Hourly vs. per-project system: which one is better?

“Payment terms for freelancer definitely affecting company finances.”

When you create a job post and hire a freelancer or agency, you have two options when it comes to setting up payments; Hourly vs. Per-project System. To make the most of this hiring experience, you should invest in easy, accurate ways to pay freelancers so companies can manage the expense better while still get the best value. Generally, the freelancer has their own payment terms; Per-project or Hourly. If they want you to make the decision about the payment, make sure you make the right move to prevent any trouble for both sides.

Hourly vs Milestone payment

So when the companies are the one who set the payment terms, which is better? Charge the freelancers hourly or per-project? When you charge hourly, it means freelancers invoiced for time worked on the project. Freelancer completes the task and sends the timesheet to the company. Then the company pays Total Number of Hours Worked x Hourly Rate. A lot of freelancers go with this method simply because most clients are instantly familiar with how it works. The problem with this method is the longer the time taken for the task to be done, the more money you need to spend.

On the other side, per-project pricing means that freelancer agrees at a fixed price for the whole project. Payments are made at predetermined project milestones, with one milestone is funded at a time. The trouble with using predetermined milestones is that the estimate most likely wrong. Both payment terms have pros and cons.

3 things to consider before you choose payment structure

Before you choose one of those terms, it’s better to consider some things first. These are the things in our mind before we setup any payment structure and work with freelancers.

Scope Project/Task

What kind of task they should solve? Do they need to do the effort on analytic and creativity? Do they just need to follow the instruction (without thinking/analytic matter)? This determines how much it will cost you to hire them. If they need to put a lot of effort on their own, the project can get longer or more complicated than it should.

There are things you should consider about the scope/task your freelancer will do:

An hourly rate can be an effective option for long-term projects. This payment term will also bring a long-term relationship with the freelancer, which is something crucial if you need them in the long run. Both sides can have the flexibility to add to the scope of work without having to create a new project.
Per project rate can be ideal for a project with finite deliverables and a clear scope you can predict in advance. This usually works better when you’re working with a short timeline since it has an established beginning and end (in terms of scope and timeframe). But don’t forget that for bigger projects you can agree to a number of milestones or add additional milestones later.

Freelancer's Experience

Ask them first, what kind of project they've done before? Do they have the experience to handle the same task/project with the current project you have? If they have no experience about a project/task, they need to do more research and it will consume more time. It is important to hire a freelancer with more experience if you want to pay them by hourly. But if you don’t mind to wait for the freelancer to do research and form their own thinking, it’s safe for your finance to pay them per project.

Time Needed For the Task

Before you determine how to pay the freelancer, ask their estimate time taken for them to finish the required task. Align those numbers with your company budget to see where cost/time falls. These are things you may want to consider about the time needed for a project/task:

Hourly payment is certainly fair, it may not be the most efficient method for time-sensitive objectives. The hourly payment contracts usually do not specify the amount of time to be spent on development. Therefore, hourly payment terms are most common for maintenance/hands-on work. It can also be used in keeping a developer on the payroll when work is expected, but goals are not always defined.
Per-project payment terms, if the project is completed below the estimated number of hours, the freelancer is getting away with a higher sum. But when the project goes over time, the freelancer is not getting compensated for their additional work. The key on per-project is detailing the deliverables as detail as you can as they likely to rush to finish.

Conclusion

Hourly or Project-based payment terms need to be clear from the first place, to maintain the expectation between two parties. The most important things, as an employer, you need to get the best method so it will be no harm for companies cash flow. However, you don’t need to be anxious about being overcharged by the freelancer. Mostly, all they want is to charge the companies a fair price. Despite all of the positive outlook, it’s better if you take a moment and plan on how you’re going to pay them.

Rock Paper Scissors is the missing link between business and technical world. We translates business language into technical, and technical limitation into business constraints. We guide organization and individuals alike to create their own digital product and navigates all the complexity of product creation process. Find out more.

References

https://doubleyourfreelancing.com/the-definitive-guide-to-project-billing/

https://www.freelancer.com/support/Project/fixed-price-vs-hourly-projects

https://support.upwork.com/hc/en-us/articles/211063418-Hourly-vs-Fixed-Price-Projects

https://www.upwork.com/hiring/startup/fixed-price-vs-hourly-upwork/

https://www.twine.fm/blog/how-to-buy-services-from-a-freelancer-per-hour-rate-or-per-project-rate/

https://www.codementor.io/blog/freelance-payment-terms-retainer-2s5ibmqc40