Flat Rate vs. Hourly Rate: How to Invoice? (9) | Saldoinvoice.com

Flat Rate vs. Hourly Rate: How to Invoice?

There are various systems of remuneration. They’re usually based on two main types: a flat rate (fixed) and an hourly fee. Depending on what you do, one or a combination of both methods may be suitable for you. Understanding which one you need and how to request relevant compensation for completed projects might be tricky. We’ll help you understand all the nuances.

What Is a Flat Rate?

Let’s take a closer look at each type of payment. What does a flat rate mean? This term means a fixed rate for the provision of certain services, the supply of products, and the implementation of entire projects. This form of billing doesn’t depend on the time you spend on tasks. The approach can be applied in various industries, both in service- and product-based businesses. It’s used to evaluate small and not very complex projects.

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Understanding how a flat rate works is easy. Determine the cost of your services per hour and estimate how long it’ll take you to complete a task. When calculating, proceed from your own experience or, if none, from generally accepted standards in your industry. You need to multiply the resulting number of hours by the cost of your services per hour to get the entire project’s price. It’s the amount you need to put in a basic invoice form.
What Is a Flat Rate? This method is convenient for businesses and orderers since it’s as transparent and predictable as possible. Both parties know the amount of compensation that will be provided. However, the format may not be suitable for complex and large-scale projects in which it’s difficult to predict all the nuances.As a business owner, you run the risk of cutting your pay and working overtime or, conversely, asking too much and scaring off a client. With this approach, you should clearly identify all the upcoming tasks and know how to calculate a flat-rate pay to receive appropriate compensation.

Definition of Hourly Charge

The second payment scheme is called an hourly rate. What is an hourly rate? In this case, the name speaks for itself. Under this method, compensation depends on how much time you spend on a task. As a rule, it’s used for large and complex projects, where it’s pretty difficult to consider all the work and possible force majeure. You can only roughly estimate the scale of tasks, but the calculation is made after job completion.

When you negotiate a billing system with a customer, both parties need to understand that the final amount at the finish line will change. You, as a performer, can benefit because you remain flexible, can adapt to changes, and know that you’ll be paid appropriately for overtime. Along with it, some businesses prefer to forego the hourly rate as they don’t know at the start how much money they’ll spend on a project.

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The difficulty with the scheme lies in the calculations and the billing process. If you wonder, “What hourly rate should I charge?” you need to study the standard rates in the industry and region. You don’t want to put too high a price so that a client doesn’t go to a cheaper contractor, and at the same time, you don’t want to deprive yourself. For example, to get the minimum allowable payment, you can define your labor costs, add overhead costs, and the profit you would like to receive from the execution of this order to them. The amount received should be divided by the planned number of hours. Depending on the situation in a region, you can raise this rate.

Advantages and Disadvantages of Flat Rate

Both payment methods described have certain pros and cons. Among the flat rate benefits, the following are worth noting:
  • simple in calculations and transparent;
  • clients know what amount they should expect;
  • convenient for planning and budgeting;
  • helps to keep money flow under control;
  • ideal for small to medium or simple projects.
This format is perfect for self-employed people who do all the work quickly and efficiently. You can use the saved time for your purposes and consider it a profit since you have already been compensated. At the same time, it has some disadvantages:
  • doesn’t provide flexibility and the opportunity to adapt to changes;
  • it can be tricky for beginners to assess the scope of work correctly;
  • if the assessment is incorrect, you may incur financial losses.
Using a flat-rate fee is appropriate if you have a lot of finished projects in your portfolio that show you’re worth the required rate. Otherwise, customers may turn to someone with lower pricing, fearing overpaying.

Pros and Cons of Hourly Rate Invoice

Providing services on an hourly basis has the following advantages compared to a flat rate:
  • gives you flexibility and the ability to expand or reduce projects in the course of work;
  • ideal for large and multi-level tasks, which can be difficult to evaluate at the start;
  • every hour of your work is paid, which is important in case of force majeure;
  • it makes it easier for customers to compare the rates of different companies.

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There are certain industries where this payment format is considered standard. Despite all the scheme’s advantages, it’s not without drawbacks:
  • if you don’t have a convenient tracker or timer at hand, it may be difficult to keep track of the time spent;
  • clients and you don’t know the exact sum upon completion of the work;
  • if you spend too much time, customers may suspect you of inefficiency;
  • this format complicates budgeting.
As you can see, each method has its advantages and disadvantages. If you want to minimize the former and enhance the latter, you can use a hybrid scheme. For different tasks, set the payment system that you find most acceptable.

How to Do an Invoice for Hours Worked

The difficulty in using the hourly rate system lies in understanding how to write an invoice for hours worked. When completing projects with this form of payment, you need a reliable timer with which you can mark the start and end times of work. This information should be transferred to the invoice for hours worked template.

Of course, within the same project, you may have tasks with different rates due to their complexity, so each should have its own line in your bill. And each should be timed separately. To get the total sum payable, you multiply the hours spent by the rate and then add each item on your list, taking into account the materials used and the due fees.

Comparing different approaches to pay for your work, for example, salary vs. billable rate, consider the specifics of your work and be guided by the standards of the industry and your region. Whichever method you choose, SaldoInvoice will provide you with all the tools you need for invoicing and getting paid on time.

Elizabeth Cherepyna
Elizabeth Cherepyna
Product Manager, she is analytic of the behavior of users in the application, communicates with them, to better understand what we need to improve, and sets tasks for her team.
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