The 8 Ways Fixed Project Bids Beat Hourly Rates

Most freelancers, consultants, and other solo entrepreneurs start out working on an hourly rate basis. Hourly rates are easy for everybody involved, but beyond that they suffer from several critical drawbacks. Here are 8 ways that fixed project bids beat hourly rates.

1: Fixed project bids force you to be more thorough and efficient

When you propose a fixed bid, you’re pulling together all of your experience and knowledge to give the client a fair price that benefits you both. For the client, the bid should be competitive. For you, the bid needs to cover your overhead, materials, labor, taxes, and profit margin.

Fixed bids don’t give you the wiggle room that hourly rates do, so they force you to seriously consider your financial requirements. The danger of underbidding makes you more careful to think through what it will take to complete the job. You’ll need to quit making assumptions and start tracking every process involved in the client’s project. And you can force clients to get more specific about their requirements, by stressing the benefits of a fixed bid, and by building in contingencies for client non-compliance. Over time, you’ll be a better business person and a more skillful and reliable professional in your chosen field.

2: Fixed bids force you to share the risk

Many small businesses are afraid of solo operators because they’ve been burned before. Freelancers claim they can do the work, but then end up taking twice as long as they estimated. When you’re on an hourly rate, the risk is heavily weighted to the client, especially if you’re invoicing them in intervals during the project. If it doesn’t work out and you part ways, the chances of them recovering any money are pretty slim, and they still need to find somebody else to finish the project. By proposing a fixed bid, you’re implicitly saying to the client, “I’m willing to take the risk that if I grossly miscalculate what it takes to get the job done, I’ll be the one eating the cost, not you.” That makes clients take you more seriously.

3: Fixed bids force you to hone your time and project management skills

Let’s face it, we could all stand to improve our time management and project management skills. Who hasn’t felt like they’re flying by the seat of their pants, at least a few times? Proposing a fixed bid really puts the pressure on you to perform. You’ll need to improve your time and project management skills if you want to consistently come in within the schedule. If you want to add to your bottom line, then you’ll figure out ways to save yourself time and money, and come in under budget. If it’s a fixed bid, and you finish early, you will have effectively increased your profit margin by saving labor costs.

4: Fixed bids allow you to do better forecasting

As long as you work hourly, you’ll almost always take longer to finish a project. In the back of your mind, you’ll figure you can always charge them for a few more hours. Sure, it’ll be painful to break the news to them, and you might have to haggle a bit, but in the end you’ll get paid. The drawbacks to this approach are that tacking on hours to cover for your lousy estimating skills results in lowered credibility. Typically, the extra money you make isn’t worth the loss of the client’s faith in you. It may even cause the client to forgo your services in the future. And they certainly aren’t going to refer you.

The hourly approach also allows you to diffuse your attention. You can afford to be more easily distracted by other activities because you tell yourself you’ll make up the time later. Lastly and most importantly, a fixed price bid makes it much easier for you to forecast your future earnings, taxes, and expenses.

5: Fixed bids inspire client confidence

Or more accurately, hourly rates don’t inspire confidence. Clients who hire independents are often small companies or independents themselves. They have limited resources, as you do. The idea of paying somebody hourly is scary to most small companies, unless you come highly recommended. Even if your work is stunningly beautiful and effective, if you’re working hourly, there’s always that fear that all that beauty and effectiveness is going to cost more than it’s worth.

6: Fixed bids tell customers that they’re not paying you for your learning curve

It’s not uncommon to take on a project that requires you to learn some new skills. Whether it’s a new programming language, a new style, a different set of tools, or a different target market, you may need to spend time during the project just coming up to speed. That can be a costly endeavor for most clients and realistically there’s no reason why they should be paying for your learning curve if they’re hiring you on the basis of your skills in a broad area.

For instance, if you say you can write an effective sales letter for any industry, then you had better be able to do that. Otherwise, you’ll need to learn about the client’s industry. However, that learning curve should not impact the schedule or the fixed bid. There’s nothing wrong with you figuring out that you’ll need to spend 10 hours learning some new technical lingo, and increasing your bid on the basis of the project’s complexity. But any fixed rate bid will reassure clients that you’re not getting an education on their dime.

7: Fixed bids say “I’m not an employee!”

Aside from the legal problems with working on a 1099 and acting like an employee, it’s no fun to be treated like an employee when you’re not one. When you charge hourly rates, at some point the client will start treating you like an employee.

After all, they’re buying your time, so if they need something done—Oh, it’s sort of like what you do, not really the same, but close, and, you’re not that busy, right? and you’re on your way to the office supply store anyway, aren’t you?—well, then you’ll be asked to do that.

And if you’re still waiting to get paid, you’ll probably do it, because now the relationship has more similarity to blackmail than to a consultant-client agreement. Once that happens, it’s difficult to break the behavioral pattern.

8: Fixed bids sever the link between your time and your fee

This is a bigger benefit than it may sound like at first. As long as you’re charging hourly rates, you are limited by how many hours you can actually work effectively. Now, if you have a lot of energy and don’t need a lot of sleep, you can probably work a maximum of 100 to 120 hours a week, for awhile. Realistically, you’re not going to be effective for long stretches at more than about 55 to 60 hours a week. And, not all of your time will be billable.

No matter how you slice it, there’s an upper limit to your potential at an hourly rate. By using fixed project rates, you sever the tie, in your mind and in the client’s mind, between the project and your time. Fixed bids focus the client on the value of the project, not on the time it takes.

Bids allow you to bring in subcontractors or to farm out work, if necessary, which allows you to expand the services you offer. If you’re a web designer, for example, you can offer Flex, PHP, Ruby on Rails, and database programming, even if you don’t know a thing about those, because you can pull in an expert subcontractor for that part of the project. It also means you can legitimately charge higher rates.

There will always be small jobs that don’t fit into a fixed bid model. In those cases, stick with hourly. There’s no point in going overboard when it’s going to be a two-hour job.