What is time billing?
Billing for time can broadly be broken down into two major categories:
1. Fixed charges; and
2. Charges against a rate over time.
Which billing structure works best for a business will depend on the nature of the work being done.
What are Our Options When It Comes to Billing Clients?
In the end, it may well turn out that a mixture of fixed pricing and time-based billing is the best way to encompass the value of your services. What is most important in that case is clear communication.
Billing By Fixed Fees/Items
Fixed price billing is simply this; you and your client agree on a set price for the service/project you are to work on beforehand with a clear idea of the scope/expectations of your work. Payment dates will also be agreed upon beforehand; whether that be paid in advance, after completion, or some split payment combination of both.
Benefits
The first thing fixed billing provides is clarity in terms of income – you will know the value of your work before performing it and will therefore have an easier time calculating profitability early and staying ahead of managing expenses.
If you are using materials or other expenses which are specific to the given project you are working on, fixed fees let you better account for those material expenses in your billing – you can communicate those material costs clearly to your client and make sure that you have covered them in the bill.
Working within a project's budget can be easier with fixed fees – you and your client can more easily track expenditure against the budget as they will have more clarity on what you are charging before the invoicing stage.
Limitations
Fixed fees can offer a less accurate reflection of the value of your work effort. When you are using a fixed fee billing structure, you are essentially guessing when it comes to the time/effort that project will take to complete. Unique circumstances from job to job will result in differing time resource requirements, which will not be reflected in your pricing. You may inadvertently overcharge or undercharge your client because of this.
The value of highly skilled workers is in their time, which is not reflected in a fixed fee billing structure. For example, if you are providing legal or accounting expertise, one of the best measurements of value for that kind of work is the amount of time you need to spend providing that expertise. As time requirements will be unique from one project to another, it becomes more difficult to accurately assess the value of skilled professional work in a fixed fee context.
What Kind of Work/Industries is a Fixed Fee Structure Best Suited to?
Trades work, like that of plumbers/electricians/builders is often suited to a fixed fee focussed billing structure. While the skillsets are highly necessary and valuable to the work, trades industries will often involve the same tasks being repeated in different situations. This lets tradespeople have a highly accurate understanding of their time requirements for a given job, which reduces the need for time billing, and the nature of trades work involves a certain amount of material cost which needs to be passed on to the consumer.
Projects involving mostly material costs will make more sense for a fixed fee billing structure. If the time worked is incidental to where the value of the industry is, such as in retail industries where the value of the business is primarily in the goods being sold, then fixed pricing is the way to go.
Shipping/transport/industries where the value is not in the time of the worker or time taken to complete work is always similar/the same. These types of industries will also find that their operating costs are affected by what is being transported rather than the workers performing the transportation.
Billing By Time
Billing by time is taking the amount of time you work against a client, assigning a price per unit of that time (whether that be price per minute, per hour, per day etc) then charging your client accordingly. Whether you charge a flat price for your time or differentiate between the relative values of different tasks/work being performed and charge a rate dependant on the job you are doing will depend on the nature of your work.
Benefits
Time billing can be the most accurate assessment of the value of your work. Because you are billing according to work hours performed, you will be able to structure your pricing to make sure you are in line with your overall income expectations. The income created by your work will be reflective of your effort/commitment, and as such an increased workload will result in increased revenue, which is not necessarily the case for fixed billing.
Highly skilled work is best reflected in the time value of the worker. If your business is in the professional services sector, you will find the value of your service is provided through the amount of time you spend on a given client. In that way, time billing allows you to best account for the value of your skillset in your pricing structure. In a very real sense, your time as an expert is what you are selling.
Time billing can provide clearer communication to clients about the charges they receive. You can offer your client absolute clarity on your invoice, as they will be able to clearly see exactly how much work effort has been involved in making their project flow smoothly.
Time tracking provides benefits in addition to the billing aspect. Using time tracking is necessary for operating a time billing structure, but provides benefits in the data it creates, which can be used to improve productivity, decrease admin requirements, and help identify areas where profitability could be improved.
Limitations
If you have material costs to pass on to the customer, you will need to include fixed pricing to account for them. There is not really a straightforward way to get around this, which means you will end up with a sort of hybrid of fixed price billing and time billings. This is not a big issue if your invoices are clear and easy to read for your clients but might get some pushback from clients who feel that material costs should be included in the value of your work.
Recording your time for time billing is an increase in your workload. The nature of time billing makes time tracking/recording a necessity and doing so requires additions to your normal workflow. You can mitigate the additional workload by utilising time tracking software to make the process faster and more useful to you outside of billing.
What Kind of Work is Billing by Time Best Suited to?
Professional services industries like Accounting/Law/Bookkeeping, where the worker's expertise is the commodity being sold, are the best fit for time billing. A time billing structure allows specialist workers to base their billing around the value of their work time to the client. Running a fixed fee structure in these industries can result in lost profits where the nuances of a specific job require more time than expected. If you are charging a fixed fee but end up working ten hours longer on a project than you initially thought you would, your profitability will decline!
What if Neither Fixed nor Time Based Billing Seems to Fit Your Work?
A final consideration is whether workers in your industry are working for one client at a time or working for all/many clients at once, and whether your scope of work has a clearly defined start/finish – take for example administrative/help work for an online service or forum, or an ongoing legal retainer.
This type of work often does not have a clear scope in terms of there being an ongoing service rather than a defined project with a clear start and finish. Charging by time might not make sense in such a case even though the main part of the service is being provided through employee work hours. In that case it may be better to consider a subscription/ongoing retainer type charge rather than fixed or time-based billing, to better account for the ongoing nature of the work.
Modern Software Makes Billing and Administration Easier – Here's How
The advancement of technology has been a huge boon for small and large businesses alike. With modern time keeping, billing, and accounting software solutions, you can automate processes which used to be highly work intensive and prone to user error.
Use accounting software providers like Xero, QuickBooks, and others to manage and track the payment of invoices, organise payroll, and keep a record of your billing process saved in the cloud. Making use of these software options can save you immense amounts of time you would otherwise spend on your billing and administrative workloads.