Pros & Cons of Billing Agency Services Hourly vs. Flat / Fixed Fee
Read time: 4 minutes
As a creative agency or a freelancer, both your good reputation and industry success can depend upon the value you bring to your clients. You will no doubt often be walking the line between inadvertently gouging your clients, and totally underestimating yourselves. The question you must ask is, are you better off operating as a fixed or flat fee operation, or bill hourly. From what I have seen working with different clients here at Function Point, and from speaking to industry friends, there is no clear winner. As well, much seems to depend upon not only how you prefer to work, but what will work best for the client—who is, after all, a huge priority!
Bidding On Your Next Job
Consider some of these ideas when bidding on your next job. There is certainly no harm in regularly reassessing your methods, to ensure you’re balancing being profitable, with keeping your sanity.
Hourly Billing enables your client to get a better idea of where the money went. You are likely providing the client with reports on what’s been archived and how quickly throughout the job or project. This method also (better) ensures you will be compensated for any overtime or additional hours. Hourly billing provides you with the often needed wiggle room for scope creep, and the ongoing evolution of project targets. If you have your own freelancers or team members on this job with you, you will also be minimizing the chance of over or under paying them. And your relationship with the client can be ongoing, rather than potentially over once a target is hit.
Using this billing method will absolutely require you to be tracking your time on something other than a sticky note. Failure to do so, (and sometimes even if you have been diligent), will leave you wide open to client disputes over invoiced time. Hourly billing also does not entirely free you from budget constraints—you may still find yourself hitting an immovable bottom line, no matter how many hours you put in. Knowing the client is going to be monitoring those hours and each hourly achievement might cause some people to feel added pressure, work faster, and make mistakes. Hourly billing may also make it harder to present your client with the most accurate estimate for the completion of the work. And you may end up being out-bid for clients using a fixed or flat fee structure.
A Flat or Fixed Fee Structure
A flat or fixed fee structure can be liberating. No longer are you as tied to your time tracking (although you really should still be doing it!) and you are probably paid up front for at least a portion of the work to be completed. Scope creep is less likely, as you will have a clear understanding of the goals and targets for the job. The pressure to rush is gone, and the chances are reduced of the client disputing the costs for the deliverable—that’s been agreed to already. And if you work quickly, and well versed in the required work, you could make a tidy profit off this billing method.
To put together a proposed fixed fee to your client, you’re going to need to have an excellent handle on estimating and managing your time. If you end up putting in more hours because you estimated poorly, the client will not be on the hook. You may not get enough to cover all the time it took to get the work done. You’ll need a firm understanding of the expectations of the work, delineating very specifically what is and is not included. For lengthy or ongoing projects, you will need to know how to best break work into more manageable deliverables.
It goes without saying that having a product on your side that enables you to estimate accurately, make time tracking easy, and enable you to readily analyze your profitability is important. Do contact us if you would like to see how Function Point could provide these and other benefits to your agency or organization.
And don’t forget to follow us on Twitter @functionpoint and to like us on Facebook www.facebook.com/functionpoint