Business service providers may charge a flat rate or hourly. What does this mean for me?
When seeking out professional services, you’re bound to encounter two types of pricing: flat rate and hourly. What’s the difference, and which one is better from a client’s perspective?
Flat rate
A flat rate is a single, fixed fee charged for a certain type of project. The details are negotiated beforehand.
This often works well for shorter projects with a well-defined scope. The less room for complications, the more likely the flat fee is to cover everything the job requires without anyone getting the short end of the stick.
Advantages
One benefit of flat rate pricing is clear right away: you know how much you’re paying from the very beginning. The single, fixed price makes recording the expense a breeze compared to hiring on an hourly basis. You’re also less likely to run into disputes about pricing when everything is agreed upon before any work begins.
With a flat rate, expectations are clear from the beginning, and setting a budget and a deadline is as simple as possible.
Disadvantages
Clients that pay for a project with a flat rate dread one phrase: “That’s out of scope.” When you pay up front for a very specific project, to be executed in a very specific way, it’s more difficult to adjust the project on the fly. Any changes might throw off the pricing and deadline estimates, so it’s important to be clear about your needs up front so that the project goes according to expectations.
Hourly
Hourly rates, as the name implies, are charged based on the time spent on the project. The contractor works for a certain number of hours and gets paid for that number of hours.
This tends to work well for long-term projects that might evolve over time.
Advantages
Hiring on an hourly basis is much more flexible than a flat rate. Your needs may change, and the hourly billing can accommodate. It’s easier to discuss the project with the service provider and modify the original plan as needed.
It’s also much easier to compare prices between two different hourly rates than it is to compare two flat fees that may or may not cover the same work.
Disadvantages
The flexibility of hourly pricing is a double-edged sword. It’s easier to implement changes or expansions that might fall outside the “scope” of a flat rate project, but your additional requests might add hours and drive up the total cost of the project. Think carefully before asking for any major changes halfway through a project.
And unlike flat rate pricing, in which the details are negotiated and agreed upon beforehand, hourly pricing can sometimes catch clients off guard. The service provider can try to give an estimate up front, but costs can rise if it turns out you need more work done than you realized at first. It’s like groceries: you can prepare a shopping list and estimate the bill, but if you get to the store and realize you forgot to put a few things on the list, your groceries will end up costing more than your initial prediction.
When should I expect one or the other?
If your project is a common, frequently requested job, it’s probably a standard service for which the provider will have a standard flat rate. A project with a set end date, especially a quick, short-term project, is also more likely to be priced at a flat rate.
If there are a lot of variables involved, like with an accountant, attorney, or business consultant, you’re probably looking at an hourly rate. This is also true if it’s a long-term business relationship in which you expect to request “on-demand” work on a regular basis, the classic example here being a lawyer on retainer. And if the project requires frequent feedback and edits, charging by the hour will allow for the flexibility you both need.
Of course, these are not hard and fast rules that will always be followed, just common trends. Some service providers will prefer flat rate pricing and others might prefer hourly.
| 📑Want some examples of flat rate and hourly pricing in the wild? Check out our article on the cost of CPA services for small business owners! |
Questions to ask
How do you evaluate if a certain method of pricing is going to work for your business service needs? Here’s some questions you might ask.
Flat rate
- Is there anything that’s not clear about the scope of the project?
- What’s not included under the flat rate?
- What happens if my needs change? Is there any room for flexibility if something unexpected happens with the project?
Hourly
- What are your variables, or “drivers,” that might increase hours?
- How often will I be receiving updates on the project?
- What’s your standard procedure when you run into unexpected changes with the project? How is that communicated?
Bottom line
Between paying a flat rate and paying hourly, there’s not a clear advantage one way or the other. Each method takes the edge in certain situations.
Ultimately, the important thing is that you trust the people you’re working with. If you have confidence in their skills and professionalism, you can focus on the needs of your project and know you’ll have good results in the end.
Want to get a better understanding of your business so decision making is easy? Schedule a call with one of the experts on our team today.
