Hourly billing rates make it a lot easier for a company or a freelancer to account for any project changes and other kinds of alterations suggested by the client mid-project. Hourly billing is also handy when working in-house for a client instead of remotely.
How to Calculate Hourly Billing Rates
To calculate the billable hourly rate, you need to divide the profits (or company revenue) by the total number of hours you’ll spend on the project to get that profit.
For example, if your company has a revenue stream of $150,000 per month and the employee teams have worked 2,500 billable hours for that month, your billable hourly rate will be $60.
If your company has already agreed to pay the employees a billable hourly rate of $100, you’re responsible for that gap and should make the proper adjustments in the workflow.
The Different Types of Billing Rates
Hourly billing is only one of the subcategories of billing rates. What makes it so common is the level of transparency it provides, as clients receive invoices with detailed work hour entries. Other types of billing rates include:
- Project-based billing rate.
The project-based billing rate is a predetermined rate charged per project. Usually, clients and employers come to terms regarding a project and its costs with a fixed price to be paid when the final result is delivered.
There could also be cases with upfront payments from 10% to 50% of the cost, ensuring the client is serious. Moreover, longer projects might be divided into milestones so that you get regular feedback on your progress and prevent potential setbacks on time.
- Task-based billing.
A task-based billing is usually charged when employees have to do different types of tasks with different hourly rates. For example, one part of a project might be content writing, for which the employee is paid $50 per hour, while other responsibilities might be administrator tasks for which the employee is paid $75 per hour.
- Team-member billing rate.
Different team members have different roles in a company and projects usually involve several employees in charge of different tasks. These employees typically get different hourly rates. For example, team leaders might get $50 per hour, computer specialists $40 per hour, and regular team members $30 per hour.
Pros and Cons of Billable Hourly Rates
- Billing clients on an hourly basis makes it easy to adjust billing when it comes to project changes or other kinds of alterations.
- The billable hourly rates create a project guideline for clients to compare work from previous projects that included similar tasks.
- Hourly billing rates are great for short new projects where it’s harder to determine the ETA of the project for billing.
- Billable hourly rates are great for in-house teams where the work can be monitored at all times to see the project progress.
- It’s difficult to include general expenses like traveling or phone calls, meetings, or similar agendas when charging billable hourly rates. If you wish to accurately invoice clients with billable hourly rates, then you have to set consistent rates and hours.
- The hourly billable rates might limit the company’s income as there is no guarantee that the company will receive the minimum payment for a project. Moreover, the company will not be adequately paid for the value the project has for the client.
For example, if the company is designing a logo for a client, the whole project might be finished in 8 man-hours, but the profit value that logo will have for the company will be far greater than what they will charge at an hourly billable rate. The logo can play a key role in business exposure by attracting more customers and bringing in higher revenue in the long run.
- It may be harder to negotiate with clients with a client due to uncertainty of the final price of the project i.e. the total amount of hours until project completion.