Hourly Pricing vs. Project Pricing: Which is Better

When providing professional services like design, programming, consulting etc., one of the most important pricing decisions is whether to charge hourly or quote a fixed project price. Both pricing models have their pros and cons from both the service provider's and client's perspectives.

In this article, we will understand what is time based pricing and project based pricing. Moreover, we will do a detailed comparison between hourly pricing and project pricing to understand which pricing model works better in different scenarios.

Hourly Pricing Model

As part of hourly pricing you are paid by your clients depending on how many hours you invested on given work. A client pays you a standard amount of money for the contract for hourly services. Now, you might be wondering how much should I charge per hour?

For example, your rate is $50 for one hour of work and you will spend 10 hours on this particular task, hence you are expected to bill the client a total cap of $500 without most of the extra charges.

When people charge regularly this model is used to charge clients for continued services which could range from legal advice, consulting, coaching and so forth. It is also useful for projects where the project scope is not well defined, the project requirements keep changing or the work involves use of a lot of specialized skills.

Some key features of hourly pricing are:

• Client pays only for the actual time spent on the project

• No upfront fixed project cost

• Hourly rates pre-decided and remain fixed

• Service provider has incentive to be efficient as their billing is dependent on hours logged

Pros of Hourly Pricing

Some of the key benefits of hourly pricing are:

• Flexibility - With hourly billing, the total project cost is directly dependent on the number of hours worked. So if requirements change or any additional work comes up, the service provider can accommodate it without negotiating pricing.

• Fairness - The client has to pay only for the work done in relation to the task. If the time taken to perform a task is less than estimated, the client reaps the benefit of lower costs.

• Transparency - Everything is quantized according to rates as well as the number of hours logged. Clients can recheck, and verify if the hours logged are accurate.

• No risk for service provider - They get paid for each and every billable hour worked in a project, which may or may not be the total time that is required to finish the project. The risk due to frustration of everyone’s effort in the project is also a problem.

Cons of Hourly Pricing

There also seems to be some drawbacks when using hourly pricing and they include the following:

• Cost restructuring discomfort - The client enjoys doesn’t get to know the final cost of the whole project at the commencement since it is dependent on hours spent. Costs can spiral if not capped.

• Requires trust - Trust must be given that all inefficiencies will be cut out and no time wasted hence no over billing. Strict timesheet reporting must be maintained.

• More administration - too much administrative work in recording the time consumed and preparing an invoice for every single hour worked.

• No incentive to optimize - The more hours a project takes, the more the vendor earns for instance which can only create redundant activities, or delays. Some ceiling has to be placed in order to prevent this.

Project Pricing Model

In project pricing, you quote the clients a single fixed fee to complete a particular project or service. This is often referred to as flat fee pricing or fixed bid pricing.

As an example, you may ask for $5000 to create a website as per the project brief detailing the specific features, pages, and functionalities of the site.

This type of payment method occurs for freelancers mainly because it is project-based undertaking for offering specific services divided into web design, web development, copy writing and others. The work and the output are agreed upon before settling on the figures.

Some key attributes are:

• Single upfront fixed price quoted for the full project

• Price based on project requirements and scope

• Service provider responsibility to deliver within time and budget

• All risk related to effort estimation is borne by the service provider

Pros of Project Pricing

Some benefits of the project pricing model are:

• Predictability - Client knows the total project cost upfront even before work begins. Helpful for budgeting.

• Incentives aligned - Vendors are incentivized to optimize efforts and complete the project efficiently within the quoted price.

• Reduced administration - No need for detailed timesheets and hourly invoicing since one single payment is made after project completion.

• Risk handled by vendor - Any risks from incorrect estimation or scope creep is borne by the vendor. Client pays only the fixed agreed price.

Cons of Project Pricing

Some issues to note about project pricing:

• Inflexible - The pricing is valid only for the exact scoped requirements. Any new additions or enhancements may need renegotiation.

• Higher risk for vendor - If effort is under-estimated, the vendor bears the cost of additional resources needed.

• Lack of transparency - Client does not have clear visibility into the hours logged and costs incurred by the vendor.

• Pricing may be padded - To offset the risk, vendors may pad the project price leading to higher costs for clients.

Hourly vs Project Pricing - A Comparison

Below is a summary of the key differences between hourly and project pricing models:

Which is Better?

So which pricing model works best - hourly or project? The answer depends on the specific project situation and individual preferences. When evaluating hourly versus project pricing models, freelancers should consider how the role of automation solutions in modernizing workflows may enable them to complete work faster and more efficiently.

Hourly pricing works well when:

• Requirements are unclear or may change

• You want transparency into the work being done

• Admin overheads are not an issue

• You want to minimize risk for the vendor

Project pricing works well when:

• You want predictable costs and have a fixed budget

• Scope is very well defined upfront

• You prioritize alignment of incentives

• You want to reduce admin overhead

• Vendor is willing to take on the risk

For most small, well-defined projects, project pricing works best. But for large, complex projects with evolving requirements, time based pricing may be a safer option.

To get the best of both models, many vendors offer a hybrid approach with a small upfront fixed fee + hourly pricing capped to a maximum project price. This balances both predictability and flexibility.

Conclusion

To a certain extent, client and service provider have trade-offs in regard to hourly cost, project pricing, incentives, administrative load, and risk. In many cases, the most suitable model is determined taking into considerations factors such as project complexity and scope stability, the vendor’s appetite for risk, and in-house administrative bandwidth.

Another alternative is the combined methods which offer predictable cost yet allow the scope to be flexible. The mode of pricing should be carefully selected for each project as well as every client-vendor engagement. In such a case, both clients and service providers will get positive results.