Should Your Business Do Away with Billable Hours?
For decades, many professionals have billed by the hour, invoicing clients by totaling the number of hours worked multiplied by a predetermined rate. Law firms in particular were fond of this billing method — and made billable hours a benchmark for the legal industry since the 1960s.
However, in response to the flailing economy, many law firms have begun offering fixed-price alternatives to hourly billing. This flat-fee system is proving popular with the large companies that retain them. According to The American Lawyer’s Law Firm Leaders Survey, 92 percent of respondents said they’d used flat-fee billing for at least one matter in 2011.
For instance, ZwillGen, an internet issues-focused law firm that works with clients such as Yahoo and MySpace, eschews billable hours in favor of milestone-focused payment terms. “We try to do a flat fee or monthly retainer or something that better aligns our incentive, so we make more money the more efficient we are, and we make less money the less efficient we are,” co-founder Marc Zwillinger told The Washington Post. Thanks in large part to this approach, the firm has quadrupled its client billings in the past year.
In these tighter times, small and large businesses alike are scrutinizing vendor expenses — and growing hesitant about paying hourly rates. If you typically charge your clients based on a billable hours rate, perhaps it’s time to re-evaluate your payment policies?
Here are a few alternative payment strategies:
Project-based fees. Define the project (a new website design, copy for an e-book, etc.) according to a set of agreed-upon milestones, and ask for payment in blocks as each milestone is reached. Allow a provision in your contract that if more work is required than originally agreed to, you’ll be able to charge for the additional time on an hourly rate or re-quote the project fee.
Flat rates. If a certain type of project has few variables that would change the amount of time you spend on it, it may be worth offering a flat fee. Such projects might include drafting press releases (with a set word count), managing social media profiles, or creating a certain number of options for a logo design. Allow for one revision request: If the client isn’t satisfied with the product after that point, you may wish to charge an hourly rate for additional work.
Monthly retainers. If you regularly perform a substantial amount of work for a certain client, you may want to suggest the possibility of a monthly retainer for your services. This will help your client budget for your services and will give you an incentive to prioritize the work for your client, as you’ve already been paid for your time. Be sure that you and your client are clear on the terms: Under a typical retainer agreement, your client will not receive a refund if you don’t use all of the allotted hours, but you may bill for additional time if you need to do more work than the retainer allows (however, you should give your client a head’s up to approve or deny the additional work in advance). Hire a lawyer to draft a standard retainer agreement that works for your business.
Kathryn Hawkins is a business writer for Intuit and is passionate about solving small business problems.