What should I look at to determine whether or not I should charge by the hour or by fixed price?

Question

Many freelancers charge their clients by the hour, and many others charge their clients a fixed price for the project.

I've worked on a few contract projects on the side and have only charged a portion of one phase of a project using a fixed price. It was my first project, and I grossly underestimated, but the client was willing to pay by the hour after the first phase of the project.

Nowadays, I always charge by the hour, but now that I have more experience and can put together better estimates, I now have the following question:

What should I look at to determine whether or not I should charge by the hour on a project or by fixed price?

Answer 1

First, I usually do hourly up to x hours or just hourly, but I do some fixed bids too.

In general fixed bids are preferable for a customer if the scope is very clear, and they are preferable for the consultant if the price is higher than the hourly would be. I would say that most of my fixed bid work brings me more per hour than my hourly rate. What I am doing essentially is saying that I will accept the risk of cost overruns for an up-front price, sort of like insurance. Sometimes they go badly over, but enough of the time they don't that I am ok. This is particularly helpful where cost overruns are rare but can be quite costly.

If I agree to drop to per hour, generally the estimated goes down, but the customer assumes the risk of cost overruns.

For example, I charge the same to migrate databases from previous versions of LedgerSMB to current, per database, as I do for one hour of consulting time. This normally takes me half an hour or so, but there are cases where a customer has done something that causes significant problems with data integrity checks and can take five or ten hours to fix. Billed hourly then most customers would pay half what I charge for this, but a few would pay up to 10 times. The fixed bid lets me spread that risk around and give the customer a guarantee that might otherwise not be available.

On the other hand, longer, open-ended projects are typically billed hourly.

Answer 2

Here is my Entrepreneur/Employer's perspective:

If you don't know well your client, your first goal is to build relationship of trust. In my view, the best way is to fix price a small job first, that is easy to estimate and deliver on time.

This will give you great opportunity to understand how the client works and how enjoyable and productive the work for both sides.

With that information, it will be much easier for you to estimate the time and cost for your next piece of work.

And if your relationship won't go as expected, you can easier quit after the small work done, with no bad feelings for both sides.

See also my other answer here.

Answer 3

I usually charge for the effect, calculated by how complicated the task is, how much do I have to spend to obtain required tools and materials and how long will it take.

Clients know then exactly, how much will it cost them. General pros for charging by fixed price are:

• you may finish something way before time, as some task was done quicker than expected
• from my experience, clients will more likely take this option, as some of them may feel uncomfortable when they pay you per hour and they can't really see you're working when at home
• it encourages you to think, how some task may be done better and more efficient

The major con is if the task is taking more time than you expected, you have nothing else to do than just cry a little and do it. Fixed price is a considerable solution, but you have to estimate how many things may "go wrong" (as in the answer from Chris Tavers). If there are many - it's better to charge per hour.

If you tend to underestimate the time you need and how much you should charge after every re-calculation add like 30% to the calculated cost ;)