Flat Rate & Retainer vs Hourly Rate: How to Pick One?

If you’ve been thinking about changing your pricing strategy as a freelancer or consultant, I’m sure you have googled “should you charge flat rate or hourly rate” or “flat rate vs hourly rate”.

And you have, most likely, seen answers on Quora and Reddit on this topic.

Quora users suggest charging a flat rate (charging per project). They rationalize choosing this option with the following reasons:

• If you charge a flat rate, you can increase your per-hour rate as you become more efficient at completing projects.
• Pricing is based on value; you estimate the project based on the value you deliver.
• Clients are more comfortable knowing they are paying for results rather than your time.

They make a good point.

And then there are Redditors who are not as pro-flat rate as Quora users but also have their doubts about charging an hourly rate. One of the users even wrote “I hate hourly because efficiency means you get paid less”.

So, which pricing model should you choose?

And is charging a flat fee and working on a retainer better than working on an hourly rate?

It might be, we’ll see.

In this article, I’ll break down what each of the terms means and explain why, in many cases, working on a retainer is the preferred method for freelancers/consultants and their clients. I’ll also share examples of when to use each pricing model.

Oh, and if you don’t have time to read the entire blog post, here’s a quick TL;DR:

Each pricing model serves its purpose. No matter which option you choose, you have to be excellent at estimating time so you can make your monthly income. And tracking time is more challenging than it might seem. But don’t worry, we’ve got you covered. 🙂

What is a flat rate?

Flat fee billing is when you agree with a client on the price of the project and charge a fixed fee for a service.

A flat rate is agreed upon in advance, and the final cost will not change, no matter how many hours you spend completing the project.

Due to its nature, flat rate pricing requires giving the client an estimate of the total number of hours it will take you to complete the project. To calculate a flat rate, you will multiply the number of hours by your hourly rate and count in buffer time for unexpected requests and admin. It’s that simple.

Here are the pros of flat rate pricing for you and your clients:

Is flat rate pay worth it?

You tell me.

Here’s a flat rate example that will make you think twice about insisting on charging a fixed fee.

Let’s say you work as a freelance web developer or web designer and a client gives you a product requirements document to estimate how many hours it’ll take you to complete the project.

You start to imagine all the steps you should take to complete the project. And then you realize:

• Estimating hours is not that simple.
• Most projects are impaired somehow, meaning they are never completed as initially planned.

Even if you have estimating experience, each project is different, and you can’t really envision what each hour on the project will look like. You have to be an experienced estimator to be able to estimate the project accurately.

Estimating is hard enough when the project scope is clearly defined and never changes. But that’s never the reality; clients tend to change project requirements frequently.

Moreover, most projects have schedule overruns. Stats show that 78% of projects go over budget or experience timeline delays due to several reasons, including unclear project goals and poorly defined objectives to measure progress.

Most clients are good at envisioning their projects and what they would look like completed but struggle to articulate that vision. For you, the freelancer, it means that the estimated hours can go up and down if the requirements for a project or product consistently change.

If you complete a project below the estimated number of hours, you will get away with a higher sum than the client would originally pay you. If the project has a schedule overrun, you will not be compensated for the additional work, causing you to rush to finish (and most likely compensating for the quality of the project).

And there’s one more thing.

As a developer, I bet you are familiar with agile software development.

Agile is a method that embraces change throughout development and, therefore, is not aligned with flat rate payment. It works on the premise “once the original project requirements are met, the project is finished”.

When you charge a flat fee, any changes to the project will have to be renegotiated, which takes even more time. And you might not have time to renegotiate your involvement in the project, as you’ll have other projects that require your attention.

The point is that by deciding how much you’ll get for a project upfront, you are eliminating the possibility of project scope changing. You’ll have no flexibility and no need for iterations, which is just what clients want. And sure一clients love knowing how much they’ll pay for your services. But they also love knowing they can count on you if any changes occur. You are their main man. You should also be a flexible main man.

So perhaps you should consider not charging a flat fee?

Working on a retainer

Retainer contracts are based on hourly rates, but with the specification of the number of hours and weeks you are going to get一you guess it一retained.

Working on retainer means that you will be “hired” to work X number of hours for Y number of weeks. You and the client have both agreed that you will allocate that number of hours per week for that many weeks.

This pricing model provides you a steady income stream and peace of mind, knowing you are there to support your clients throughout their projects.

Here are some pros of working on a retainer:

Charging by the hour

Charging by the hour means exactly what it sounds like: you track hours spent on a project and charge for the total number of hours.

Setting an hourly rate allows you to be flexible; if any changes are made to the project, you will be there to keep up with them and charge them in your invoice. So, it’s safe to say that charging by the hour is fair to you and the client.

Here are some pros of charging an hourly rate:

But it has its downsides:

• You are in a pickle if you are too efficient: if you can complete a task in 2 hours (as an experienced freelancer) instead of 5 (a beginner freelancer), you won’t be able to charge as much.
• You have to justify the time spent working on each task. And you have to be prepared to hear the question, “Why did it take X hours?” frequently.
• Agreements that specify hourly rates set a rate of pay; they do not specify the amount of time that should be spent on a project. So you can expect the volume to be inconsistent, and if the project goals are not clearly defined you will be left with an open-ended contract.

Which pricing model should you choose?

You can go either way, depending on the project type and scope.

Flat rate pricing can come in handy when you are dealing with:

• A low-risk project for which you can easily estimate time.
• A project that has predictable phases and tasks.
• A well-defined project scope with set-in-stone requirements.

Need an example of such work?

Content writers tend to choose flat rate pricing when charging for blogs posts and articles. They have agreements with clients, like the articles will be delivered monthly and have predictable outcomes and focus.

On the opposite side of the spectrum, hourly pricing is great for high-risk projects whose requirements aren’t fully defined or projects that tend to change quickly. Choose to charge an hourly rate when:

• There’s a high-risk project but also high-value work.
• There’s a long-term project with fluctuating requirements.
• The project scope is ever-changing.

An excellent example of hourly billing is working as an in-house consultant. Consultants are often treated as employees, although they are technically “temporary” employees. Employers understand the T&M model well and feel comfortable compensating exactly for the number of hours put in.

Keeping in mind the aforementioned guidelines, here's a recipe for choosing a pricing model: if a project is low-risk choose a flat rate and vice versa; if it’s high-risk, opt for hourly pricing.

But is it really that simple? Does it all come down to assessing project risk?

In most cases, it does. But it also comes down to your time. After all, you should decide when it’s convenient for you to work on a project, based on your current workload (like ongoing projects) and the time you can dedicate to that project.

So, it’s necessary to track time.

And that’s why we created Memtime, an automated time tracking tool that remembers every billable minute of your day.

Here’s how Memtime ensures you stay on top of your time and projects:

A quick note.

If you are wondering how to successfully implement billing methods, know that clear communication is the answer.

Whether you work on a retainer or charge by the hour, being transparent with your clients about your pricing strategy will pay off.

Here are 3 quick tips that will help you build open, trustworthy relationships with clients:

• Set up clear expectations. Be upfront and honest about your billing method and payment terms.
• Be flexible, even if it means changing your pricing model. Projects change, and sometimes adjustments are necessary, so be ready to alter your pricing model to show clients how dedicated and motivated you are.
• Be proactive when informing clients about payments. If your billing process changes, let clients know in a timely manner to prevent misunderstandings.

To recap

To charge a flat rate or not to charge a flat rate, that is the question.

We say: instead of determining your billing strategy before partnering with a client, wait.

Get to know your client and their project.

Listen to their problems and read the project requirements.

Try to stay as flexible as possible.

And then decide which pricing model best suits your situation and the client’s needs.

Also, keep in mind the main goals of any fee structure:

• Ensure you get paid for the value you bring to the client.
• Eliminate stress for you and the client.
• Eliminate the time you spend doing admin things so you can focus on actually doing your job.

And to ensure you are doing your job, keep track of your time with Memtime.

Memtime works as your silent partner (literally), as you won’t even realize it’s there. However, all your daily activities in programs and tabs will be captured down to the minute. It can do wonders for you, your projects, and clients.