Flat Rate vs. Hourly Rate Differences & How to Choose
December 14, 2022
Whether you’re just getting started with your business or you have some experience under your belt, it’s important to set a pay rate for your services. This means that you should consider the two most common types of pay rates—flat rate and hourly rate—and choose the one that works best for your business.
To do so, it’s helpful to know the flat rate vs. hourly differences and figure out which option can benefit both you and the client.
To help you out, we have gathered all the information about both types of pay rates you may ever need, so let’s dive in!
What is a Flat Rate?
In accounting, a flat rate is the fixed cost of a product or service that is being sold. What this means is that the cost is always the same, regardless of how long it takes a person to provide the service or finish the project.
The flat rate includes the full cost for every aspect of the project, such as the work spent on it, the materials that were used to finish it, as well as any additional overhead expenses.
Both businesses and their clients can benefit from the flat rate method since the price of the service is set from the beginning. This way, both parties will discuss the price and agree to it beforehand, and there will be no need to track additional time for the service.
This type of flat rate works perfectly with finite deliverables, which means you will easily be able to estimate what the total costs of the project will be at the end of the project.
What is an Hourly Rate?
In accounting, an hourly bill rate is the amount you charge clients depending on the time it takes you to finish a specific project.
This method is characterized by the fact that every minute spent on the project needs to be tracked. By tracking the time you spend providing the client with the specific service, you will know exactly what you need to be compensated for.
It’s best to opt for this type of pay rate if you are working on long-term projects. That is because you will be spending a considerable amount of time on finishing them and, therefore, gathering more profit.
Flat Rate: Advantages & Disadvantages
To know whether it’s a good idea to use the flat rate billing method for your business, look at some advantages and disadvantages of this method:
Flat Rate Advantages
- Transparent pricing. Since the flat rate method enables you to predict the total costs, the full price will be known immediately and will not depend on the time you spend doing the tasks.
- Makes it easy to keep track of your payments. When you use the flat rate option, the invoice will only include one payment, which will be much easier to track than many singular payments (which is generally the case with hourly rates).
Flat Rate Disadvantages
- Work more for less pay. If a client is not satisfied with the service and asks for any tweaks, the flat rate forces you to work more without getting an additional payment for the extra hours spent on the project.
- Not the best choice for newcomers. To be able to set a specific flat rate payment, you will have to convince the client that you are worth the price. And to do so, it's essential to have a portfolio that lists all your achievements. This is hard to provide if you’re a newcomer who hasn’t had the chance to gather some references. Also, as a newcomer, you probably won’t know how to set a proper project rate since you don’t have enough experience with it.
Hourly Rate: Advantages & Disadvantages
Now let’s look at some advantages and disadvantages that opting for an hourly rate may offer:
Hourly Rate Advantages
- Best for long-term projects. If the projects you work on are considered long-term, it’s the perfect opportunity to set an hourly rate. This way, you can get paid for the length of the project and not worry about jumping from one job to another.
- Easy to track any project changes. In case the project that you’re working on suddenly goes through changes, you can then keep track of and charge an additional price depending on what the next project requires. In this situation, you wouldn’t have to worry about whether you’re getting paid the right amount.
Hourly Rate Disadvantages
- Too expensive. The hourly rate includes overhead costs in addition to direct ones. This means that a person can charge for every minute that they have spent in the business, even if that time wasn’t related to finalizing a product or service.
- Payment may be delayed. An hourly rate equals a long invoice. And when the client gets in touch with a long invoice, they will be more likely to be late with the payment, as they need to go over each line of the invoice to make sure there are no errors.
When it comes to the flat rate vs. hourly pay preferences, clients generally stay away from the hourly rate method, as it is too complicated and requires the above-mentioned long invoices. That’s exactly why they prefer the flat rate method, as they are informed of how much they need to pay right away and do not have to worry about any additional budgeting issues.
How to Choose Which Rate to Use
Knowing which rate will work best for you depends on a couple of factors, including:
- What type of business you run. If your business is currently set-up online, it’s best to use the flat-rate option. It helps you keep track of set prices without worrying about any additional expenses or lengthy invoices.
- What your business needs. If you mostly work on long-term projects, it’s best to use an hourly rate. On the other hand, if your business relies on shorter projects, the flat-rate option is a better choice, as it settles the payment amount from the beginning.
- What the best option for clients is. Some customers prefer an hourly rate, whereas others prefer a set price that they only have to pay once and not worry about whether it fluctuates or not. It’s important to discuss this with your client beforehand to find common ground.
- What option can bring you profit. If profit is the thing you’re looking for, it's recommended to opt for an hourly rate. This way, you keep track of each second spent on a project, which then leads to a higher profit.
Taking these factors into consideration will help you decide which option is best for growing both your business and your customer base. However, once you get the gist of both options, you’ll notice that the flat rate option works better in most cases, as it’s easier to set.
Use Our Generator to Create Invoices
Once you set your pay rate and finish working on a specific project, you’ll want to charge the client for your services. If you want to generate these documents as quickly as possible, we’ve got you covered!
Our online invoice generator is easy to use and only takes two minutes to provide you with a ready-made, customized document. And that's not all—you can also preview each step and check if it needs any changes at any step of the way.
All you need to do is go to our invoice generator page and fill out the required text fields to get started. Once you enter the page, you can:
- Title the invoice
- Enter the invoice number
- Fill out the company’s information
- Provide the client’s information
- Enter the payment details
- Click “Preview” to check what the invoice will look like
- Click ‘“Finish” once you’re done and download your
Final Thoughts
Whether you’re working as a freelancer or for an established business, it’s important to know how to set your pay rate. After all, your income depends on this decision, and we hope that this guide has helped you make the right one!
After you’ve settled on one of the two options, the next thing to consider is sending in an invoice for the payment. If you need help with creating this document, you can turn to our free invoice-building service—the invoice-making process is hassle-free, and the software doesn’t take too much time to make a personalized invoice for you in a snap!
Besides that, you can also check out the other services we provide, including the generators that can provide you with customized pay stubs,W2 forms, and 1099 forms.
Key Takeaways
- A flat rate is a method that can be used to determine the total cost of a project without worrying about additional charges or fees.
- An hourly rate is a billing methodthat is used for calculating the time it took a contractor to complete a specific project.
- To decide on which method you should use, you need to consider what your business needs and what your clients would appreciate more.
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