Project billing methods: Fixed price or retainer?
Irene Kalesi in Invoicing Tips

Successful project billing and its different methods

A big part of effective project management is pricing and billing your products/services appropriately. Teams should put enough focus on creating excellent deliverables as well as on learning how to bill their projects. There is a variety of different billing processes like fixed pricing. Each of them works well with different types of projects. As you can imagine, factors like project duration, employee billing rates, type of industry as well as diversity and amount of services offered affect project billing. In turn, project billing influences the financial health of your business. Thus, the need for methodical and careful decision-making is imperative for a business.

First and foremost, you need to choose how to bill your clients. So, what are the types of billing for projects? How can you decide which one works with your business needs? We will guide you through the different billing options, their benefits, and pitfalls. Without further ado, let us go through the most used billing methods in today’s business industry.

Basic project billing methods

Fixed price billing

Before a team starts working on a client’s project, both parties have to agree and sign a contract agreement. In that contract, the billing method of choice can be by fixed cost. More specifically, the remuneration about this project will be a fixed amount of money that will include resources spent, project-related expenses, costs, and hours of work. In order to determine how much a project should be charged, you need to carefully estimate time, resources, and employee rates. Therefore, agencies should raise the fixed price if the client is more difficult or the project is of longer duration and hard work.

Fixed pricing is quite inflexible and financially risky for the contractor. However, clients love it, as fixed price billing greatly benefits them. Businesses of any size prefer it because it helps them have a more concrete overview of the money they will have to pay and plan better their budgets.  At the same time, product/service providers passionately dislike fixed cost billing since their work may not be accurately paid off. Additional hours and resources, not included in the fixed cost, will not be charged extra. To avoid any financial issues, managers should delineate the project plan and explain it in detail, in the contract agreement. This way, extra project changes or requirements will have to be discussed with the client to secure good business relations and fair remuneration.

Hourly rate billing

Moving on to the next project billing method, charging by the hour is the most widespread one. Measuring financial remuneration based on the hours devoted to a project sounds fitting. This specific pricing model is popular amongst freelancers, small businesses, and agencies. Especially, law firms, consultancies, and designers prefer time tracking. Apart from the time spent, they should also bill expenses and materials used during the project. Thus, a great way to estimate the actual cost of a project is to define overhead and employee labor costs, combining them to the respective project expenses while adding a profit margin. Then, coming up with the hourly project rate will be easier. Keep in mind that in projects, there can different hourly rates based on the employee and the task difficulty, giving birth to billing variations.

Assignee hourly rate

Professionals with different billing rates usually make up teams that work in projects. Some are in junior positions working on minor tasks. Others have more experience and take on more demanding tasks. Thus, an invoicing and time tracking software has to offer a variety of billing methods to facilitate teamwork and accurate project billing.

Task hourly rate

To estimate labor costs, you need to take into consideration the tasks needed for the completion of a project and not by a stable hourly rate per employee. In task-based pricing models, the duration and difficulty of a task impact the way that clients are billed. For example, a web design task may cost $60 per hour while a web development task may cost $80 per hour. Thus, in order to calculate the final bill, the total worked hours should be multiplied with different task rates. This process can be too much, so try finding the right software that can calculate the billable amounts automatically.

As expected, clients are not very fond of hourly billing. They have to keep up with the project’s progress to learn more about the hours worked and the expense. So, generally, they need to observe if the estimated budget is enough for a project. Invoicing and time tracking software like Elorus has a client portal feature. Then, the client can stay up to date with any project news and avoid unexpected charges. For even greater business transparency, the client may ask for a full analysis of the hours, and project costs. From the contractor’s viewpoint, calculating hours based on rates is the most reliable way to ensure payments for the rendered services.

The retainer

In the world of business, working on a retainer agreement sounds like a dream come true. A retainer pricing model means that a client assigns work continually to independent contractors or agencies and pays in standard intervals throughout the course of a year. This kind of business agreement describes a long-lasting relationship built on mutual professional appreciation.

Naturally, this pricing model creates a sense of security for both the service providers and clients. The first ones get stable income and are financially safe. The second ones are reassured that they will receive the right services whenever they need them.  At the same time, working consistently with a client helps you learn their business needs and creates a more balanced workflow. However, service providers should not put their minds at ease. On the contrary, they should always deliver high-quality results and do not forget the terms and conditions on which you have initially agreed on.

Pricing the milestones

Last but not least, another kind of billing method is per milestone. In this case, contractors get paid when they have worked on a project and fulfilled milestones in different stages of the work. When reaching a milestone, the service provider should receive remuneration equal to the time worked, expenses, and every task until that milestone.

This approach is actually rewarding in every sense since the independent contractor is paid for successful deliverables, the time and resources used to reach that point. Equally, clients have results on their hands before paying for the services they needed. However, if the two parties do not collaborate with trust, then disagreements and contract disputes may occur.

On the whole, finding the right project billing method is the gateway to successful invoicing management and revenue control. Knowing your needs, the project requirement, and your clients’ demands will further assist you to make the best possible decision when billing your work.