Fixed Price or Hourly Rate Project - Which is best?

Many clients have allocated a budget for their project and feel that a Fixed Price is best because it limits the amount that they have to pay, whereas with an hourly rate they might have to pay too much and have no control over what they are charged.

Let me discuss the advantages and disadvantages of each type of project.

FIXED PRICE PROJECT

If you have a simple project such as making one page, fixing an error, migrating a website and can clearly define all of the tasks that need to be done, then a fixed price project might be right for you.

In a fixed priced contract all the tasks must be defined with a Scope of Work document in detail with milestones and deliverables. If there are any changes to be made, then you must be willing to pay additional amounts. Moreover, under the Upwork system milestones work like this.

Milestone 1 must be authorized to begin work
Once Milestone 1 is completed you must approve it and make payment before Milestone 2 can begin
Milestones must be done in the original order. You cannot start with Milestone 3, if, for example, Milestones 1 and 2 have not been approved and paid for.
Milestones cannot be canceled or modified. For any changes, you need to start a new contract.
If the web developer informs you that a milestone has been completed you have 14 days in which to contest the work otherwise you will be billed by Upwork

Fixed price web projects can have several disadvantages, including:

Lack of flexibility

Once the milestone and price is set, it’s difficult to change it without risking negative consequences. This can be a problem if costs increase or decrease significantly, or if new ideas arise during the project.
There’s no room for adding or changing features. This can result in delays if the scope of the project needs to be adjusted.
Clear communication is essential for fixed price models to work well. If project specifications aren’t clear, the final product may be different from what was expected.

Fixed price models are best for smaller projects, but can be too rigid for more complex products.

Fixed-price projects have several benefits, including:

Predictability: The price is fixed and won’t change, so the budgets and resourcescan be planned in advance.
Stability: The fixed price provides stability for both parties throughout the contract.
Clear deliverables: Fixed-price contracts establish clear deliverables, timelines, and milestones.
Cost certainty: The client can rely on not paying more than the agreed price.
The web developer has an incentive to complete the project efficiently and cost-effectively.
Low risk for clients: Fixed-price models are a good choice for small trial projects.
Transfers risk to the web developer: The web developer takes on all risk associated with the project’s cost exceeding initial estimates.

HOURLY RATE

If your project cannot be defined in detail, for example:

If you just want a website built but I don’t have the content or design ready yet.
You want to sell products but don’t know how many yet.
You need to make changes as the project goes along.
The project is long term.
You want to see some designs before the project is begun.
We don’t know what is causing errors on the website.
The website needs to load faster

Then an hourly rate project is the way to go.

Here are some reasons why an hourly rate project might be better.

COST CONROL

With an hourly rate project, you can limit the total hours worked per week. Moreover, with Upwork you get to see a Work Diary which gives a description of what I am working on every 30 minutes with a screenshot. At any time you can pause the contract if you feel that I am not doing it right or that the progress is too slow.

BETTER PROJECT

With a fixed-price model, you build specification in the beginning, which means you are effectively making serious decisions when you have the least amount of information. You can’t change (or it gets difficult/expensive to change) when you start to see the project come to life. The web developer always looks at a task and figures out how much time it will take to do then adds a percentage for unforeseen problems before giving a fixed price. So Fixed price projects tend to cost more.

RISK

It sounds like a fixed-price model should lower your risks – shouldn’t it? Not really. There are some reasons why it might not:

Estimates are hard to make, especially for vague task descriptions and long-term projects.
Once a milestone is defined you are committed to it. And it is almos impossible to make changes.
It’s harder to track progress, and you are only able to assess the deliverables on milestone handovers.
In the traditional fixed-price model, from the day you agree to the project, your priorities are exactly opposite to those of the web developer – they want to do the least possible, as the price is fixed, and their profit is only influenced by the number of hours they put into the project, whereas you want them to spend as much quality time as possible on your project, as it costs you nothing. Usually, if you want to accomplish something together, the trick is to try to align the priorities. An hourly rate is much closer to this goal.

Costs

Believe it or not an hourly project is usually cheaper. For any type of project, the web developer needs to calculate how much time the project will take. For a fixed price project there are a lot of unknowns so the web developer always builds in a percentage for the unknowns. So, in reality, you don’t get the lowest price, rather the safest price for the web developer.

Quality

You can get good quality under both types of projects.