Many service providers eventually come to the point of asking themselves and others whether or not they should base their billing on a flat project rate or charge by the hour. Deciding which method to use can be a point of contention for many service providers. If they charge by project they might under bid and feel a little resentful; if they charge by the hour then they have to worry about time tracking and client sticker shock.

There are a lot of pros and cons of each type of billing. Hourly rates are a lot easier to do for certain professions such as designers, administrative professionals and anyone who does a variety of different types of work for one client. Package rates are easier for basic website or template creation and writing professions. In many cases a combination of package and hourly rates will work very well.

There are many benefits to moving from hourly rates to package rates but there are also big issues. Sometimes you’ll run into clients who get a package rate who will suck every single hour of every single day out of you for a small package rate. Don’t allow that to happen. Keep your contracts very tight, and your duties very clear when you create a package rate. In order to create a solid package rate you need to understand how to write a good contract and properly price packages.

Package rates are really based on hourly rates. If you know what you want to earn hourly, then you simply estimate how long the project will take you if all goes perfectly, multiply by your hourly rate and that is your base project rate. But you’re not done yet. Nothing ever goes perfectly, right? Take that fee and multiply it by 1.5, and don’t forget to add in any potential expenses such as hosting or materials. You now have your project rate.

Then add in some conditions to the contract such as how many times you’re willing to edit the project, or how many hours you’re willing to put into the project. Be very specific about what your responsibility is to the project and the client’s responsibility to the project. Be very clear on when deliverables are due from a client and from you. Your contract cannot be too specific; leave no ambiguity. A sentence such as “Any work outside the scope of this project will be billed at my normal hourly rate of $45 per hour”, can help alleviate many problems.

Another factor to consider is how your clients feel about hourly rates versus project rates. You can do a few tests to offer some project rates to see how the clients respond. But remember, if you can get most of your work down to flat project rates, you’ll actually end up earning more money in the long run. The reason is that the more you do something, the faster you get at it.

With an hourly rate you’re often being punished for being fast. But, you can get into trouble with flat rates too. So, the answer to the question is both. Use a combination of flat rates along with a contingent hourly fee for going outside the scope of the project and you can’t lose.