Should You Bill by the Hour or Project?

By John Rossheim, Monster Senior Contributing Writer

There's more than one way to make a buck. You can charge your client by the hour, or you can negotiate a set fee for the entire project. Which is the best business decision? To some extent, it depends upon the nature of the services you perform.

However, the independent professionals we spoke with recently surprised us with their strong consensus: For most contractors, it's almost always better to charge a project fee.

Win Clients and Keep Them Happy

Most clients are likely to choose a proposal based on a set fee, contractors say. "It's like the difference between a building contractor who will put an addition on your house for $20,000 and one who will do it for $20 per hour plus expenses," says Bob McAdams, president of Fambright, a custom-software firm in Lincoln Park, New Jersey. "You may not be sure which alternative is cheaper, but you at least know whether or not you can afford the first guy."

But doesn't billing per project open you up to fiscal risk? "Some people argue that hourly billing is a lot safer because you're protected if the project takes longer than you expected," says McAdams. "But if you're that inaccurate about estimating how long a project is going to take, you're likely to end up with a dissatisfied client."

Melissa McNatt agrees that an accurate proposal is key. "To charge by project, you make the goals extremely clear," advises McNatt, principal of JumpStart Sales, a salesforce consulting and training firm based in San Bruno, California. "We have very detailed conversations up front, and the proposal then puts the details in writing."

"If there are midcourse changes in the project requirements, your agreement with the client sets the stage for adjusting the fee," she adds.

Increase Your Income

Contractors say that charging by the project should also enable you to boost your bottom line in the long run. "It might take me 1,000 hours to develop a training course for the first client, but just three hours to convey the information to other clients," McNatt says. "Each client should pay for your expertise even if the same number of hours aren't necessary to compile that expertise."

Charging by the project can help you improve your net. When you're working on your own time, there's a strong motivation to improve your productivity, whether by adopting more efficient technologies or improving your work habits.

And McAdams believes that when it comes to raising your fee, it's better to do this on a per-project basis. "Rate increases tend to be unpleasant for clients to hear about and awkward for consultants to announce," he says. "But when you're billing on a project basis, the higher rate just gets absorbed into the cost. As long as the total cost is attractive, the client usually doesn't care about the rate."

Still, doesn't a consultant run the risk of putting a lot of time and effort into a proposal, only to have the prospect reject it and ask a lower bidder to follow your project plan? Yes, but there is a strategy to hedge against this potential loss. "The solution is to recognize that creating the specs is something of value -- perhaps even the most valuable thing you are going to do for the client -- and to charge for it," says McAdams.

When It's Better to Charge by the Hour

Even given all of these good arguments for charging by the project, independent professionals in certain fields are better off making like a taxi driver and flipping on the meter.

Suppose you're a technical writer and a prospective client wants you to edit a series of short articles by various writers. The quality of the writing varies widely, and you can't afford to put a lot of extra time into the pieces written by hacks. You've got to charge by the hour if you want to make a living. If the publisher wants to present a product of uniformly high quality, she shouldn't have a problem with this.