Whether self-employed or running a small business, billing for your client is a common process. But this process involves various techniques that depend on how you get your job done. Some entrepreneurs or small business owners charge their clients on an hourly basis, whereas some charge a flat rate. It is the convenience or the job requirement that decides the process of billing.
The prime difference between flat rate pay and hourly rate pay is how you are billing your client for the task done. Charging a flat rate is simpler in that you set a price for a particular task and charge accordingly to your client. However, the hourly rate involves calculating the total amount on the number of hours worked. Each pricing technique has its own merits and demerits. In this article, we will discuss more on this. Scroll down!
Before discussing which is the better option to choose, let’s learn what is a flat rate and what is an hourly rate pay system!
What is Flat rate pay?
A flat-rate pay is when you charge your clients a set price for a particular work regardless of the number of work to be completed. For a project with finite deliverables charging a flat rate makes the payment process easier. Besides, in a project where estimating the hours of work is difficult one can charge flat rates to avoid complications.
For calculating the flat rates one can implement the hourly rate by multiplying this with the number of hours needed for the completion of the project. In other cases, for a particular set of tasks where you know the value of the project you can imply flat rates. Flat rates are also applicable for those projects that are considered more on the services provided than the number of hours worked. For example, these pay systems benefit automotive technicians and auto mechanics in some projects.
What is Hourly Rate pay?
An hourly fee is something that you can charge your clients on an hourly basis. Track the number of hours worked for a specific project and multiply it with your hourly rates. For this billing procedure, you need to have an efficient time tracker that will monitor the hours spent working for the client.
This process is effective for long-term projects and is also helpful for in-house projects. This is challenging for remote projects but this also makes it easier to account for the variables involved in the project. Despite the challanges, in some cases it is also beneficial where work is calculated on an hourly basis.
It is even easy to invoice for hourly work, wanna know? – Check out our article on this!
Now as we have already discussed flat rate meaning and what hourly rate is, let’s figure out on what part these pricing techniques differ from each other.
Flat Rate Vs Hourly Rate
Pros
Flat Rate:
For freelancers who are capable of completing work efficiently and on time, a flat rate is the most profitable billing process. The faster the work gets completed there is more scope for getting new projects. Moreover, this billing method makes it easier for the client to understand how much they have to pay. Besides, this set price for a specific task helps the client plan their budget and eliminates the stress involved in tracking hours for hourly rates.
Here are some of the other advantages of Flat Rate:
- These pay systems offer predictability as you can anticipate the number of work done whether warranty repair or any other type.
- Flat rates help business owners to plan their budgets conveniently. It helps to manage the overheads and inventories in a more organized way.
- It offers increased efficiencies in terms of productivity and payments. A flat rate implies higher pay in some cases, therefore, it motivates professionals like technicians or mechanics to increase production.
- A flat rate system simplifies the job transaction and makes bookkeeping easier. It helps to capture job descriptions quickly and organizes your invoice-making process.
- These payment systems make it very clear about what one is going to get paid, therefore it minimizes the pay dispute rates or misunderstandings.
Hourly Rate:
Accounting variables in projects are easily managed by the hourly rates. Besides, hourly rates are helpful for long-term projects rather than short ones. This billing method eases up your work as well as gives the client a baseline for comparison.
Let’s discuss in a more detailed manner what the probable advantages of hourly rates are:
- The predictability factor of the hourly rate pay system is the same as the flat rate. This also helps the workers to have an idea about their weekly wages. Moreover, it also simplifies the billing process for auto mechanic work.
- Hourly pay rate scheme offers a constant employee income for technicians or mechanics even though the business is running slow.
- Warranty repairs with price rates set by industry standards will pay their labor on a flat rate basis which will be more for the stipulated time. Whereas in some cases manufacturers calculate how much time is involved and the wages remain unaffected by the hourly rate pay system.
Cons
Flat Rate:
Charging flat rates is challenging for newcomers as you need to have a proper and accurate estimate. Secondly, some clients insist on hourly rates, and convincing them is difficult in such cases. Moreover, a flat rate opens up the scope for negotiation for clients over the set price. Without a professional portfolio, this becomes tedious to convince your clients that you are worth the rate.
Here are some more cons associated with the flat rate system:
- To increase the pay, there may be a tendency to rush to complete the job. This may in turn cause a decline in work quality by flat-rate workers.
- If the cost of the job is determined wrongly then it may give rise to payment disputes.
- One can make good money from their hard work if they are auto mechanic or auto techs. However, the scenario of decreased profit may arise due to reduced production because of personal stress, poor health, or overwork. In such cases, shop owners end up with decreased profit margins due to the flat-rate pay system.
- Problems may also arise in the case of warranty repairs which generally take more time as per industry standards. But it leaves the mechanics with less pay as the manufacturers claim to get the job done before the required time.
Hourly Rate:
Hourly rates could be disastrous for short projects which may result in loss. Designing a logo may take a few minutes but the project is worth a higher price, so in such cases, the hourly rate does not work well. Besides, you don’t get a minimum payment for the project and it becomes difficult to include the general expenses of the project.
Some of the other cons associated with hourly rates are:
- This pay system could be a major productivity killer. As the laborers are aware of their monthly salary this may discourage productivity. For example, if the auto mechanic does it in two or three hours they ought to receive the same wage, and hence, there is little or no motivation. This could be a cause behind reduced production.
- Hourly rate decreases the potential of increasing the wage of the laborers. For example, auto mechanics are already aware of their predictable income, and hence, they are quite reluctant to increase their weekly wages.
- Hourly pay systems may not be fruitful in the case of complex diagnostic works. Complex works may lead to a costly final repair, which cannot be charged to the customer. As a result, this payment system in these cases may not be advantageous.
Approximately 35% of those in the plumbing industry and almost 100% of the maintenance industry prefer the flat-rate pricing model. Despite this fact, the hourly pricing model is the popular one as it comes with certain advantages that fixed-price models can never touch.
Key Takeaways:
| Hourly Rate | Flat Rate |
| The amount charged for a specific task on an hourly basis. | A set price is charged for a specific task regardless of the number of work to be completed. |
| Tracking hours is not always feasible. | It does not involve tracking hours regardless of how long the work continues. |
| Less pay for quicker work hence not beneficial always. | The set price does not depend on the length of work but rather depends on the project type. |
| Complicated with budgeting for customers. | Whereas, the set price for a specific task makes it easier for customers to plan out their finances. |
| Simply multiply the number of hours worked by the hourly rate to get the final amount. | Involves complicated and lengthy calculations. |
| It is way more flexible as you can make changes midway. | No flexibility as making changes in the middle of a project involves a new quote. |
Bottom line!
Both the billing methods, flat rate vs hourly rate have some advantages and disadvantages. You need to decide on this considering your project type and preferences as to which method should be applied. Hopefully, this article has given you an idea about the basic difference between flat rates and hourly fees so that you can choose the right one for your next project.
Frequently Asked Questions
1. Is flat rate pricing always more expensive than hourly rate pricing?
Flat rate pricing can be more expensive than hourly rate pricing, but the overall cost largely depends on certain conditions such as the scope of the work and the time required to complete the task. Flat rate pricing can save money compared to hourly rates and can offer transparency. However, hourly rates may offer better value in certain situations.
2. Are tips better than hourly rate pay?
Tips are not guaranteed, but the hourly rate ensures a fixed amount for completed work without fluctuation during slow periods. While receiving tips is beneficial, the hourly rate provides stability and is not affected by fluctuations. It’s important to remember that tips are taxable. However, solely relying on tips has its downsides, as they can be inconsistent and unpredictable
3. When should you use flat rate pricing and when should you use hourly rate pricing?
Flat rate and hourly rate pricing are used under different conditions. Flat rate pricing is suitable when the scope of work is well defined, while hourly rate pricing is more appropriate when the scope of work is not clearly defined.
4. How do flat-rate employees get paid during slow periods?
During slow periods, flat-rate employees receive a predetermined salary or fee for the services they provide, whereas hourly employees get paid based on the number of hours they work.
