Flat Rate Pay Vs. Hourly Rate Pay: Which is Better for You?

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Every business has a different method of working, so does the billing method. Thus, there are two ways, one is a flat rate and the second is hourly rate pay. The methods matter in billing the clients while charging for the work.

In this blog, we will explain everything you need to know about flat rate pay and hourly rate pay. We will compare the flat rate pay v/s hourly rate pay; so keep scrolling!

Before comparing which one is better for you, it is essential to have a clear concept of the individual pay rates. Let’s start with a flat rate.

What is a Flat Rate Pay?

In flat rate pay, you set and charge a fixed amount for the projects. It includes the cost of labor, material, and extra costs. This pay system is the most used for small-term projects.

For example, if you and the customer have determined to assign a worker for the entire job and pay him/her $100 till the project is complete. The pay here is called the flat rate pay. Even though the work has been completed before the assigned time, he/she will get the same amount as decided.

A flat rate is calculated by multiplying numbers of hourly rates with the hours it takes to complete. It is easy to create an estimation because the price is fixed. For a project with limited resources, charging flat rate pay will make the payment process easier.

Now, let’s understand another billing method that is equally important for several businesses and that is hourly rate pay.

What is an Hourly Rate Pay?

If you are looking to hire workers for limited work or longer projects, hourly rate pay is for you. In hourly rate pay, the amount is charged on basis of hours the worker has worked for the project.

The number of hours is determined before assigning the work; thus, hourly work is flexible. For instance, company A is looking for labor workers for a construction project and they have hired few workers.

You and the contractor have decided to charge them according to the hours they work not for their work. That mutual agreement is considered in hourly rate pay.

In other terms, billing customers every hour means you need an hour-based record of all you have worked on until you complete the job or until you have achieved a milestone on the project.

US Average

In February 2022, the average salary you get for hourly wages is $26.94/ per hour in the USA.

To make it easier and more understandable for you we have compared and formed the differences between flat rate pay and hourly rate pay.

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The Difference: Flat Rate Pay V/s Hourly Rate Pay

Factors Flat Rate Pay Hourly Rate Pay
Charge determination The charge is determined on the project. The charge is determined on the basis of hours worked.
Amount changes Fixed In the flat rate, the amount remains fixed. In the hourly rate, the amount is uncertain as it will be decided later
Calculation Time Shorter Longer
Ideal Project Ideal for small projects. Ideal for long projects.
Accurate Estimation With flat rate pay, you can provide nearly accurate estimates. With hourly rate pay, you cannot provide accurate estimates.

Pros and Cons of Flat Rate

Every process has advantages and disadvantages, likewise let’s see the pros and cons of flat rate:

    Pros of Flat Rate:

    • It gives clarity on how much time it will take to accomplish the project and how much money it will take.
    • It helps in keeping business owners like contractors and customers on the same page.
    • The chances of changes in the project get decrease as everything is already discussed.
    • Customers’ conflict will reduce when you prefer flat-rate because they’ll be sure of what they are paying for beforehand.
    • You can create an estimate of the entire job with the help of flat rate system.

    Cons of Flat Rate:

    • If you are not experienced in the industry, it becomes difficult for you to give an exact estimate.
    • If your predicted amount goes wrong, you can face heavy loss.
    • The flat rates can create payment disputes because of wrong cost determination.
    • The customers may not agree with the flat rate price.
    • Several times it becomes tedious to create an amount for a flat rate and that looks unprofessional to the customers.

Pros and Cons of Hourly Rate

How will you be able to judge if the hourly rate is suitable for your billing process? It is only possible after knowing its pros and cons of it, so here are the advantages and disadvantages of the hourly rate system:

    Pros of Hourly Rate:

    • The calculation of the hourly rate is almost similar to the flat rate, so it helps businesses to understand the payment method.
    • It makes it easier for accountants to do billing and make variable changes in the projects.
    • The chances of unfair revenue decrease as they are paid according to time and hard work.
    • It is ideal for long-term projects as they give specifications in pay rate.
    • It creates a baseline for customers to compare work with other competitors.

    Cons of Hourly Rate:

    • In hourly rate, there is no guarantee in minimum payment and is restricted because of limited income.
    • Not suitable for a short-term project because it takes time to calculate the average and sum up the total value.
    • There is no consistency in revenue.
    • If you design a company logo, for example, it may take you just a few hours to do so, and you’ll be paid for just a limited time, but the value may be higher than what you’ll get the payment for.
    • With an hour-based charge, several times you’re not going to get the payment for the real value of the project.
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Which is Better: Flat Rate or Hourly?

Both the hour-based rate and flat rate have their pros and cons. You should look into each pay rate system and see what suits your type of business and customers. At times, customers decide whether they want an hour-based rate or a flat rate. The bottom line is, that you should bill the customers at the rate that favors you in the long run.

For hour-based projects, it is required to calculate the rate per hour and the number of hours you have worked, with details of each completed task. You should also organize the work you have done in hours, so the customer can see what they are paying for.

If you prefer to charge your customers by the hour, you should keep records of the total hours spent working for them. Also, if you are seeking an efficient method for recording, use an invoice generator. It will streamline your finances with its automation process.

Moreover, you can proceed to bill after both you and the customer have set an agreed cycle, maybe weekly or monthly, as the case may be.

Now, let’s discuss the most frequently asked questions regarding the comparison:

Frequently Asked Questions
  1. How does flat rate work?

    Flat rates are charged on mutual agreement between business owner and customer.

  2. How to calculate flat rate pay?

    To calculate the flat rate pay method follow the method:
    Hourly rate * Hours of work + Materials cost * Markup percentage = Total flat rate price

  3. How much you can make on a flat rate?

    The average you can make on a flat rate is $57,896.

  4. Is it better to be paid a flat rate or hourly?

    Both have their pros and cons, in the end, it depends on your business size and requirement.

Author Bio
Jeel Patel
Jeel Patel

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.