Should You Charge a Fixed Fee or An Hourly Rate for Your Services?
Have you wondered about this question? Right after being asked about how much to charge for bookkeeping services, usually I hear this one. And of course, the short answer is, it depends.
It depends on which method you are most comfortable with. It also depends on whether you can run your business more profitably charging one way or the other. And finally, it depends on what your clients will accept.
Which method do clients want?
There is a reason prospective clients ask, “How much do your charge?” But it isn’t really because they are price shopping. (Though, admittedly, some are.) They are more interested in value….and how much it will cost them bottom line to get their books done, or to get the help they need with QuickBooks.
If you quote them a simple per hour rate, say, $40 an hour, the very next question you will most often hear is, “How many hours will it take you to get the work done?”
So the question they are really asking is, “How much is this going to cost me and is it worth it?” For that reason, you will often hear a sigh of relief from prospective new clients when you quote them a fixed fee. Now that they know what it costs, they’ll want to see what they will get for their money (value).
We’ll talk about how you can demonstrate the value of your services BEFORE the engagement ever starts in a future article. For now, let’s stick with the flat rate vs. hourly fee question.
Which method is better for you?
Hands down, most bookkeepers and QuickBooks consultants prefer to charge by the hour. And it’s true. You run a very real risk of underestimating the amount of work needed for a new client. And if you do, you’ll have to eat the difference. Ouch! No one likes working without fair compensation.
So charging fixed fees do put more risk on your shoulders. Of course, that’s part of the reason clients generally like fixed rates better.
But estimating is an art and can actually turn out to be more profitable, when done right. To make that happen, you must learn how to estimate in such a way that you will be well compensated. That skill usually comes with experience. So if you want to build this skill, start slowly with small projects only.
To come up with an estimate, plan out the project as completely as possible BEFORE giving your client a firm estimate. That means gathering as much information as possible. You may also want to stress that it is ONLY an estimate, subject to revision. If the project turn out to require more work than anticipated, agree ahead of time how that will be handled.
The key is to define all the parameters and expectations BEFORE you start work for the client. You will also want the agreement in writing.
Which is best for you? If you just want to keep it simple (and safer), charge by the hour. If you want to make it easier for the client to say yes, as well as build a skill that can dramatically boost your bottom line in the long run, try your hand at flat fees. Just remember that it takes some practice to get it right.
Making it Work for Both You and Your Client?
As I’ve suggested before, using a win-win approach will usually yield the best results. So if your clients prefer fixed fees, but you prefer charging by the hour, why not strike a compromise?
You can quote your hourly rate and estimate how many hours it will take, and then sell your client a prepaid block of time to get the job done. That way, it feels like a fixed rate to the client, while you get your hourly rate AND you get your money right away. (No risk of A/R woes after the fact!) You may even wish to give your clients an incentive to work with you on this basis by giving a discount, say 10%, for buying 10 or more hours at a time.
Whenever estimating for a job, though, ALWAYS include extra padding to cover any unexpected work that may be necessary. If you don’t end up using all the time when the job is complete, you can always use it against future services.
Ultimately, you will need to find the combination that works best for you. Know how much you NEED to make and then match that with the method that will give you what you need, while still making your clients feel comfortable working with you and getting good value for their money. Think win-win or no deal.
What methods have you found that work in your business? Let’s compare notes! Leave your comment just below the Resource links.
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Gabrielle
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RESOURCES
Intuit Rates Survey 2007 (The 2008 survey has not yet been published)
How Much Do You Charge? [related article]
11 Responses to “Should You Charge a Fixed Fee or An Hourly Rate for Your Services?”
Gary on June 9, 2009
Hi Gabrielle,
Thanks for providing this information. I believe it would be helpful to those who are just started their services.
Just wondering do you apply the same principles when quoting for one off job?
Gabrielle on June 9, 2009
Great question Gary!
Remember, you are the boss, so you get to decide the best method. In my own business, generally if there is just a single, small project, I usually just quote an hourly rate and will require up-front payment. If it does have the potential to grow into a larter project, I will still specify that if additional work is needed, additional charges will be forthcoming.
The bottom line guiding principle, though, is always win-win or no deal (from The 7 Habits of Highly Effective People)
Donna on June 9, 2009
Hi Gabrielle,
I had to just laugh. I’ve been working on developing flat rates and really struggling to find the right balance. I went out to lunch with a bookkeeper friend yesterday to compare notes, but she’s struggling a bit too. So, off to the internet to google fix rates for bookkeepers and start reading your posting. Great posting and thought to myself I would love to talk with the author more about how to estimate this…then found I know you. LOL.
I have a spreadsheet worked out with my thougths…I’d be willing to share with you to get your thoughts and see if I’m going the right direction.
Talk soon
Donna Sooter
Sooter Consulting & Admin Services
Gabrielle on June 9, 2009
Hi Donna!
Great to hear from you!!
Sure, let’s connect and see if we can’t brainstorm a “formula” that works for you.
Being able to estimate for fixed rate purposes is ultimately an acquired skill that comes with experience. But working out a repeatable system that works for you in your business saves lots of time and lost revenue.
Yes, let’s talk soon, and then we can see what we can share of value for everyone here on the blog!
Gabrielle
Ashley Harvey on June 10, 2009
Hi Gabrielle,
I have a unique situation. I have a weekend gig whereby I do a minimum of two hours of work, but depending on the situation I could end up working for, say, ten.
Now to make this worth my while, I charge roughly 3.125 hours in advance, so that if it’s only a two hour gig I make more than my hourly rate. If I spend more than 3.125 hours on the job, I switch to my hourly rate.
I’ve been using a very simple invoicing system and manually entering my line items, so it hasn’t been a problem. Now I’m using Quickbooks, and I’m wondering if I can reduce the time I spend on billing by using the timesheet function. Can I make it smart enough that it knows to charge per-hour if I’m over 3.125 hours on a service call, and a flat rate if I’m under?
Thanks.
Gabrielle on June 25, 2009
Great question Ashley,
Yes, this is an unique way to bill your client. You may be able to use the price level function in QuickBooks if you are using the Accountant’s or Professional Services version of Premier. But this is rather unique. Otherwise (if you’re using Pro), you will likely still need to have a flat rate item to cover the first 3.125 minimum, and then straight time thereafter.
Probably not what you wanted to hear, but as you said, this is a unique way to bill.
Gabrielle
K Johnson on June 3, 2011
Once a fee is agreed upon between bookkeeper and client, should a contract be written up on the agreed rate?
Gabrielle on June 9, 2011
Short answer: YES! It can be somewhat informal, depending on your style, but it MUST be in writing to not only serve as a reminder to both of you on the details of your working agreement, but it will make it much easier to resolve any issues that arise later.
Keith Ross on October 7, 2011
How to figure rates both hourly and flat rate.
I have several years consulting with small business owners. I have many years sexerience in the client w/u for CPA firms.
Gabrielle on October 7, 2011
Ahhh Keith,
The eternal question that gets asked over and over again.
The short answer (certainly not the only answer nor necessarily the “best” answer, but it’s the quickest way) on the hourly rate is to find out what others are charging for comparable services and place yours somewhere in the middle. You can use the 2009 QuickBooks Rates Survey as a starting point.
Another “fast and dirty” method for hourly rate is to find out what a full charge bookkeeper would get paid in your area on average and then multiply that amount by 2 or 3 times. That would be a minimum that you could charge and afford to stay in business.
I personally don’t like these methods because they come from a “commodity mindset” – meaning that the services you provide are assumed to be the same as everyone else who provides bookkeeping services, and that should NOT be the case. But at least it provides a starting point.
For the fixed price calculations, you can use the method described in the last few paragraphs of the article above. Again, a quick way to do it. Ultimately you have to come up with your own formula that fits yours and your clients’ objectives.
Eve on October 13, 2011
Hi Gabrielle,
First of all – great website!!
I’m a Chartered Accountant who is looking to get their own book-keeping business off the ground in my spare time – and it’s tough!! I have applied for an ABN and got a website sorted and am fairly confident on the rest (I’m an accountant so not fazed by Quickbooks/MYOB etc) – but I’m having a few problems with setting my fees! Coming from an accounting firm, I know the “value” of what we do and I know how much book-keepers charge my firm – but it doesn’t seem to work the same way when you’re pitching to your own potential clients. I’ve had a few potential interested clients, but as soon as I tell them the hourly rate – poof! They’re gone!
I saw your comment about not under-selling ourselves and I agree 100%. I’m not going to be giving up my weekends for money I can make watching a friend’s kids (no offence to nannies!). But….how do I sell my services without scaring off would-be clients?
Just today I had a follow-up response from a client who said he was happy with my quoted hourly rate ($50 an hour). But I’m not counting my chickens before they hatch and I see money in the bank.
Also, what are your thoughts on engagement letters? I’m just starting out and not sure how to “make it official” with a client….as in, if I was to start doing the work and then they refused to pay….I’m just worried I’ll be left high and dry. Would you recommend some kind of engagement letter outlining the provision of services for a fee, the agreed hourly rate, scope of the work to be performed, etc? Or is that over-kill?
Any feedback or thoughts appreciated!
Thanks,
Eva