ICBA Blog

Should You Opt for an Hourly Rate or Project Rate?

A project rate increases productivity, boosts earning potential, and may be the easier sell to a client

Deciding whether to set an hourly rate or project rate is one of the most hotly debated topics among independent contractors. That’s because either way has its pitfalls, and establishing a rate to begin with can be challenging. To set a project rate, you must look at the tasks involved, estimate the time you’ll need to complete them and then decide on the rate you think a client will find acceptable to pay. It’s a lot of guesswork, and it can take some time to master, especially if you’re new to freelancing. But more and more freelancers are leaning towards the project rate as the way to go. Here’s why:

Setting a project fee doesn’t limit your earning potential.
If your hourly rate is $50, you will only earn that amount per hour, and likely you only have so many hours to put towards the project. Let’s imagine you have 20 hours available, with a plan to earn $1,000. However, if you set a project rate and are able to work more efficiently than expected, you stand to make more per hour and you free yourself up to take on more work.

For example, if you set a project rate of $1,000, but you complete the project in 15 hours, you will have made about $66 per hour instead of $50. And you will then have an additional 5 hours at your disposal to work on the next project on your plate or do other tasks to bolster your business, like marketing yourself.

With an hourly rate, on the other hand, you have no incentive to work more efficiently than you estimated. If you do work faster, you’ll earn less. If you complete the job in 15 hours at the $50/hour rate, you’ll only rake in $750. Opting to work less efficiently so you’ll get paid more won’t bode well for your client either.

An additional factor your client may not like is the inability to budget for the project.
At an hourly rate, your client would know that you charge $75 per hour, for example, but without knowing an exact number of hours the project will take to complete, that client is left in the dark on total pricing. If you offer an estimated number of hours but go beyond that range, will the client be frustrated with the extra expense?

You may also have an easier time selling a project rate to a client than an hourly rate.
Keep in mind that as an independent contractor, you likely aren’t working 40 project (or billable) hours a week. Part of your M-F (or whatever days you work) has to be designated for tasks you don’t get paid for, like sending invoices, providing quotes for future gigs, weeding through your inbox, etc. You need to set an hourly rate that’s high enough to also cover the time you spend on these housekeeping and development tasks. Whatever rate you land on to make ends meet may seem really high to a client who perhaps earns a salaried income and gets paid no matter what they are doing in their 40 hours on the clock. If you know you’ll need 15 hours to finalize a project, for example, you’ll find it easier to justify a total fee of $2,250 rather than stating that you require being paid $125 per hour.

There are two downsides to charging a project rate.
One potential issue involves scope creep. That’s when a project turns into way more hours than you ever thought possible or when a client is such a pain in the derriere that you wish you would have charged a higher fee just for that factor alone. What can you do to help with scope creep? If you work in a creative field, like graphic design or content marketing, you can include a clause in your contracts about the number of rounds and scope of revisions you’re willing to provide at the agreed-upon project fee. If scope creep occurs often in your field, perhaps an hourly rate option is the way to go.

Another pitfall involves underselling yourself. When formulating an estimate, you might be tempted to trim it down to convince the client to hire you. But later, when you’re stuck working longer hours, you’ll feel resentful. If you find yourself doing this frequently, try the opposite approach. Instead of chopping your estimate, increase it by about 10% to 20%. Remember that although everyone loves a good deal, clients are also turned off when you undervalue your work. They wonder what the catch is. Will the quality match the low fee?