Flat rate vs. hourly billing: Which is better?

Flat rate billing and hourly billing are the two main types of pricing systems used by businesses to determine how much they’re paid on a given project. Flat rate billing refers to the practice of charging a single, fixed, up front price for all the time, effort, and materials that go into a project. Hourly billing, on the other hand, is when a business charges an hourly rate for its work, and maybe even adds extra charges for any materials needed for the project.

It can be difficult to determine if flat rate billing or hourly billing is more suited to your needs. Each pricing system comes with its own unique advantages and disadvantages, and understanding these differences will help you determine which method is right for you.

Read on to learn more about the pros and cons of flat rate billing and hourly billing—we’ll even go over how you can combine these two methods into a single hybrid billing system. If you’re interested in a particular section of this article, use the links below to skip to it.

• What is flat rate billing?
• What is hourly billing?
• Which is better: flat rate or hourly pricing?
• Hybrid billing: How to combine flat rate fees and hourly rates
• Final notes

What is flat rate billing?

Flat rate billing is a pricing method where you charge a client a single fixed rate for a project. This means that, unlike hourly billing, you’re being paid for the final product itself, not the time you put into creating the final product. Flat rate pay was popularized by the automotive industry, and has long been the industry standard, because it allows auto techs to operate more productively. Now this pricing structure has been taken up by dealerships and many types of small businesses.

The flat rate pay system is appealing to both businesses and customers because it’s so simple. One agreed-upon price is all there is to worry about—no need for time tracking, specific documentation, or other proof that you worked the hours you claimed.

As a contractor—whether you're a freelance writer, plumber, or electrician—it’s important to accurately predict how much time and effort you will need to put into a project before giving a flat rate quote. If your prediction is inaccurate and some aspects of the project take more time than expected, you won’t be compensated for the extra hours. Regardless of the amount of hours—whether you work for two hours or ten—you’ll be paid the same amount.

Flat rate billing is generally ideal for short, well-defined projects. If you quote a flat rate for a particular project, it’s usually best if you have experience with similar projects. This way, you can accurately predict the amount of time and energy it will take. Accurate estimates are especially important using this pricing method: you’ll need to factor in every aspect of the project, from the time it takes to communicate with the client to the time the job takes to complete. Using this method, it may also be a good idea to include a provision that only allows for a certain number of revisions or changes to the final product, so that your pickier clients don’t drag you into endless rounds of revisions that hurt your bottom line.

As a customer, the project you’re assigning should be very well defined so that you don’t have to worry about making too many revisions or changes once you receive the final product. Before finalizing any agreement with a contractor, you should lay out the specific deliverables that you expect to receive from them at the end of the project.

Example of flat rate billing scenario

Let’s say you are the shop owner of a plant nursery. You feel like your shop’s logo, which you display both in store and on your website, is old, stale, and could use an update. In search of a fresh, trendy logo, you reach out to a graphic designer who has designed logos for other local businesses.

You tell them that you and your team have done some brainstorming, and you want an updated logo for your shop that has a more modern feel to it. You tell the graphic designer that you’d like them to come up with three logos for you to choose from.

The graphic designer, having completed similar projects, considers the amount of time and effort it will take to create three logos. For three logos, and one round of revisions, the graphic designer quotes a price of $400. You agree, and shortly afterward the graphic designer provides you with the agreed-upon three logos, one of which you love and adopt as the new logo for your plant nursery.

How to calculate flat rate pricing

1. Estimate the number of hours it will take to complete the project.
2. Multiply the number of hours you’ll spend on the project by your hourly rate. The resulting number will be your labor costs.
3. Calculate costs of any materials you’ll use to complete the project.
4. Multiply the cost of materials by your markup percentage. The resulting number will be your total materials cost.
5. Add together your labor cost and materials costs to find your total flat rate price.

Use the following formula to calculate a flat rate price:

(Hourly rate * Hours of work) + (Materials cost * Markup percentage) = Total flat rate price

What is hourly billing?

Hourly billing is when you charge a baseline hourly rate for your work on a project. In addition to charging for your time, you may also charge for any materials needed to complete the project.

When compared with flat rate billing, hourly billing tends to be more flexible because you’re generally not limited to a set amount of time or deliverables. If any sudden changes occur or new requirements are added to the project, you can always adapt to these changes and charge for more hours to get the work done. This makes hourly pay ideal for long-term projects where all of the details have yet to be sorted out.

While hourly billing does offer more flexibility in terms of adapting to changes, making revisions, and so on, it also tends to be more complex than flat rate billing. You’ll have to track all of your hours and justify the amount of time you spent on a given project in order to satisfy a client that labor costs are fair and accurate.

As a customer, hourly billing makes the price of a project more unpredictable, since you won’t truly know the total cost of the project until the end.

Example of hourly billing scenario

Let’s pretend you’re the owner of a budding clothing brand. You’re starting to gain some traction, but you still feel like your brand’s online presence is lacking. From your website to social media pages, your brand’s digital presence isn’t as organized and effective as you would like.

To address this issue, you contact a marketing consultant who agrees to totally revamp your brand’s digital presence and develop a well-organized content strategy, to help you reach your goals to boost sales by 20% and gain 20,000 followers on your Instagram page. Ultimately, there are a lot of pieces that go into a project like this and it’s hard to determine from the beginning how much time and effort it will take to achieve your goals.

In this scenario, it would probably be best to pay the marketing consultant an hourly wage, since they’re working on a long-term project and, rather than providing you with specific deliverables, they’re helping you along toward more abstract, unstructured goals.

Which is better: Flat rate or hourly pricing?

When using flat rate pricing, you may be paid less overall than you would using hourly rate billing if a project takes longer than anticipated. However, hourly billing requires an accurate system to track the time you spend working on a project. Using hourly billing, you may also get paid less for faster work. There are pros and cons to each pricing method.

To determine which billing system is best for you, consider the details of your project, as well as the following benefits and potential disadvantages of each method:

The pros of flat rate billing

For contractors

• Makes time tracking easy: With hourly billing, you have to meticulously track your hours to accurately bill the client. But with flat rate billing, the number of hours you work doesn’t matter, so you don’t have to track time for the client.
• Rewards efficiency: Charging a flat fee gives you the potential to earn more money in less time. If you complete a project quickly and efficiently, you’ll end up with a greater profit in the end.

For customers

• Transparent pricing: When you pay a flat rate for a service, you know exactly how much you’re paying from the very start. It’s simple, straightforward, and prevents billed hours from adding up and making a given project more expensive than anticipated.
• Budget-friendly: Flat rate billing is precise and predictable, which makes it easier to organize the budget for a project.

The cons of flat rate billing

For contractors

• Requires more calculation: In order to arrive at a fair quote for flat rate work, you’ll have to consider every step of the process beforehand, carefully predict how you’ll spend your time, look into the cost of any necessary materials, and anticipate any problems or issues that may arise. This can be a difficult task, especially for an inexperienced freelancer.
• Risk getting underpaid: Say you estimate a project will take ten hours, and you charge a flat rate based on that assumption, but in reality, the project takes 20 hours. You won’t receive any extra compensation for the additional ten hours you spent working. You have to accurately predict the work that will go into a project, or risk getting underpaid.
• Harder to sell: With hourly billing, a client can quickly drop you if they’re unsatisfied with the work. But with flat rate billing, you’re often asking a client to pay a large sum up front. If the client doesn’t feel like you’re worth it, the high price may scare them away.

For customers

• Less flexibility: If you decide to make changes to the project midway through, or want to make revisions, changes, and so on to the final product, you’ll likely have to request another quote.
• High upfront cost: While an upfront cost provides some level of predictability, you also have to consider whether you’d be able to get the same value for less through an hourly rate.

The pros of hourly billing

For businesses

• Get paid for all of your work: With hourly billing, you earn in proportion to how much you work—known as billable hours. That means you don’t run the same risk of getting underpaid as you do with fixed rate billing.
• Low upfront pricing: It may be easier to land clients with hourly billing because, unlike fixed rate billing, they don’t have to commit to paying a large sum upfront.

For customers

• Increased flexibility: Hourly billing allows you to easily make changes and add to any project without having to negotiate additional quotes.
• Easily compare different businesses: Many businesses post a general hourly rate that makes it easier to compare prices. Flat rate quotes are often more particular—businesses may have to know the details of a project before providing an accurate quote.

The cons of hourly billing

For businesses

• Tracking hours can be a challenge: When charging an hourly rate, you’ll have to track the hours you worked on a project and describe how you spent your time. This requires organizational skills and a good system for keeping track of billable hours. 
• Less pay for quicker work: Since working less hours results in less pay, you may make less money for being quick and efficient with your work when using hourly billing.

For customers

• Discourages efficiency: Flat rate billing encourages businesses to be efficient so that they can maximize profits. Hourly billing, on the other hand, encourages them to take their time so they can earn more money.
• Complicates budgeting: When you pay an hourly rate, the amount you’ll end up paying them in the long run is often an unknown variable. With flat rate billing, it’s easier to budget because you know exactly how much you’re paying from the start.

Hybrid billing: How to combine flat rate fees and hourly rates

If you’re a freelancer or run a business, there’s no reason why you have to choose one or the other when it comes to flat rate vs. hourly billing. Why not do a bit of both? To create a hybrid billing system, sit down and, one by one, review all the services you offer. Consider which ones are more suited for a flat rate and which are more suited for hourly billing. Create a price book for flat rate services and establish a rate for your hourly services—this will make the process of pitching yourself on client projects easier and more uniform. You can even set up templates to make laying out quotes and invoicing much more efficient.

Final Notes

When considering whether to use a flat rate vs. hourly billing pay structure, take into account all the pros and cons listed in this article. To summarize, a flat rate billing system generally works well for projects that have a well-defined scope and specific deliverables; an hourly billing system is ideal for more broad, ongoing, unstructured work. 

Whatever pricing system you decide to go with, one thing’s for sure: You’ll need tools that’ll support your billing system of choice. With QuickBooks, you can easily track time spent on a project, send invoices, keep track of income, and more! Use QuickBooks to access the essential tools you need to stay on top of your business.

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