New freelancers and consultants must quickly decide what approach to take in billing their clients. It can be a challenging task for those who have grown used to being paid on a salary, hourly, or commission basis. The billing method used, though, depends a great deal on the type of product or service you offer.
This method can be used by professionals and consultants or by manual and skilled trade laborers. Attorneys have used the billable-hours method for decades. Depending on the type of service, billable hours may also have a gross profit markup applied.
The first step in using billable hours is to determine the actual cost to the business for those hours. For independent professionals, that cost will be based on a calculation that includes the costs of maintaining a business, such as rent, utilities, and office supplies and equipment. For companies that are billing for the services of their employees, other costs such as employee benefits, taxes and insurance will need to be taken into account.
Percentage of Project Completion
Construction professionals and companies such as contractors, architects and material suppliers most commonly employ a method called billing by percentage of project completion, also known as progress billing. Front-loading the billing ensures a more even cash flow and may help to compensate for late-project billings that could end up being less than costs. Also, most non-residential clients withhold 10 percent of the total contract amount until the project has been deemed complete and satisfactory.
Materials Plus Markup
For materials provided after a project is substantially completed, or for changes made to a contract during a project, billing by material cost plus markup may be most efficient. In this method, the actual cost of the items, based on vendor invoices, is multiplied by the contract or agreed-upon percentage of gross profit margin and then billed to the client. This is the simplest and most basic method for billing in that it requires only actual and verifiable costs, and little chance arises for mistakes or confusion.
The quantifiable services method is similar to billable hours, but pertains to intangible service delivery. For instance, freelance writers and editors often bill by the word, as opposed to the time it takes them to write or edit a piece. This type of billing works well for those who provide creative services such as website or logo design, for which billing by the hour is ill-advised. Providers may establish flat rates for certain types of deliverables, then establish pricing for upgrades or additions. Many web-based billing applications are available for these types of professionals.