By becoming self-employed or an entrepreneur, you will need to think about the way you are to be paid for your services. Will you choose the hourly or the flat rate? Will you choose to be paid on an hourly rate or by the project? These two methods of comparison have their advantages, but also their disadvantages. To help you make an informed decision, we decided to make the comparison.
The hourly rate
The hourly rate may be considered if the majority of your clients requests it at the time of submission. For those who are wondering what their hourly rate should be, it is important to take into account three aspects:
- Your needs: What are your business expenses (furnishings, cell phone, office rental, etc.)? What are your personal expenses (electricity, Internet, mortgage, etc.)? How many weeks of vacation would you like?
- Your competition: What rates does your competition offer? What is the salary of an employee performing the same tasks as you?
- Your clientele: Are you positioned in a high-demand market?
To help you calculate your hourly rate, let us imagine this scenario using the following method as our inspiration. After calculating your business expenses, personal expenses and income tax, you realise that you need an annual income of $70,500. To calculate the number of billable hours, you must take into account hours devoted to your work; anything outside your work (such as accounting, prospecting, networking, etc.) should not be billed. 30 hours a week would be a realistic figure. Then, you must multiply these hours by the number of weeks you will work. By reserving time for vacations as well as for holidays, you come to 47 weeks a year. 30 hours times 47 weeks equals a total of 1410 hours of work per year. Finally, divide the desired annual income by the work hours and you will get an hourly rate of $50.
So, there you are! You have come up with a number that should help your client make a decision. Indeed, since it can be difficult to evaluate the time spent on a project, the client nonetheless wants to ensure there is compliance with his or her budget. This is an option offering more flexibility. If it turns out that during the scheduled time period you have to add new services, these can be invoiced as a supplement. Thus, you will not be penalised and will be paid for the work done.
On the other hand, you can be penalised for your productivity. The more efficient you become, the less you work and the less money you earn. That is why it is recommended that you increase your hourly rate gradually.
Finally, for some clients, the hourly rate does not let them see the value of your work. “$50 an hour? It’s far too expensive!” they cry out. Confronting these reluctant clients, you will have to justify your rate. Unlike a salaried employee, you must compensate for social benefits you do not have : vacation, sick leave, employer contribution to the pension plan, etc.
The flat rate
The flat rate is a single rate for the entire project. To establish this flat rate, some self-employed workers will use the hourly rate as a reference point while evaluating the time needed to complete the project. Sometimes they will even adjust this rate based on the client’s budget.
This form of estimation can be reassuring for the self-employed. Indeed, he or she no longer needs to calculate the number of hours and can focus only on the project. Moreover, since he or she is less bound by time, he or she can find new ways to increase his or her productivity, and thus earn much more money.
For the following example, let us take the hourly rate we calculated earlier, which is $50. By the time you become aware of the mandate, you estimate you need 10 hours to complete it. You then offer your client a flat rate of $500, which he or she accepts. Good news: you finished your mandate after 8 hours of work, equivalent to an hourly wage of $ 62.50. The more productive you become, the better your performance.
However, the opposite situation can happen. Let’s go back to the previous example, but instead of 10 hours, you take 12 hours to complete the project. You get the equivalent of an hourly wage of $ 41.67. This time, you were at a disadvantage with your estimate.
Evaluating a flat rate may be difficult, especially if you have just started freelancing. Fortunately, with experience, it will be easier for you to evaluate your workload.
For the client, the flat rate offers him or her peace of mind. Since he or she already knows the total cost for the project, there will be no surprise at invoice time and thus his or her budget will be respected. This will make it easier for you to convince him or her to entrust you with the mandate. However, if new tasks are added and they were not part of the initial agreement, we suggest you renegotiate your rate with your client.
Between the hourly rate and the flat rate, which to choose?
Unfortunately, there is no magic solution. Some economic sectors will favour a particular payment method, such as billing by the word, while in other sectors, it will depend on the client’s preferences.
However, we recommend that you calculate the payment methods presented above. Through these reflective exercises, you will determine the value of your work and will be able to justify it to your clients.
To make your invoicing easier, do not hesitate to use a project management tool, such as our online solution Nutcache. In fact, our tool includes, among others, a “Services” section, in which you can list all the services that you offer, as well as the rate for each service. By using our solution, you reduce your billing time, which can then be used on other projects.
To learn more about all the features of Nutcache, try it free of charge for 14 days!