Hey, we get it. Project time tracking is hard. You want to focus on producing stellar creative work, not on invoices, revenue streams, and change orders. But, learning how to price your projects is critical to the long-term success of your business. In fact, if you don’t get project pricing right you might not be able to stay in business at all.
Getting pricing right isn’t just about figuring out how much to charge. (Though, that’s pretty important too). First, you have to choose the pricing model you’re going to use. This will determine how much you get paid and for what exactly. Not sure which model is right for you? We’ve got you covered!
We’ll walk you through the different models, tell you a bit about the different scenarios in which they make the most sense, and cover the pros and cons of each option. That way, you’ll have all the info you need to pick a model that works both for your business and your clients. We’ll also cover how time tracking is essential to knowing your costs and determining your price, regardless of the model you choose.
Let’s get into it!
Hourly: charging for your time
By far the most common form of pricing, the hourly model is used by everyone from individual freelancers to agencies. It’s sometimes referred to as the time and materials model. Basically, you get paid for the number of hours you work on the project as well as any expenses you incur, such as travel. It’s a model law firms and accounting firms use all the time.
There are a few ways to calculate your hourly rate. In the helpful book The Business Side of Creativity: The Complete Guide to Running a Small Graphics Design or Communications Business, Cameron Foote proposes this formula:
“The best way to establish an hourly fee is to first calculate actual business costs (labor + overhead) and make it the basis for determining the minimum hourly rate that must be charged if a business is to be viable. Then, knowing this figure, what is actually billed per hour should be the minimum, plus an additional profit margin, plus (or minus) any modifications required by the competitive environment.”
In short: Total up your operating cost (salary + overhead) and add a market-driven profit margin before breaking it down to the hour.
You get paid for all your work. As long as you calculate your hourly rate correctly (and track your time accurately), you’re guaranteed to get paid for all of your work. Awesome!
Clients don’t love it. Clients don’t like surprises, especially when it comes to budgets. Using hourly pricing leaves the door open to unexpected costs for your clients. As your business grows, you might have a hard time using hourly pricing because larger clients tend to have fixed budgets. Hourly pricing works best if you’re a small shop or independent consultant with good discipline and you work with clients that have more flexibility in their budgets.
How time tracking fits in
When you charge hourly, the need for time tracking is obvious: you need to know exactly how many hours to bill your client for! Make sure that you (and your team) are doing a good job keeping track of how long you’ve worked, so you get paid for all of the time you put into a project. In this case, accuracy is essential.
And if you’re charging clients by the hour, they’ll probably want to make sure they aren’t being cheated. They might ask to see a detailed breakdown of your time, especially if they aren’t thrilled with the project’s progress. You’ll be prepared for these kinds of conversations with reports created from your timesheets.
Fixed-fee: one upfront price
Fixed-fee is another common method of pricing. In some ways, it’s also the most complicated, which is why many agencies have a love-hate relationship with this method.
Fixed-fee pricing charges clients a fixed amount for a specific set of services, like redesigning their website or building an app. To come up with a price, you’ll need to estimate the time and resources needed to complete the task, multiplying the number of hours you think the project will take by the rates of the individuals working on it.
Let’s say you’ve just landed a design project. You first need to map out all of the team members you’ll need, like a creative director, an art director, a junior designer, and an account executive. Then, multiply the hours they will each spend on the project by their individual rates (how much you pay them per hour).
Agencies often take it to a more strategic level from there, with changes to this base price. They might give a discount to crucial new business they want to win. Or, they’ll add a higher multiplier if they know the client is difficult and will go through several rounds of feedback.
Clients love this model. Multinational corporations and startups have one thing in common: they all have budgets. Knowing the exact cost of a project is helpful for clients, so agencies that provide a fixed price up front are in a good position to win that business.
Your cash flow will be predictable. You’ll be able to predict revenue pretty accurately, which helps you plan for the rest of the year. Just make sure you’re asking for payment at regular intervals clearly stated in your contract.
Fixed-fee engagements almost always favor the client. In other words: you could lose money. You have to estimate the time it will take to complete a project before you’ve even begun. You bear the cost if it takes longer than you estimated. If the client requests multiple revisions, you might also burn through lots of hours you didn’t plan for when setting your fee. If not managed carefully, these projects can cost more than they bring in.
Be sure to write an airtight project scope with clear guidelines for change orders and revisions. If the client wants to go in a different direction or makes additional requests, you’ll either have to eat the extra costs internally or have an uncomfortable conversation with the client for the good of the project.
How time tracking fits in
You might think you don’t need to track time while you work on fixed-fee projects, but that would be a big mistake. Time tracking is essential to getting fixed-fee pricing right.
With a fixed-fee project, you know exactly how much money you’re bringing in, but how do you know how much each project costs you? Unless you can figure out what your costs are, you have no idea if you’re making money or losing money on that project.
That’s where time tracking comes in. It’s important for each person who works on the project to track their time. That way, you can multiply the number of hours worked by how much you’re paying them per hour (their cost rate). If this number is larger than your fee, then you’re losing money.
Also, when estimating how long a project will take (and how much you’ll charge), you don’t want to pull a number out of thin air. Time tracking gives you a record of exactly how long past projects took and who worked on them. This data helps you avoid underestimating how much work a project will take and leaving yourself in the red!