Fixed-priced Billing vs Hourly Billing
When a client’s decision to book your service business is often heavily dependent on price, it’s not always clear if the best billing system to win their business is fixed-price or hourly.
The budget is set from the start
Fixed-price billing is a big benefit to your clients. Your clients feel in control of their budget, and if you estimate labor and materials properly you know exactly how much you’ll make from a job.
However, underestimating labor and materials is the biggest risk of fixed-price billing.
If you determine a fixed-price for a job based on your estimate of the job taking 2 employees 5 hours to complete, but it looks like it will take 8, then you might have to absorb the cost of the 3 extra hours of employee wages.
Because of that risk, fixed-price billing is best for jobs when you know the full scope, and you’re familiar with how long the tasks involved will take.
Fixed-price billing means you aren’t penalized for simply becoming better at what you do.
You can charge based on value
When it comes to fixed-price billing, you aren’t limited by the working hours in a day. If you provide excellent service and are in demand, your job fee can reflect that.
For example, maybe your reputation allows you to charge $300 for your service, and it takes you about 2 hours to complete. Telling you client it costs $150 per hour might make them less likely to hire you because it just seems like a steep hourly rate, even though they’re happy to pay you $300 to solve their problem.
As you create efficiencies and increase your team’s expertise, you’ll get jobs done faster, and fixed-price billing means you aren’t penalized for simply becoming better at what you do.
Productivity is hard to measure
There are several studies regarding how humans are terrible at predicting productivity for our future selves. So if you charge on an hourly basis and your clients want an estimate of how many hours a job will take to complete, there’s a chance you’ll over or underestimate, especially if the job duties or job location are new to you.
Of course, the major plus of hourly billing is that it allows you to take longer if needed, and in the end you’ll actually get paid for the work you do.
Speaking to your client’s desire for an estimate of hours it will take you to complete a job, the more you track the final count of labor and materials at each of your jobs, the better you’ll become at predicting how many hours you need for future jobs.
Hourly billing is especially handy for longer jobs or jobs where details aren’t 100 per cent clear from the start.
There’s less risk to you
Billing hourly means that if you hit unforeseen bumps in the road during a job, you’re not under pressure to work faster in order to finish a job on time like you might be using fixed-price billing. For this reason, hourly billing is especially handy for longer jobs or jobs where details aren’t 100 per cent clear from the start.
Of course, when businesses charge on an hourly basis and require more time than estimated to finish a job, clients can end up with a larger bill than they expected. Hourly billing can leave clients in the dark about final prices causing some to become upset when the bill arrives.
If you provide a time estimate for a job, it’s best to let clients know from the start that you’ll get in touch with them if you encounter something that will cause the job to take longer. That way if you find mould that will slow down a bathroom renovation, or grime that will slow down a cleaning appointment your client isn’t thrown off guard by the idea of extra work.
One solution doesn’t fit all
There isn’t an obvious answer to the fixed-price vs hourly billing question, and for some businesses it’s best to mix it up and charge hourly for jobs with unknown variables and offer a fixed-price for predictable jobs.
It’s up to you to test and see what works best for your business and the types of jobs you do.
Do you find that you mix up billing strategies, or are you committed to one over the other? Share your thoughts and best practices below.