Project Fee or Hourly Rate? That’s the Wrong Question

Today I read yet another set of blog posts debating whether writers, designers, and other creatives should charge hourly fees or project fees. The debate leads freelancers to focus on the wrong questions. If you’re going to make a living as an independent business owner, first get a good understanding of how your business model generates revenue.

At the simplest level, when you sell an hour, you’re selling labor. You agree to engage in a particular activity for a particular period of time. Charging that way is appropriate when the job can be reduced to its manual labor component. For example, one proofreader may be faster than another; however, it makes sense to pay a proofreader for the time she spends with pencil to paper.

Some hourly work represents a mechanism, not direct compensation for activity. Consider the psychotherapist. What a client buys is an active relationship that plays itself out over a span of time. The therapist-business owner who charges $150 per hour actually markets a year or two of treatment to an individual client. The meaningful unit for planning purposes is $7500 annually or $15,000 per customer. The potential client has to weight whether he can afford the entire investment, not if $150 per hour is a fair price.

Now let’s take a look at the project fee. The critical piece in arriving at the right project fee – actually pricing a project. Compare these two approaches to Web design:

Design firm number one targets independent schools. Working from a template, they construct sites with standard modules such as athletic calendars, fundraising appeal to alumnae, school mission and vision aimed at prospective parents, and interactive, password-protected sections for teacher-student communications. They have a tested consulting process designed to elicit the information they need from each client.

Design firm number two works with solo business owners. Some of its clients are clueless as to the basics of marketing and haven’t yet settled in a niche. Some are micromanagers. Some are expert marketers looking for particular technical features. The firm relies on a network of subcontractors, affiliate programs, and other vendors to deliver excellent service. Every project is different.

Firm number one can probably almost always predict the time and materials it will take to complete the job. What they provide is more than the sum of the parts. Automation and formulas lower the operational costs while adding value to the service. While each school has a unique personality to convey, one of the goals is that the school looks and feels like A School. A flat fee can make negotiations simpler: they can propose a specific, predictable result for a set price a customer can slip right into the budget.

Firm number two has a different challenge. Often, the client has no grasp on what the real work is (as in the case of the “copywriting” job that really entails “marketing coaching” or the “products page” that will require programming to install a shopping cart.) In this circumstance hourly might be the way to go – or even a hybrid method where particular tasks or subgoals are expensed.

So, what kind of business are you in?

  • Are you carrying out a specific activity that you would want to bill for?
  • Driving a structured process toward defined deliverables?
  • Holding responsibility for an entire area of work, with numerous contingencies?

Think through that first, and pricing won’t be such a mystery.

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