Project versus Hourly Pricing

When working on a large project, there are generally two ways to bill for the project – by the hour, or by the project. In an earlier article, I discussed the system I use to determine a price for a project. My hourly rate is determined based on how much I want to earn, and how much I can charge and still get a sufficient quantity of work.

Ideally, as a contractor, I would prefer to work by the hour. While I need to keep track of exactly how much time I spend on the project, I can also earn significantly more at the end of the project, since all time spent working on the project is billable.

On the other hand, billing by the project allows me to budget going forward – I know that I will be paid $1,000 per month by a given client for each of the next 6 months.

From the perspective of a client, there are pros and cons to each system as well. When billed by the project, the price tends to be inflated because the contractor is absorbing the risk of overruns, so the project could end up costing more than it needs to. On the other hand, when billing by the hour, it’s close to impossible to budget accurately for the cost of the project.

The other factor to consider is changes to scope, and how that’s handled. With hourly billing, it’s not relevant to the contractor, and the client saves times discussing whether a change request is required and if the price is going to change. The contractor simply bills for another hour (or 10, or 100). With project based billing, this can be an endless source of frustration as various items are declared to be out of scope (and therefore not covered by the original quote).

As a small business owner, I am in general willing to absorb more risk  on each project in terms of scope and price. Giving a larger bid for a project helps alleviate the risk, and with changes to scope, I can choose if it’s worth negotiating the point or not. I suspect, however, that as the size of the projects I work on grows, I will become less willing to bill a flat rate, since it will become harder to estimate the real cost of the project.

Perhaps not, though, and that can help other businesses save their money to grow their business instead of their IT bill.