Hourly Billing - Definition, Advantages, and Disadvantages
Written by: Eveline Jacobse
Last updated: 30 June 2023
Table of contents
- What is hourly billing?
- How does it work for employees?
- Why is hourly billing important for businesses?
- Hourly vs. value-based pricing: which is better?
- Fixed fee vs. value-based pricing: which is best?
- The benefits of hourly billing
- How do I set up an hourly billing system?
- The benefits of using an online time-tracking tool
- Hourly accounting in practice
What is hourly billing?
Hourly billing is a type of billing used by businesses to bill for services based on the number of hours worked. You can use this billing type for various professional services, including work-related services, consulting business, independent professionals, and project-based services.
The purpose of hourly accounting is to document all employees' work hours. Each employee keeps a digital time sheet or a paper time sheet with their recorded hours. Personnel offices use the collected data to create monthly payrolls to analyze and plan for the next month.
How does it work for employees?
According to Section 3 of the Working Hours Act, daily working hours are limited to eight plus two overtime hours. Working six days a week means 48 hours, 60 hours, when you include overtime. In order to reduce employee overtime after six months, employees are not allowed to work more than eight hours a day on average.
It also regulates the hourly billing of an employee. For example, if you work more than six hours, you are entitled to 30-minute breaks; If you work more than nine hours, you may be entitled to a 45-minute break. In addition, the Working Hours Act stipulates a rest period of 11 hours between two working days.
Why is hourly billing important for businesses?
When companies use hourly billing, they can quickly see how much time has been spent on a project and accurately bill their clients. As a result of this accounting firms can also track employee productivity and verify that employees are working their allotted hours.
Hourly billing is also essential for businesses as it allows them to justify their projects more. When companies know how many hours it takes to complete a project, they can more easily estimate its cost based on their plan and finances accordingly.
Hourly vs. value-based pricing: which is better?
Hourly billing has long been the pricing method of choice for many service-based businesses. But in recent years, value-based pricing has become a popular alternative.
So, which pricing method is better?
The answer is: it depends.
Both hourly billing and value pricing have their pros and cons. The key is to understand the difference between the two pricing models and choose the one that makes the most sense for your business.
Hourly Billing: Pros and Cons
Hourly billing is simple and straightforward. You charge your clients hourly rates for the work you do.
The hourly rate can be based on your experience, the type of work you're doing, or the market rates in your area.
Hourly billing is great for businesses that need to track their time and expenses carefully. It's also a good option if you're billing for services that vary in scope and complexity.
The biggest downside of hourly billing is that it can be difficult to estimate how much a project will cost. This can be a problem if you're trying to win new business or keep existing clients happy. Hourly billing limits the amount of money you can make on a project and can cause tension between you and your clients.
Value-Based Pricing: Pros and Cons
Value-based pricing is a pricing method where you charge based on the value of the results you provide.
With value-based pricing, you don't need to worry about hourly rates or estimating project costs. Instead, you focus on the value your work will provide to the client.
Value-based pricing is great for businesses that want to focus on results rather than time. It's also a good option if you're selling products or services that are unique and difficult to compare.
The downside of value-based pricing is that it can be difficult to determine the value of your work. This can be a problem if you're not confident in your ability to deliver results or if you're selling a commodity product.
Fixed fee vs. value-based pricing: which is best?
As the name suggests, fixed-fee billing is when you charge a set price for your services, regardless of how long the project takes or how many resources are required. Fixed price is often used in industries where the scope of work is well-defined and the time required to complete it is known in advance. A fixed fee basis is less common in web design and development since the scope of work is often open-ended and can vary greatly from project to project.
In contrast, value-based pricing is when you charge based on the value you deliver to the client, rather than the time it takes to do the work.
The benefits of hourly billing
As a business owner, you may be wondering if the hourly billing model is right for you. Here are some of the key benefits of this type of billing:
- It's easy to track your progress, record your work, and view your hourly wage for each project.
- You can work on multiple projects anytime, so you're never too busy working with clients or prospects.
- You can negotiate a higher rate than a fixed-fee pricing contract since you are not bound for the services provided, only for the project effort (e.g. hourly).
- Having a cap on the number of hours you will work will prevent you from being taken advantage of by clients trying to put you down.
- You can take on as many or as few projects as you like, making it easy to adapt your workload to your availability.
How do I set up an hourly billing system?
When setting up an hourly billing system, there are a few things to consider:
- What services will you be billed for?
- What is your hourly rate?
- How do you keep track of employees' working hours?
- How will you make your bills?
After you have answered these questions, the setup of your system begins. To invoice your customers, you can use an online invoicing system like FreshBooks or create an invoice in Excel.
An hourly billing system allows companies to track how much time has been spent on a project and accurately bill their clients. This type of billing also ensures that employees work their assigned hours.
The benefits of using an online time-tracking tool
Bill and Pay Accurately
The first and most obvious benefit of using an online time-tracking tool is that it helps you bill and pay your employees accurately. If you're manually tracking employee hours, there's always the potential for human error. This can result in overpaying or underpaying your staff, which can put a strain on your business finances.
When you use an online time-tracking system, you can be confident that the data is accurate. This means you can avoid any financial errors and ensure that your employees are always paid correctly.
In addition, online time-tracking tools make it easy to generate accurate invoices for your clients. This can save you a lot of time and hassle, as you won't need to spend hours creating invoices manually.
As a business owner, it's important to ensure that your employees are productive. If they're not, then you're likely to see a decrease in profits.
Online time-tracking tools can help you improve employee productivity in a number of ways:
- You can see which employees are slacking off and not working their assigned hours.
- You can identify which employees are taking too many breaks or working on personal tasks during work hours.
- You can monitor which employees are working on multiple projects at the same time and determine if they're spreading themselves too thin.
- You can track which employees are working on tasks that are outside of their job descriptions.
Set Clear Objectives
Who should do what? What tasks need to be completed by when?
It's important to set clear objectives for your employees so that they know what's expected of them. Otherwise, they may end up working on tasks that are not a priority for your business.
With online time-tracking tools, you can assign tasks and deadlines to your employees, helping you set clear objectives for them. You can also use the data from your time-tracking tool to see which employees are not meeting their deadlines. This can help you determine if you need to reassign tasks or provide more training.
Monitor Employee Performance and Productivity
An organization's most important asset is its people. To ensure your company is running as efficiently as possible, you need to be able to track employee performance and productivity. The most effective way to do this is through online time-tracking.
Time-tracking data can provide valuable insights into employee performance, such as:
- How much time employees are spending on each task
- Which employees are working on multiple tasks at the same time
- How many breaks employees are taking
- Which employees are working overtime
By monitoring employee performance, you can identify potential issues and take steps to address them. For example, if you notice that an employee is taking too many breaks, you can talk to them about it and see if there's a way to increase their productivity.
Hourly accounting in practice
According to a ruling by the European Court of Justice in 2019, all employers must record the total working hours of their employees. The ECJ states that hourly billing should not only cover overtime. Using a variety of time-tracking methods can ensure accurate timesheets. These must record the start and end of working hours and breaks.
In the digital age, digital time recording systems are used almost exclusively for billing hourly. In practice, automatic and manual hourly accounting systems are compatible with computers and smartphones. The system records the employees' working hours to the second and acts as a time clock so that the employees do not have to do anything after logging in. Employees and employers can thus keep an eye on their working hours.
Digital time recording is essential for legal certainty when working from home or on project sites. Employees must also follow German labour law regulations outside of the workplace. A home office or co-working space are an example of this. Digital time tracking enables the exact assignment of employee hours to a project.
Hourly billing is a great way to ensure that you are being paid for the time you spend working. It also gives you the flexibility to work on multiple projects at the same time. If you are interested in implementing an hourly billing system, consider using an online time-tracking system like Shiftbase. This will make it easy for you to track your employees' working hours and create invoices for your customers.
Eveline is an experienced HR expert with a passion for content writing in the field. She has distinguished herself by sharing her in-depth knowledge and insights into HR topics and trends through articles that are both practical and informative. Her experience and expertise in human resources add value, and she continues to dedicate herself to informing and inspiring peers with her well-thought-out and well-founded content.
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