Pros & Cons of Billing Agency Services Hourly vs. Flat / Fixed Fee

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

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 You are likely providing the client with reports on what’s been archived and how quickly throughout the job or project.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.

Factors to Consider when Choosing Hourly vs. Flat Fee Model

Deciding between hourly and flat/fixed fee pricing models for your creative projects depends on several factors. You don’t necessarily stick to only one method, but rather be flexible depending on your agency’s circumstances and each client’s requirements. Here are some criteria to consider:

  • Project types: Different project types may be better suited for different pricing models. Assess whether your next project is a short-term, one-time, or long-term, ongoing engagement.
  • Client expectations: Consider your client’s preferences and expectations regarding pricing models, as they may have specific needs or be more comfortable with a particular approach.
  • Profitability analysis: Take into account your operational costs, time utilization, and historical project data to determine which pricing model is more likely to yield higher profitability for you.
  • Market competition: Research how your competitors price their services. For each project, think about which method is more advantageous, then choose whether to align with prevailing market practices or differentiate yourself with another pricing model.

Which One Best Suits You?

Here are some scenarios where each billing model could be the best choice for your creative agency:

When to Choose Hourly Rate Model:

  • Uncertain or changing project scope: If the project requirements are unclear or likely to evolve greatly during execution, hourly pricing allows you to cover the additional time and effort required.
  • Creative or innovative projects: When working on projects that need exploring new ideas or extensive experimentation and iteration, an hourly rate can accommodate the creative process.
  • Customized or highly specialized work: If you offer services that require unique skills or expertise, charging an hourly rate ensures you are sufficiently compensated for your high-level knowledge and endeavor.
  • Freelance or ad hoc work: In one-off projects, clients often require services for a specific scope or duration. In this case, the hourly rate method is better to offer flexibility and transparency.

When to Choose Flat Rate Model:

  • Well-defined project scope: For projects that have a clear and well-defined scope, flat rate pricing provides predictability for both parties. It helps manage expectations and allows clients to budget accordingly.
  • Ongoing or retainer-based work: If your agency engages in long-term partnerships or provides ongoing services to clients, a flat rate or retainer arrangement can simplify billing and secure a consistent revenue stream.
  • High-value deliverables: If the project’s end result is a high-value deliverable, such as a branding campaign, website development, or marketing strategy, go for the flat rate. It better reflects the value your agency offers rather than the mere time spent.
  • Competitive pricing strategy: Offering flat prices is recommended if you want to distinguish yourself from competitors, especially if clients prefer fixed prices over hourly billing.

Remember, it’s not always an either-or choice. Depending on the project, client requirements, and your agency’s capabilities, you can tailor your technique on a case-by-case basis. For example, consider a hybrid approach by combining hourly and fixed-rate pricing, or offer clients the option to choose the model that suits them best. This flexibility helps you cater to a broader range of clients and boost your agency’s revenue potential.

Bill Accurately Using a Project Management Solution

Leverage time tracking, resource allocation, budgeting, and reporting to create precise pricing estimates and monitor costs for both hourly rate and flat rate projects!

Billing Made Easier with Function Point

Function Point is a comprehensive project management software that can assist creative agencies in creating pricing estimates and monitoring project costs. No matter if you’re using hourly rates or flat rates, here’s how the software can support your agency in both scenarios:

Function Point for Hourly Rate Projects:

  • Time Tracking: With Function Point, you can track time spent on different projects. It lets team members log their hours, thus accurately recording how much time is dedicated to each project.
  • Estimation Accuracy: Utilize the time-tracking data to improve your future estimates. By analyzing past data, you can determine the average time required for specific tasks, which helps you create more precise estimates and avoid under or overcharging clients in the future.
  • Resource Allocation: Allocate resources efficiently by assigning tasks to your employees based on their availability, expertise, and workload. This optimizes resource utilization and prevents overbooking or burnout.
  • Real-time Monitoring: Function Point gives you 360-degree visibility of the project status, with the ability to monitor progress in real-time. You can track and compare the actual time spent on each task against the planned hours. This way, you can quickly identify any deviations from the original plan and take necessary actions to keep the project on track.

Function Point for Flat Rate Projects:

  • Project Budgeting: Function Point allows you to set up project budgets for flat-rate projects. You can input the fixed fee for the client, and the software will help you monitor costs against the budget throughout the project’s lifecycle.
  • Expense Tracking: While flat-rate projects don’t involve tracking hours, additional expenditures can incur during the project. Function Point enables you to track any related expenses to include them in the budget, such as software licenses, stock photos, or printing costs. 
  • Cost Analysis: Function Point provides detailed reporting and analysis features to evaluate the profitability of your fixed-rate projects. By comparing actual costs versus the quoted fee for the client, you can assess whether the project is generating the expected margins and improvise your pricing strategies for upcoming projects.
  • Client Invoicing: Simplify the invoicing process for flat-rate projects with Function Point. You can issue invoices based on the agreed-upon fee, additional costs, and any milestone payments. This streamlines the billing procedures and ensures correct and timely invoicing to clients.

To Sum Up

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. You can leverage Function Point’s capabilities in time tracking, resource allocation, budgeting, and reporting to create precise pricing estimates and monitor costs for both hourly rate and flat rate projects. The software provides valuable insights that enable you to optimize project profitability, maintain client satisfaction, and improve overall project management efficiency.

Do contact us if you would like to see how Function Point could provide these and other benefits to your agency or organization.

Are You Making The Right Decisions for Your Agency? Free Guide Download

Learn how an all-in-one agency management tool takes away the guesswork and helps you make better decisions for a thriving team, happy clients, profitable agency growth.