The Hourly Rate vs. Fixed Bid Debate
It’s a mind-racking question that’s not just for freelancers anymore, but an internal debate for a wide range of service-based industries, from design to law to engineering to construction to contractors of all shapes and sizes. How do you most effectively bid out a project or a job, and what are you making back in profit, when all’s said and done? This is the great business conundrum, but also the easiest to answer. Consistently nailing both the estimate and the profit margin adds up to success.
It’s basic numbers, but why does it have to be so difficult? Why do so many entrepreneurs and enterprises fail to make this equation work? With cloud-based technology, however, the hardships of number crunching are over. You can get the digitized facts in real time, in order to make better decisions that best fit your unique business situation.
So will you make more, plus save your bacon, by charging an hourly rate? Or will you exceed your expectations, and improve your client’s perceived value, by going with a fixed bid?
The Hourly Rate Case
Billing at an hourly rate can take the guesswork out of it. Especially for complicated and multi-faceted projects, like programming a new software app, an hourly rate would secure returns, since the unknowns might eat into any best-case scenario budget. It’s a no muss, no fuss approach to billing, but does it really work out?
- You’re in complete control over your rate.
- Every hour is guaranteed to offer the same return down to the dollar.
- Guards against client changes in scope or endless revisions.
- People are notoriously inaccurate when predicting the productivity of their future selves.
- The better and faster you (or your team or your product) get, an hourly rate might not reflect what you’re really worth in the marketplace.
- You encounter psychological client hurdles when charging high(er) rates, even if you’re far more productive or talented than others.
- Your earning potential is fixed, because your time is fixed.
For more security and less risk, an hourly rate makes sense and fits with the expectations of several industries. With good estimates and client relationships, plus adding in the costs of business and your brand worth to that final number, an hourly rate could work precisely in your favor, down to the minute.
Make It Work:
- Consider educating your client on how rates in your industry work, and why yours adds up for them.
- Give clients a detailed low and high end range in estimates for best and worst case scenarios, and explain how their approval, meeting requests and other actions reflect in that end number.
The Fixed Bid Case
Fixed bids can make planning and budgeting easier for clients, so they often get approved with less stress, and can really add up to high satisfaction for both parties if done right. Creative and expertise-oriented services offer value beyond the actual time it takes to produce them, so fixed bid prices can express that end result and worth in ways that make both you and potential customers feel good.
- Based on value and end results, so more accurately reflects quality of talent, expertise, productivity and product.
- Improves client’s perceived value, they’re reassured to know the full parameters of the project budget and final outcome.
- You absorb cost overruns, so might lose more money overall with unexpected time sucks, including in revisions, client demands, or when the scope expands into new areas.
- You and the client lose flexibility by not being able to change project requirements on the cuff.
Especially for straightforward jobs with clear parameters, when the overall return on investment value for the client is high, the fixed bid model can incentivize you to deliver more quality in less time, and give you far more overall earning potential based on your expertise and brand reputation in your given field.
Make It Work:
- Provide an incredibly detailed scope of work to start, that possibly includes the rounds of revisions or number of meetings, and give an out-of-scope clause.
- If the project goes out of scope, notify the client early, often and tell them exactly why.
To make either scenario reasonable and concrete for both you and your clients, start time tracking, even for any employees and contractors. When you can track time in the office, at meetings, and on the move, like clocking in or out to projects on a tablet or smartphone app, you gain a clear picture of your profits by the end of the day. This go-anywhere method allows you to track time to clients and tasks, then you can draw up real-time reports on how your total team effort was spent. With those numbers in hand, you’re always on top of how much you’re making, and if you’re on track to meet goals.
Online time tracking dramatically changes the point of view for both hourly rates and fixed bid projects. Those working hourly may fail to track the incremental things they do for a client, or have a tough time accurately figuring out where time really went, especially when multitasking or relying on staff. Those on a fixed bid need to know what their overall profitability is, and the only way they can figure this out to any degree of certainty is to take their fixed bid estimate and divide it by the actual hours worked. Then, they can see what their effective hourly rate is, and if that meets or exceeds their expectations.
Deciding which way to charge depends on your feedback loop. Maybe do an A/B test. Charge some clients hourly, and some with a fixed bid price. Make sure you build in end-of-project reflection time to analyze the basic facts and do the math, which could be as easy as syncing timesheet data into business financial software. At the end of the day, only one question remains: under which bidding umbrella do the numbers add up better for your business? Online time tracking can help give you a quick answer, so you stay in the money.
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