Consulting Fee Structure: Hourly vs. Project-Based Pricing

As a freelancer and independent contractor, how you bill your clients is a big decision. Beyond your bottom line, this decision shapes your operating model, client relationships, and work-life balance. Two of the most known and debated billing methods are to bill by the hour or by the project. 

Which strategy is best for you and your business? Fortunately and unfortunately, as with many choices, the answer depends! Consider the nature of your business, your stage of growth, client and personal preferences, and financial goals to determine how to find your ideal strategy.

Hourly Billing: Time is Money

The hourly billing method is simple: you work, you log your hours, and you invoice your client for that time at an agreed upon fixed rate — typically on a monthly basis. In other words, your time is money. The value you're providing is the time it takes you to complete a project. The below calculation determines your total earnings:

number of hours worked x agreed upon fixed rate = your earnings [1]

If you're new to the business, we have a guide to help you determine how much to charge hourly. Or, if you are receiving pushback on your rate, here is what to do if your client says iit’s too high.

The transparency and fairness of the hourly approach are appealing to many freelancers and contractors, especially those providing consulting or tailored, ongoing support. But it also brings challenges.

The pros of hourly billing

• Fair compensation: You get compensated for all of your efforts. If your hourly rate is $100, and it takes you 4 hours to finish a project, you earn $400. If a task takes you longer than expected, you don't lose out on any income. 
• Flexible scope: You can easily adapt the scope of the project as changes arise, adding more hours and ensuring compensation for the extra effort. 
• Transparent billing: See the time you’re spending on the total project and each task within the project by tracking your time. Share this breakdown with your client so they can understand their investment and your value. 

The cons of hourly billing

• Unpredictable revenue and expenses: Without understanding the total costs of a project, some clients may not work with you. This unpredictability also makes it hard for you to do your own financial planning.
• Constricted earning potential: You can only make as much money as the hours you have in a day. Also, as you become more efficient, you make less.
• Burdensome administration: Despite its usefulness, tracking your time can be cumbersome and distract you from billable tasks.

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Business models to consider for hourly billing

Hourly billing makes most sense in industries and business models where the scope of work is tailored to individual needs and has the potential for continual changes, whether that’s due to uncertainty or ongoing services. Consulting and advisory services tend to fit this definition — management consulting, legal services, financial advisory, or other — where hourly billing accommodates individual client needs. 

It’s also typical of freelancers and contractors who provide on-demand, customized support to bill hourly. Technical support roles like IT consultants and software developers who respond to tasks like troubleshooting, maintenance, and on-demand support make sense. It may also include professionals offering training, coaching, or tutoring services, for one-on-one services tailored to individual client needs.

Implementing hourly billing effectively

If hourly billing is the right route for you, you can optimize your approach in three ways:

1. Provide up-front communication of your rates, availability, and any other fees you may charge your client. Providing estimates helps your client know what to expect, even if the total cost is variable. 
2. Ensure transparency at all times so there are no surprises down the line. Notion or Asana are reliable time-tracking tools to help you streamline time management tracking. Consider sharing a platform with your client so they have the ability to check in on your progress at their convenience.

Maintain regular invoicing, such as bi-weekly or monthly invoicing, to maintain a steady cash flow. This regularity aids in better financial planning for you and your clients, making the financial aspects of your service more predictable and manageable.

Project-Based Billing: Value is Money

Unlike hourly billing, project-based billing is when you set a fixed price for the entirety of a project. Scope — including deliverables and timelines — payment, and payment terms are all determined with the client prior to you starting the project. Depending on the contract, you may receive a percentage or set amount of payment at the beginning of the project, throughout specific milestones along the way, and/or upon completing the project. When throughout the project you invoice the client will also depend on the terms you’ve set. Project-based billing emphasizes the value of the deliverables, rather than the time it takes to produce them.

How much should you charge for the project? Unlike hourly, your project-based billing is simply the value of that end product or deliverable. However, if you’re unsure of what that number may be, you can use this calculation to determine your project-based rate through the following calculation: 

the cost of hiring someone else for the project + the cost of project management + profit margin  = your earnings [1]

If you are unsure about how much it would cost to hire someone else or manage the project, you can do research and/or source quotes from other skilled freelancers. Be sure to factor in handling communications with the client as well as any other expenses that may arise, such as travel or other materials. Your profit margin is variable. 30% is common.

It can be daunting to quote a bigger number to your client. Being able to spell out the breakdown of the costs that lead to high value can help justify. At the same time, however, if you quote a number too low, you may send the wrong message about your value. 

For those with clearly-defined projects, goals, and outcomes, project-based pricing can lead to additional benefits such as increased earnings and streamlined processes. Again, though, it’s not without its challenges. Here are the pros and cons of project-based billing:

The pros of project-based billing

• Clear expectations: Both you and the client go into the project on the same page for the project’s scope, costs, and deliverables, minimizing misunderstandings. You also have the advantage of financial planning with a transparent and predictable income per project.
• Higher earning potential: When you focus on the quality of deliverables, rather than the quantity of hours worked, efficiency is an incentive. If you charge $500 for a project and it takes you 4 hours to complete. When compared to the hourly rate of $100 in the previous example, you can earn $125/hour based on your efficiency of completion.
• Simplified administration: Project-based billing reduces the need for detailed time tracking and invoicing, freeing up more time for the work at hand.

The cons of project-based billing

• Risk of Underestimation: Even with clear and upfront communication, things come up. If you underestimate how long the project would take, you may feel you aren’t being paid fairly. 
• Managing unexpected tasks: Additionally, clients may make additional unforeseen requests outside of the original scope, requiring you to renegotiate the contract to account for the added effort and/or deliverables.‍
• Hyperfocus on Quality: It can be stressful to balance the desire to deliver your top quality product along with the realities of the effort it takes.

Business models to consider for hourly billing

Consider billing by the project in industries and scenarios where you’re more experienced and with clear project scopes and deliverables. Many creative services like graphic design, web development and design, copywriting, and content creation fall into this category. Event planning and management, and construction and contracting, too, given their pre-defined timelines, budgets, and deliverables.

Implementing project-based billing effectively

If implementing project-based billing, these three best practices can help set you up for success: 

1. Pre-define the terms and expectations: You want to feel good about going into it. Before starting the project, hash out the project scope — including deliverables, timelines, and any specific requirements — as well as payment amount and terms, with your client. 
2. Plan for additional requests: It’s possible that additional requests come up throughout the project. While it may not be possible to know what’s ahead, try to get a sense of what those may be. You can do some scenario planning with your client to avoid surprises.‍
3. Set up regular check-ins: Maintain open communication with your client throughout the project. Weekly or bi-weekly check ins are a great way for parties to share updates, work through any challenges, and manage expectations.

Choose your Billing Strategy and Embrace the Learning Curve

Whether you choose hourly or project-based billing depends on several factors, including the nature of your business, your business goals, and your personal and your client preferences. 

If you’re just starting out or provide customized solutions, like consulting or IT services, hourly billing might be your best bet. That way you can account for the variable scopes of work and the corresponding time commitments of these services. 

On the other hand, seasoned freelancers with streamlined processes or who are delivering tangible outcomes, such as graphic designers, web developers, and content creators, might benefit more from project-based billing. With this approach, you get clear expectations from the start and have the potential to earn more.

It’s important to remember there's no universally perfect approach. In addition, your billing method for one client does not mean you must repeat for the next. Choose the one that gives you the most of what you’re looking for in that particular situation, and be open to adjustments and flexibility as your business evolves. Whichever you choose, you’ll learn something for how to do it differently and better next time.

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References

1 D. Peck, “Hourly Pricing vs. Project Pricing,” devlinpeck.com, Updated on May 5, 2023 [online]

C. Maddox, “Should Freelancers Charge An Hourly or Per Project Rate?”, due.com, Updated on Jan 17, 2022 [online]

M. Olpinski, “Hourly Rates vs. Fixed-Pricing”, mattolpinski.com [online]

N. Steffen, “Hourly Pay vs. Project-Based Payments: What is the Best Way to Pay a Contractor?”, nicolesteffen.com, Aug 7, 2023 [online]

A. Strote, “Freelancers: The Best Pricing Models for Creative Services.”, creativeagencybook.com [online]

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