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Fixed vs. Hourly: What is The Best Project Billing Process?

4 minutes

Implementing a project billing process is critically important for the success of any business, whether you’re a freelancer, small business, or huge corporation. But with several different types of billing methods available, which is best suited for your needs? What are the advantages and disadvantages of each? Why are some models firm-focused, while others customer-focused? Before we get into more detail, let’s take a look at the different ways you can invoice your clients for a project.

Types of Project-Based Billing Methods

 While it may seem like a tedious, utilitarian task, identifying a billing method is not something that should be overlooked. When poorly executed, it can have a devastating effect on your client relations. Below is a brief overview of the four billing methods for managing a project, along with the pros and cons to help you avoid common billing mistakes. Keep in mind that the goal is always to bill an amount that is equal to the value of the work performed on a project. That means what works for one project may not work for another. One size doesn’t fit all – some clients are better billed on a fixed rate, while others are on time and materials.

Fixed-fee

Pros:

This is the simplest method to use and clients love it because it gives them a solid understanding of how much the project will cost. In essence, the client agrees to pay a single fixed fee for the fulfillment of the project, no matter how much time is spent on the project or how many people work on the project. You charge a fixed, flat fee for a specific service and you get paid that amount as long as you deliver to the client’s satisfaction.

Cons:

Determining the fixed cost of a project can be tricky, especially if you haven’t completed a project of similar scope in the past. If you’re not careful, it is possible to severely overcharge or undercharge your client, and no one wants to be left holding the short end of the stick. Additionally, if a client requests a lot of changes, the project can quickly become unprofitable. The best way to avoid this from happening is to have a strict policy on changes. Otherwise, you run the risk of a project taking much longer than planned or incurring higher expenses.

Fixed project rate

Pros:

This method tracks one hourly rate for the entire project, which includes your profit margin. The greatest advantage to this method of billing is that it guarantees 100 percent profitability, regardless of who does what or the number of hours worked. On the flip side, clients will benefit from precise billing – they know exactly what is due for the project concerning time, materials, resources, and other costs. No surprises.

Cons:

Providing your client with exact costs and a timeline for completion will take some work on your end. Additionally, as the project progresses, you may find that your initial estimate was way off. Another downside to this method of billing is there is no incentive to be efficient since you are being paid by the hour. This could hurt your client retention rates if they suspect you’re putting in superfluous hours for additional revenue. They might wonder, what is it that you do all day?

Member rate

Pros:

For this billing method, the billable amount is calculated from the members’ rates. Essentially, a billing rate is based on the person doing the work. So, every team member working on the project can have a different base rate for the task performed. With member rates, you can also enter a different hourly rate for each member. This way, teams can work on a project together and focus on their individual tasks, without having to worry about invoicing. 

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Cons:

With member rates, it might be difficult for a business to expect incoming revenue and for the client to expect the final amount.

Service rate

Pros:

With a service rate approach, the billable amount is calculated from the project services’ rates. This is a good method for billing if the project requires many moving parts. If you charge different rates for different services, you can set a different rate for each task on a project. You can also set which tasks are billable and which are non-billable. 

Cons:

As with member rates, it might be difficult for a business to expect incoming revenue and for the client to expect the final amount.

Project Management Software for Billing & Invoicing

Do you know how long a project is really going to take? How much money it will actually cost? Project management software can help you better understand where your time and resources go with the ability to see which team member is working on what task and for how long. The beauty of having this data is that it allows you to analyze how you spend your time and find ways to work more efficiently. 

billing process

You can quickly see who has too much on their plate and who can take on more work. Everyone’s held accountable and everyone works towards the same goal. Billing your client is as easy as taking your hours logged, and exporting them into clean, personalized reports for invoicing.

Bottomline

Whether you run a business or freelance, you have a lot on your plate. Setting up a billing system for clients is one of the easiest ways to speed up your work processes and eliminate manual labor. In short, the better your invoicing system is, the fewer questions or concerns your customers will have about their bills. Investing in up-to-date automation software ensures that all payments are settled quickly and without hassle.

2021-09-14T19:30:04+00:00

About the Author:

As a marketing consultant, Andressa has joined the Nutcache team recently. Based in Brazil, she loves to work with content marketing and business communication to build, create, and establish brand awareness and brand reputation efficiently.