Hourly Rate Or The Flat Rate for Self-Employed?
Becoming self-employed or an entrepreneur or a freelancer means considering how you will be paid for your services. Will you choose the hourly rate or the flat rate? Will you choose to be paid by the hour or by the project? These two methods of comparison have their advantages but also their disadvantages. We decided to compare them to help you make a well thought decision.
The Hourly Rate
The hourly rate can be considered if the majority of your customers request it at the time of the quote. For those wondering what their hourly rate should be, it is important to consider three aspects:
Your needs: What are your business expenses (furniture, cell phone, office rental, etc.)? What are your personal expenses (electricity, internet, mortgage, etc.)? How many weeks of vacation would you like to have?
Your competition: What rate does your competition offer? What is the salary of a salaried employee performing the same tasks as you?
Your clientele: Are you located in a high-demand market?
To help you calculate your hourly rate, let’s imagine this scenario using the following method. After calculating your business expenses, personal expenses, and income tax, you realize you need an annual income of $70,500. ought to calculate the number of billable hours, you must take into account the hours spent on your job; anything outside of your job (accounting, prospecting, networking, etc.) doesn’t have to be billed. 30 hours a week would be an actual number. Then, you need to multiply those hours by the number of weeks you will be working. By reserving time for vacations and statutory holidays, you arrive at 47 weeks per year. 30 hours for 47 weeks equals 1410 hours of work per year. Finally, divide the desired annual income by your working hours and you will get an hourly rate of $50.
And There you go! You have obtained a figure which should help your client to make a decision. Indeed, since it can be challenging to evaluate the time devoted to a project, the client nevertheless wants to make sure to respect his budget. This is an option that offers more flexibility. If you must add new services during the mandate, these may be billed as an extra. Thus, you will not be penalized and will be paid for the work carried out.
On the other hand, you can be penalized because of your productivity. The more efficiency you gain, the less you work and the less money you earn. This is why it is recommended to increase your hourly rate gradually.
Finally, for some clients, the hourly rate does not allow them to see the value of your work. “$50 an hour? It’s way too expensive! They exclaim. In front of these reluctant customers, you will have to justify your price. Unlike a salaried employee, you must compensate for the social benefits that you do not have: vacation, sick leave, the employer’s contribution to the pension plan, etc.
The Flat Rate
The flat rate is a single rate for the entire project. To establish this flat rate, some self-employed workers will use the hourly rate as a benchmark while evaluating the time required to complete the project. Sometimes they will even adjust this rate according to the client’s budget.
This form of estimate can be reassuring for the self-employed worker. Indeed, he no longer needs to calculate the number of hours and can focus solely on the project. In addition, since he is less limited by time, he can find new ways to increase his productivity and thus earn a lot more money.
For the next example, let’s take the hourly rate we calculated earlier, which is $50. When you read the mandate, you estimate that you need 10 hours to complete it. You then offer your customer a flat rate of $500, which he accepts. Good news: you have completed your mandate after 8 hours of work, the equivalent of an hourly wage of $62.50. The more productive you become, the better your performance.
However, the opposite situation can happen. Let’s go back to the previous example, but instead of 10 hours, you take 12 hours to complete your project. You then obtain the equivalent of an hourly wage of $41.67. This time, you were disadvantaged by your estimate.
Evaluating a flat rate can be tricky, especially if you’re starting out as a freelancer. Fortunately, with experience, it will be easier for you to assess your workload.
For the customer, the flat rate offers peace of mind. Since he already knows the total cost for the project, there will be no surprises at the time of invoicing and thus respects his budget. This will make it simple for you to convince him to entrust his mandate to you. However, if new tasks are added and separate from the initial agreement, we suggest you renegotiate your rate with your client.
Between the Hourly Rate and The Flat Rate, Which One to Choose?
Unfortunately, there is no magic solution. Some economic sectors favor a particular payment method, such as billing by the word, while others depend on customer preferences.
However, we recommend that you calculate the payment methods presented above. Through these reflective exercises, you will determine the value of your work and be able to justify it to your clients.
Do not hesitate to use a project management tool like our online solution Nutcache to facilitate your invoicing. Indeed, our tool includes, among other things, a “Services” section, in which you can list all the services you offer and the price for each service. Using our solution reduces your time spent on invoicing, which you can then use on other projects.
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