Understanding the different contract types is essential for your professional success as a freelancer. Two of the most common contract types are hourly and fixed-price. Knowing the advantages and disadvantages of each can help you choose the best contract type for your projects.
Upwork offers two main contract types, hourly contract. This is ideal for ongoing projects where the scope of work might evolve. You'll track your hours using Upwork's time tracker fixed price contract. This is perfect for well-defined projects with a clear deliverable. You'll agree on a fixed price upfront, and milestones can be established for payment installments.
Hourly contracts
In an hourly contract, you're paid based on the number of hours you work on a project. This type of contract can be beneficial for projects with:
- Uncertain scope: Estimating the work required for a project is difficult.
- Ongoing projects: Projects that may evolve or require additional work.
- Flexibility: If you need flexibility in your work schedule to complete the project.
Hourly contracts offer the advantages of fair compensation, flexibility, and risk mitigation. However, they require accurate time tracking.
Fixed-price contracts
In a fixed-price contract, you agree on a set price for the entire project, regardless of the time it takes. This type of contract is suitable for projects with:
- Clear scope: When the project requirements are well-defined.
- Time constraints: If the project has a strict deadline.
Fixed-price contracts offer the benefits of predictable income, reduced administrative burden, and increased efficiency. However, they also carry the risks of underestimation, limited flexibility, and potential for scope creep, where clients may request additional work without adjusting the contract.
- Milestone contracts: An optional feature of fixed-price contracts suitable for breaking down large projects into smaller milestones, with payments released upon completion of each stage.
Choosing the right contract type
The best contract type for you will depend on the specific project, your preferences, and your client's needs. Consider the following factors when making your decision:
- Project scope: How well-defined are the project requirements?
- Timeline: Is there a strict deadline for the project?
- Risk tolerance: How comfortable are you with the potential risks of each contract type?
- Client preferences: Does the client prefer a particular contract type?
How much money would I make as a full-time employee? What do other people charge for similar services? After doing some market research, calculate your billable hours. Billable hours are hours work that require compensation. The average rate breakdown is 60% billable hours, 40% non-billable hours. For example, you want to work 30 hours per week, and there are 52 weeks in the year. 30 hours multiplied with 52 weeks makes 1,560 hours per year. Now, let's say you need five weeks off per year. That's 150 hours per year. Remove these hours from the total of 1,560 hours. That's 1,410 working hours per year. Now let's explore how additional expenses impact your rate. Health insurance, taxes, business insurance and licenses, equipment office space software, subscription marketing, and advertising costs. Consider increasing your rate over time as your experience changes and your expertise increases.
Scheduled rate increases
As a freelancer, it's important to ensure your income keeps up with your growing skills and responsibilities. One way to do this is by scheduling a rate increase in your Upwork contracts. Here's how it works. When you're proposing a new contract, you can include a scheduled rate increase in your proposal. Choose how often you want your rate to increase. Decide how much you want your rate to increase. Your client can accept, decline, or suggest a different increase By scheduling rate increases, you can ensure fair compensation, avoid constant negotiations, and establish clear expectations with your clients.
Scheduled rate increases allow freelancers to gradually increase their hourly rate over a contract. This feature is handy for long-term projects where the freelancer's skills and experience may improve over time. Here's how to include a scheduled rate increase in your proposal:
- Proposal section: Find the Schedule a rate increase section in your proposal.
- Frequency selection: Choose how often you want the rate increase to occur (e.g., monthly, quarterly, annually).
- Amount selection: Specify the percentage increase or a custom amount.
- Calculation preview: A calculation will show your projected rate after deducting freelancer service fees.
If you don't want a scheduled rate increase, select Never from the frequency dropdown.
Additionally, you can include a scheduled rate increase when suggesting a new contract, and the client can approve, decline, or edit the proposed rate increase.
If a client includes a rate increase in their offer, you'll see it in the Contract Details section. Furthermore, if you want to suggest a different rate increase, message the client. Only the client can change the rate increase schedule and amount in the offer.
Note: Scheduled rate increases are optional and permanent for the contract's duration. You'll need to start a new contract to negotiate new rates in the future.