This Is Why You Shouldn't Always Charge by the Hour When you get good enough at what you do, hourly rates will start penalizing you.
By R. Paulo Delgado Edited by Amanda Breen
Opinions expressed by Entrepreneur contributors are their own.
Before I became a full-time ghostwriter, I spent 17 years as a freelance web and software developer.
I was also passionate about the charge-per-hour model.
When it makes sense to charge by the hour
Software development is a tricky beast. Developers generally agree that there is no bug-free software. Just the other day, a single bug in the Fastly network, triggered by one user changing some settings, sent the internet into a "meltdown," taking down enormous sites like CNN, Bloomberg and The Guardian, and affecting internet mainstays such as Reddit and Amazon.
Bugs happen. And if a company handled every bug that appeared, at no cost, it would go out of business.
Or would it?
How does the charge-per-hour model incentivize bug-free software?
Early in my career, I read a lengthy white paper written by a software company in Australia touting all the reasons charging by the hour made sense. This matter of bugs was a big part of it. I agreed wholeheartedly.
But as I improved as a programmer, a lot of that paper stopped making sense from a business perspective.
Imagine two companies: Company A says, "Bugs happen" and "Nobody wants to work for free." Company B says, "We'll put our neck on the line, accept a monthly retainer instead of an hourly rate and fix any bugs that come up, no matter what. You won't pay us a cent more."
Who would you trust to write better software? I'd give my money to Company B.
Related: 4 Ways to Set Your Rates As a Solopreneur
The problem with charging per hour
Whenever I wrote excellent software that had no bugs, I would suddenly be out of work. My "big months" were either when I landed a new project or when there were a ton of bugs to fix.
I had also reached a point in my profession where I was solving problems for clients three times faster than when I had started out as a programmer, which, in turn, meant I was earning less.
That just didn't sit right with me. Shouldn't I earn more for getting better at what I do?
The problem eventually solved itself because, after years of working towards it, I was finally able to wave goodbye to software development and jump full-time into my true passion: professional writing.
I also waved goodbye to charging by the hour.
Related: 8 Great Time-Tracking Apps for Freelancers
Charging per project is a win-win
From day one as a writer, I charged per project. Accustomed to starting and stopping a clock, I kept track of how long it took me to write a blog post, marketing email, lead-generation book or novel.
Then, I divided those hours by the price I had charged and either bowed my head in despair at how long the project had taken or ran to my wife, doing heel clicks, celebrating how much I had earned per hour for that particular client.
If I became more efficient, put in the time to learn the client's business so I could truly write with their voice and to their audience, the writing picked up speed so that I could soon start earning a very respectable hourly rate indeed. But if I cut corners and the client returned to me wanting endless revisions, I could only blame myself for letting the quality slip — and thereby losing endless hours trying to get it right.
Charging per project forced me to get better at what I did. And the better I got, the more I earned.
Related: 8 Pricing Strategies for Your Digital Product
How to charge fixed prices for large projects (and not end up working for free)
Big software projects are difficult to quote for. The client sees the first few versions and suddenly wants the software to do a hundred additional things.
It happens all the time. And not only in the software business.
As for writing, after the first few chapters, clients often get a better view of the shape their book is taking and start coming up with new ideas.
The solution to this problem is easy: I don't quote for the full project. I quote for phases of the work with a deliverable at the end of each phase. At the end of each phase, we can discuss new requirements and put a new quote together.
Oh, and I do give clients a ballpark figure at the start of the project for what the entire thing might end up costing them so that they're prepared.
Yes, this is a lot more difficult than charging by the hour. It requires active participation on the part of the service provider. It requires going the extra mile to completely understand what the client needs. Sometimes, it even requires a chunk of unpaid work at the start while you get all the necessary data together to properly quote for the job.
But, unlike with charging by the hour, you can make this up later by improving yourself, becoming more efficient and delivering better-quality work in a shorter time.
