Tag: small business

The Hourly Rate vs Flat Fee Debate

July 7th, 2010 — 10:23pm

I’m happy to say I have a good problem.  My client list is growing faster than my ability to bring qualified staff on-board.  This is referred to as a good problem because something good is happening (my client list is growing), but it’s a problem nonetheless if I can’t service these clients satisfactorily due to insufficient  availability of qualified staff who can help get the work done.

The interesting dynamic of being short on time means that I have to complete my projects faster so that I’m getting through my project load quicker ensuring that my clients aren’t waiting on me.  If those projects are billed at an hourly rate, it also means I’m making less money while delivering basically the same value. Sure, you could argue that the quality of the work is suffering since I’m spending less time, but I’d also argue that the value per dollar spent by the client is way higher.  I may be cutting corners but the essential value is still delivered for less.

This is where a proponent of flat fee rates would chime in and say “that is exactly why you should stop billing by the hour and start charging flat fees.”   If I were to charge a flat fee, my ability to work faster benefits me whereas working faster at an hourly rate clearly benefits the client.  The interesting thing is that I believe there are many clients who prefer flat fee structures because they want the predictability of knowing how much the project will cost up front and because, as humans, we’re pre-wired to believe that the people who work for us are looking to eek out an extra buck whenever they can.  The thinking is that there’s an incentive to the person who bills by the hour to work slower, take more time and therefore earn more money.  And there’s the interesting dichotomy and my particular predicament.  On the one hand, I may be perceived to be working more than necessary (though I doubt it) when actually I’m working more efficiently and charging less.

Thankfully, I’m pretty certain my clients know the value they’re getting and that probably helps explain in some measure what’s fueling the good problem of growth I’m currently dealing with.

But this is what kills me. If I’m getting better at what I do and am able to work faster and take on more clients, shouldn’t I be rewarded for that? The big problem with hourly billing is that my earnings max out based on how many hours I can work in a day (unless I scale my staff and grow income by increasing capacity – but that’s a different equation and is confusing the issue at hand).  The challenge I have is that much of what I do is ad hoc consulting … a client calls up, describes a problem, I research the problem and make a recommendation, then charge for the time it took to arrive at the recommendation. If a second client calls with the same problem, I can answer the problem much faster and in doing so, charge less since I spent less time. This heavy discounting of my knowledge and experience is not lost on me but I don’t yet see an easy way around this.

Thankfully, I know I’m not alone. There are many great articles already on the Web lamenting this problem. One I particularly liked is Flat Fee Versus Hourly Rates – How to Charge for Your Web Design or Graphic Design Services … (colorfully written too).  As always, you have to strike a balance. There are times when either method has its place.

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