The best way to explain the project-based rate is by using an example. Let’s say that you offer web design services as a company or a freelancer. You get an email from a potential client – a small hot dog business – looking to procure your services to create a brand new website.
If you decide to charge him $250 USD for the whole project, that’s your project-based fee. The project-based fee is used when you want to set your client a fixed rate regardless of the time and resources your company will need to create a finished product.
Why Use a Project-Based Rate?
Project-based pricing can be a profitable endeavor as it’s a step forward to value-based pricing and can help you reach higher profit levels. If a company is doing a similar type of work for similar clients on a regular basis, it can cut some of the costs and increase its profits by charging a project-based rate.
When billing clients for long-term projects, companies can also implement milestones, which basically means breaking up the project into a series of achievable goals, with each goal having its own payment cycle. This way, you can track the project’s progress more easily.
Moreover, the company might require a 10-50% up-front payment of the total project-based rate, depending on the size of the project. This method of working is helpful from a working capital perspective but also keeps the clients mindful of the connection between project value and fees.
The company will know how to make a good estimate of the man-hours and resources needed to finish the project, but some freelancers and contractors that work on their own don’t have the luxury of an entire management team behind them.
As a result, they should think about charging a project-based fee when:
- The client is hell-bent on mentioning money several times during the info brief.
- It’s clear that you can finish the project ahead of the client’s initial estimate.
- You have to work remotely as a freelancer instead of working in an office where management can track project progress.
The Advantages of a Project-Based Rate
- You won’t lose money if you work fast.
If you’re working on recurring projects, finishing a similar task might take you 2 hours, whereas 6 months ago, the same type of task would take 6 hours to finish.
If you charge the same hourly rate for recurring tasks, you’ll end up underpaid, and that’s when the project-based rate comes in. After doing recurring things for some time, you get better at it, as simple as that.
- You can charge based on the quality of your work.
Over time, your expertise and skills will help you reduce the time you need to complete a certain type of task. However, if you charge an hourly rate, you might end up earning less than if you charge a project-based rate, where you have the flexibility to set your own price based on the quality you deliver.
- You’ll avoid unexpected surprises.
When you agree to a project-based rate with your client upfront during your info brief, you will be able to prevent any unexpected surprises on both ends of the agreement.
Your clients won’t get an invoice that’s different from the agreed sum for the finished project, and you will be able to avoid any type of pushback once you’re started working on the project.
- You don’t need to send time-tracking reports to clients.
When you are asked to track work hours to be paid accordingly, there is a chance that you will find it tiring and time-consuming after some time, but when you are working with a project-based rate, you won’t have to send your time tracking reports to your clients for billing.
Of course, companies still keep track of work hours for internal purposes, even when dealing with a project-based rate, but the pressure is much lower.
The Disadvantages of Using a Project-Based Rate
- Not ideal for new long-term projects.
When you work on a long-term project, there can be all sorts of changes and alterations mid-project at the behest of the client. This can include changing the project directions, additional meetings, brand new additions to the project, etc.
These changes might add tens of hours of work, but the negotiated price will remain the same because you’ve agreed to a project-based rate.
- The client might take you for granted.
There is a redline zone in the world of project-based rates when the client tries to take advantage of your agreed rate and starts treating you as their employee instead of a contractor or freelancer. The clients might feel entitled since they’re paying a bulk sum for your work and start throwing extra work without extra pay.