Flat Rate vs. Hourly Rate

When it comes to billing clients, you have a variety of options. One of the first decisions to make is whether to charge a flat rate or hourly rate. There are pros and cons to both options, so the best choice can vary depending on the type of work performed, the materials used, and your own billing preferences. We’ll explore the definitions of flat and hourly rates below, along with the pros and cons of each method.

What is flat rate?

To get started, it’s helpful to define what both rate types mean and how they work. So, what is a flat rate? With this type of billing structure, you charge a set price for the full project. This flat rate covers the cost of materials, labor, and any overhead costs. A fixed payment structure is ideal for clearly defined projects with finite deliverables, where you can easily estimate what the costs will be.

Some freelancers will use their hourly rate as the basis for a flat rate, by multiplying the estimated number of hours by hourly pay rate to arrive at a final fixed figure. Clients often ask for a flat rate for budgeting purposes because it gives them a clear amount that they will be asked to pay. Final payment might be taken in one lump sum or in instalments throughout the duration of the project.

What is hourly wage?

As we’ve defined above, a flat rate is a single, fixed fee for a project, but what is an hourly wage? With this second type of billing method, you charge the client per hour. With a flat rate, you’ll estimate the time it will take for the project in advance. By contrast, an hourly pay rate requires that you track the hours worked on a project as you go along. You’ll then bill the client for each hour worked, either at agreed upon intervals or at the conclusion of the project.

There are certain circumstances under which it makes more sense to charge an hourly rate. For example, if you’re working indefinitely on a long-term project, you won’t be able to formulate an accurate flat rate. This is also true for projects likely to change in scope along the way.

Flat rates work in factors like perceived value and materials as well as the time you spend working. When coming up with an hourly pay rate, you’ll need to work these into the equation. It might be helpful to research the rates your competition charges. You should also think about any business and personal expenses you will incur during the project.

Pros and cons of flat rate vs. hourly rate

There are advantages and disadvantages to both billing methods:

Flat rates benefit self-employed contractors who are efficient. If you’re able to complete work faster than expected, you’ll earn more per hour. Hourly pay rates don’t necessarily favor productivity. If you finish the project ahead of schedule, this only means fewer billable hours – and lower pay.

Charging an hourly rate also requires more paperwork and admin, since you must track all hours worked. With a flat rate, you conduct your research and planning in advance. Once you’ve done this, you can work without time constraints or additional paperwork.

Clients often prefer flat rates over hourly rates because they are more useful for budgeting purposes. A flat rate is easier for a customer to understand. At the same time, you can expect some haggling over prices. Be prepared to show off your portfolio and references to justify a flat rate. Some clients prefer hourly invoicing particularly for long-term or in-house projects.

Which rate should you choose?

Ultimately, there are pros and cons to both fixed and hourly rates. Many small businesses and freelancers opt for a mix of both billing methods. Flat rates are ideal for short-term, straightforward projects with few surprises. Yet for longer term work that’s likely to shift in scope, an hourly pay rate ensures you get paid adequately.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.