My rates were low so finding work wasn’t too difficult. However, I was working all the time, and not making much money.

As the projects I was bidding seemed to get larger, clients were not as interested in hourly-based work. They wanted to know a number, or at least a range, that they could use for budgetary purposes. The caveat as I worked on larger projects, was that scope creep and learning curves were really taking a bite our of my profits.

Both hourly and project-based pricing are good options. The wisdom is knowing when and how to use them.

And, fortunately, there are more billing options than just those two.

  • Hourly: You charge your client an hourly rate ($/hr) until you finish the project.
  • Project-based: You charge for your time based on the totality of the project’s scope and requirements.
  • Value-based: You base the project fees off of a percentage of the financial value that the product/service brings to the client.
  • Retainer: You enter into a monthly agreement with your client to perform certain tasks and be available for work up to a certain, pre-defined time limit.
  • Combination: Often times, with larger projects, you can combine the above options to create a unique billing structure. Say, for example, you work under a retainer for 20/hrs per month at $35/hr, but any work completed past the retainer agreement is billed hourly at $45/hr.

Each of these options have their strengths and weaknesses. From my own experience, I found the easiest option to track is the hourly option, but it also becomes the most limiting from an earning perspective.

Billing hourly isn’t a bad place to start for young freelancers

Working hourly isn’t bad when you’re first starting. Hourly billing forces you to keep track of your time on a project. Once you’ve gained a few similar projects under your belt, you are in a much better position to estimate a project when asked for a project-based estimate.

But working hourly is the worst way to make a good income as a freelancer because you will always be caught in the “trading time for money” cycle. And, working hourly can tend to create “buyer fatigue” because your client can sometimes have a hard time seeing the end of a project if the project isn’t managed well and communication isn’t good.

Project-based estimates are a double-edged sword.

On one side, they can be very profitable if managed well and expenses and time are maximized.

But, on the flip-side, if you do not have detailed requirements for a project and a very specific scope of work, these types of projects can very easily run away as scope creep sets in.

How to prevent project scope creep

Preventing scope creep requires great attention to project management, constantly checking client requests against the deliverables outlined in the project agreement/contract.

I always add a clause to my contracts the gives me the latitude to bill extra for any work not specifically defined in the contract. This little clause has not only saved my bacon on more than one occasion, but has allowed me to earn more from the project as the client makes decisions or changes along the way.

Perhaps you are ready for an even better way to build estimates that allow you to make a better margin and will simultaneously help you weed out smaller-paying clients and attract high-paying clients.

Essentially, it’s a modern take on the hourly billable concept. It’s called Minimum Billable Units (MBUs)

Minimum Billable Units (MBUs) are a different way of presenting blocks of billable time for projects.

A minimum billable unit is the smallest amount of time that you will bill clients. For most of us, we base MBU by the hour. But many other professions use different MBUs.

For instance, many photographers will create a package which includes a block of time (which includes studio/location time and editing time). They sell these blocks of time versus specifying hours individually.

Most freelancers and clients are comfortable with hourly billing. But, let’s take a look at how using MBU’s can work for you.

How to calculate Minimum Billable Units (MBUs)

Let’s say you are currently billing your time at $25/hr. If you were to sell a four hour block of time, someone could book you for the day for $200. If you’re billing $100/hr, someone could book you for half a day for $400.

In the first case, you would simply create a policy stating that you won’t start work for less than a $100, and then bill them in increments of $50 for every half day worked. But, in reality, you can determine how you want to block your time and sell it.

MBU’s based on half day blocks are easy to calculate.

When your customers see your new policy, three benefits will emerge.

  1. Filter Out Weak Clients – Clients who are looking for cheaper work will begin to self-remove themselves.
  2. Communicates Greater Value – Clients with larger budgets will see a greater value in your time.
  3. You Make More Money – Selling just got a whole lot easier and your potential for making more money just got increased.

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