How do you bill your clients?
Your rate and rate structure determine how you do a sale and how much money you make. Make sure you understand the different ways you can set up your rates and rate structures to maximize profit as well as the value you can provide to your clients.
Available rate structures
To display our different rate structures, we need to start looking at our team members. Our team consists of:
- Johnny the Writer, can do a little graphic design. He has 3 years of experience as a writer and 1 year of experience as a designer.
- Tracey the Developer, can manage but prefers not to. She has 15 years of experience as a backend developer and 5 years of experience as a frontend developer.
- Jennifer the Graphic Designer, who can do a little development and project management. She has 12 years of experience as a graphic designer, 2 years of development experience, and 2 years of project management experience.
- Rich the Project Manager, writes every now and then. He has 4 years of experience as a project manager and 1 year of experience as a writer.
The Project Hourly Rate
The first, simplest, fastest, easiest way to build a project is what we call the project hourly rate. The project hourly rate is a set amount per hour that you bill for whatever work you do on the project.
The project hourly rate on this project is $120/hr. Here is how each person is billed:
Person:
Johnny
Tracey
Jennifer
Rich
Rate:
$120
$120
$120
$120
As you can see, it doesn’t matter who’s doing what work, all the rates are the same for each person across the board. That is a project hourly rate. This is probably the easiest way to sell your time. Very often, clients don’t really know the difference between the skill levels of each person. They don’t know or care who’s junior, who’s senior, or who’s time is really more or less valuable. If you have a fair, middle-ground project hourly rate, or a team that is made of all similar level people, then the project hourly rate works very well.
Very, very often we set the rate at project hourly rate because there is no discernible difference to the client between people and we are measuring our cost on a fully burdened rate, not on a person hourly rate.
More importantly though, when we are doing our sales, we are selling the value of what we provide, not what hours we are working. We sell the value of the initial deliver, but after that has been delivered we move to selling time to support the system.
The Person Hourly Rate
The next thing you’ve got is a person hourly rate. A person hourly rate is very often used in consulting.
On a person hourly rate, we might bill our team like this:
Person:
Johnny
Tracey
Jennifer
Rich
Rate:
$85
$250
$195
$115
Pricing in a person-based hourly rate system is based on the person’s experience and the role and the value to the customer, you may price different people at different rates.
Task Hourly Rate
This one is probably pretty self-explanatory by this point. The Task Hourly Rate is based on the value of the task to the client. Very often when pricing on a task hourly rate you also break people down into categories like “Junior Developer” and “Senior Developer,” which represents their knowledge and speed.
On a task hourly rate, we might bill our team like this:
Person:
Writer
Junior Developer
Senior Developer
Junior Designer
Senior Designer
Project Management
Rate:
$115
$105
$150
$105
$140
$135
Pricing in a person-based hourly rate system is based on the person’s experience and the role and the value to the customer, you may price different people at different rates.
With this system, you can put people into different roles billing them at that particular rate.
It’s also important to remember that we’re not talking about the cost to you. We are just discussing the rates you bill your client and the way you think about these rates.
To review, we’ve covered the:
- Project hourly rate
- Person hourly rate
- Task hourly rate
But there is one more.
The Flat Fee Project
A flat-fee project means that no matter the number of hours used, your project will cost a set amount, also known as a “Flat Fee.”
The flat fee is great for the client in that it allows them to know a final amount for the work you will be doing irrespective of the issues you encounter within the project. It gives them security and helps them understand their budgets. But it also means two very important things for you.
When you bill a flat fee project, you must always take into account the following:
1. The risk in known unknowns.
For example, if you must integrate with an API you have never integrated with before and don’t know what goes into this work. You know you may run into an issue, but you have no idea what the issue may be.
2. The potential risk of unknown unknowns.
These are the things that pop up unexpectedly and ruin your day, your margin, and sometimes your project. The more planning you do upfront, the less unknown unknowns you will run into in the project.
3. The coefficient of risk.
Once you’ve done a good bit of planning, you can put together a coefficient of risk. This is a variable that is set based on the number of known unknowns and the expectation of unknown unknowns. Your coefficient of risk helps you determine how much padding should go into the project to protect yourself from losses.
4. Padding
All the items above can be called padding, but we like to just add some extra padding on a project based on how we feel about it. Even if the project has had a substantial risk variable added, and we still just don’t feel good about it, we will pad hours anyway. This is generally added based on a percentage of the project build hours and is anywhere between 5% and 25% of the build time.
These items come together to add a block of time to the project to protect you from losses.
PROTIP: When you do a flat fee project, DO NOT just add up the amount of time you would take to build the project on time and materials (just hours), make sure to build in padding for risk and extra items the client may ask for.
Your flat fee cost is usually your estimate on time based on a project hourly rate, then your coefficient of risk time, then your extra padding.
Flat Fee Projects and Scope of Work
The other very important aspect of billing a flat fee project is that you must hold your client to their scope of work! When someone is buying something from you for a set price, the things you are agreeing to do for them must also be set.
The more specific, the better. At JHMG, when we build flat fee projects, the scope of work is air tight. Every revision, every page, every feature, every everything is written out ahead of time very thoroughly. In addition, we generally charge an up front amount before the final flat fee amount to just plan the project. This way, we have the budget to give our clients a comprehensive document that outlines everything we are going to do before we set the flat fee of the project, or bill them for the majority of the work.
The trick to doing this is to have a complete, fully reviewed scope of work document for your website, application, SaaS, or project. The deeper the better for both you and your client.
Most Projects
In general, we will take the total project rate, person or task hourly rate, and calculate that times the number of hours and then that gives us the project cost. Rates times the hours equals the cost.
We use the flat fee projects more when we are selling on value instead of selling on time. This happens much more on marketing-based projects instead of heavy development projects.
We’ll talk about selling on value versus selling on time another time but, person hourly rate, task hourly rate, flat-fee project and project hourly rate, really important things to keep in mind as you go forward growing your business.
Your business can switch back and forth between the ways you bill to manipulate price so you can bring more value to your customers. Remember, it’s all about bringing the most possible value to your customers!
Brainleaf has tools that enable you to change your rate structure as you write your scope of work and see reports on profitability based on these changes.
Let me know in the comments if you have any questions!
Jason Long is the founder and CEO of BrainLeaf. A self professed serial entrepreneur, he is always interested in new businesses, new ideas, and new ways to change the world. He has over 18 years of experience in design and development, he has served in a variety of different roles ranging from designer to CEO. Most of his time is spent working on the build and development of new ventures while trave
