Hourly rate vs day rate: which is best for contract work?

Hourly rate vs day rate: what’s the difference?

An hourly rate means charging a client for each hour you work.

A day rate means agreeing a set amount for a working day, usually based on an agreed number of hours.

For example, you might charge:

• £45 per hour
• £350 per day
• £1,500 for an agreed project

The figures can look similar on paper, but the way each pricing model works in practice can be quite different.

The best option will depend on the type of work you do, how predictable each job is and how your clients prefer to work.

When to use an hourly rate?

Charging by the hour is fairly straightforward. You agree a rate with your client and invoice for the time you’ve worked.

One of the main benefits is flexibility.

That can make hourly pricing useful when you’re not quite sure how much time a piece of work will need.

You’ll usually need to keep an accurate record of your time, and some clients may want a clear estimate before the work starts so they can keep track of costs.

When to use a day rate?

A day rate is a fixed amount a client pays for a day of your time.

This can suit longer contracts or work where a client needs you for most or all of the working day.

It can also make invoicing simpler.

For example, if you work 10 days at £350 per day, you would invoice £3,500 before any agreed expenses or additional charges.

One thing worth agreeing upfront is what counts as a working day.

A £350 day rate could be based on seven hours, eight hours or another agreed working pattern.

That matters because a day rate can start to feel less worthwhile if your working days regularly run much longer than expected.

For example:

£350 ÷ 7 hours = £50 per hour

But:

£350 ÷ 10 hours = £35 per hour

A day rate can work well, but it helps to be clear about expected hours and what happens if a job regularly runs over.

Is it better to charge hourly or by the day?

Neither option is automatically better.

An hourly rate can be useful if the amount of work is likely to change, because you’re charging for the time you actually spend on the job.

A day rate can work well when a client is effectively booking your availability for a full working day.

A useful way to think about it is to ask:

What happens if the work takes longer than expected?

• With hourly pricing, extra time usually means extra cost for the client.
• With a day rate, it becomes more important to agree what a working day looks like.
• With a fixed project fee, you’re agreeing a price for the end result, so you may take on more of the risk if the job takes longer than planned.

The right approach depends on how you work and how clearly the job can be defined from the start.

When can an hourly rate work best?

Hourly pricing can be useful when the workload isn’t completely clear at the beginning.

You might prefer an hourly rate when:

• you’re providing ad-hoc support
• you’re taking on a smaller piece of work
• the amount of work could vary
• the job involves troubleshooting
• the client only needs a few hours of your time

It can also help when a project starts to grow beyond what was originally discussed.

This is often called scope creep.

A client may ask for one extra change, then another, and before long the job has become much bigger. With hourly pricing, that extra work can usually be reflected in the amount you charge.

When can a day rate work best?

Day rates often suit work where a client needs most or all of your working day.

That could include:

• longer contractor placements
• consultancy work
• work carried out at a client’s premises
• training or workshop delivery
• projects running over several weeks or months

A day rate can also make your income easier to forecast.

If you know you’re booked for 15 days next month at £400 per day, you have a clearer idea of the revenue those assignments should bring in.

Just make sure you and the client are clear about the working hours and what happens if the day regularly runs beyond them.

How do you calculate your rate?

When you’re new to contract work, it can be tempting to base your rate mainly on what you used to earn as an employee. That can be a useful starting point, but it doesn’t tell the whole story.

When you work for yourself, your income may also need to cover things an employer previously paid for or supported, such as holidays, sick days, pension contributions, equipment and software.

Your rate should reflect the full cost of working for yourself, not just the hours you spend doing the job.

A simple way to start thinking about your rate is:

Target income + business costs + contingency ÷ realistic billable time = minimum rate

For example, imagine you want your business to generate £60,000 a year to cover your income, running costs and a financial buffer.

If you expect to bill for around 180 days during the year:

£60,000 ÷ 180 = £333.33 per billable day

This is only an example, but it shows why it can be useful to base your rate on realistic billable time rather than every working day in the year.

Your actual rate will also depend on things like your experience, industry, demand and the value you bring to your clients.

Don’t forget the time you can’t directly charge for

One of the realities of working for yourself is that not every hour is billable. Time spent responding to enquiries, preparing quotes, pitching for work, marketing, travelling or handling bookkeeping all keeps your business moving, even if you can’t charge a client for it directly.

Keeping track of this ‘behind the scenes’ work can help you build a more realistic rate.

If you work 40 hours in a week but only 25 are billable, your pricing needs to reflect that. Focus on billable time, not just total working time, when setting your rates.

What else should your contractor rate cover?

Your rate needs to do more than cover the hours you spend on client work.

Depending on how you run your business, you may also need to allow for:

• Holidays
• Sick days
• Gaps between contracts
• Equipment and software
• Professional costs
• Tax and pension planning
• Insurance

Taking these things into account can give you a much clearer idea of what a sustainable hourly or day rate looks like.

Agree your payment terms before you start

A good rate only works if you’re clear on how and when you’ll be paid.

Agree the essentials upfront: your rate, working hours, overtime, expenses, invoicing, payment deadlines, cancellations and how extra work will be charged.

Putting it in writing can help prevent misunderstandings and protect your time, income and client relationships.

What other ways to charge for contract work?

Hourly and day rates aren’t your only options, you may also want to consider: 

Fixed project fee

You agree a price for delivering a clearly defined piece of work.

This can give your client good cost certainty, but it’s important to agree the scope carefully so the job doesn’t grow without the price changing.

Retainer

A client pays you a regular amount for ongoing work or an agreed amount of support each month.

This can help give your business more predictable income.

Value-based pricing

In some types of work, the fee may be based more on the value of the outcome than the number of hours involved.

You also don’t have to use the same pricing model for every client.

You might charge one client by the hour, another by the day and another on a fixed project basis.

Payment risks contractors should plan for

Working for yourself can give you more control, but it can also mean taking on risks that an employer may previously have handled for you.

A few of the main ones include:

• Irregular income
• Late payments
• Cancelled work
• Relying on one client
• Unexpected business costs

How can contract workers protect their business?

Choosing the right rate is one part of protecting your income.

It’s also worth thinking about how your business would cope if something unexpected happened.

That might mean:

• using clear written agreements
• setting payment terms upfront
• keeping accurate business records
• building a cash buffer
• avoiding over-reliance on one client
• looking after important equipment
• putting suitable business insurance in place

The right business insurance will depend on what you do.

Public liability insurance can help if your work accidentally causes injury to someone else or damage to their property.

If you provide professional advice or services, professional indemnity insurance may help if a client claims that a mistake, omission or professional error caused them a financial loss.

You may also want to consider cover for equipment or other risks linked to the way you work.

Insurance won’t replace good pricing, sensible contracts or careful cash-flow management, but it can form part of a wider approach to protecting your business.

Hourly rate or day rate: finding what works for you

There’s no single right way to charge as a contractor. Hourly rates can offer more flexibility for shorter or changing workloads, while day rates can make longer assignments simpler to price and manage.

Whichever approach you choose, make sure your rate reflects more than just the time you spend on client work. Allow for business costs, non-billable time, holidays, gaps between contracts and the occasional unexpected expense.

Clear payment terms, well-defined project expectations and suitable business insurance can also help you manage some of the wider risks that come with working for yourself.

Ultimately, the best pricing approach is one that works for your business, feels fair to your clients and gives you a sustainable return for your time and expertise.

Beyond pricing, protect your finances with Business insurance

Having a strong business insurance policy can protect you for various incidents and avoid financial losses.

Typically, you’ll want insurance to cover public liability as a minimum.

Find out more about business insurance policies from Protectivity.

*Insurance policies will vary and may not have the option to add specific extras, depending on the sector you specialise in.

*Disclaimer – Insurance policies differ between providers and are subject to their terms, limits, excesses and exclusions. This article provides general information and is not personal insurance or legal advice.

Make sure you have the correct level of insurance for your requirements and always review policy documentation. Information is factually accurate at the time of publishing but may have become out of date.