Succeeding in Your Business: Should your service business charge a flat fee or an hourly rate?

“I run a home organizing business.

“When I do a job for a client, my work is divided into two parts: the first part is the ‘design’ phase, when I look at the client’s home and make recommendations — including detailed drawings — as to how they can improve their closets and other storage spaces.

“Once the client approves my designs, the second part is the ‘implementation’ phase, when I purchase the materials and install everything in the closets and storage spaces. Many of the vendors I deal with are ‘to the trade only’ in that they will only work through people like me.

“Earlier this year I committed to a big job. To get the work, I quoted a flat fee for the design phase of the project ($8,000), and an hourly rate for the implementation (purchase and install) phase. The client signed my contract and paid a $2,000 advance against the flat fee.

“Well, the client turned out to be the client from hell — they accepted my initial designs but then changed their minds, then changed their minds again when I submitted revised designs. I had to wait days for them to return phone calls and e-mails. I went through four different designs before they finally accepted one.

“Had I billed by the hour for the design phase, I would have earned $15,000, but had to settle for the $8,000 flat fee I quoted.

“It gets worse: when I submitted my invoice for the $6,000 balance for the design work, the client refused to pay and terminated my contract, wailing and moaning about what a terrible job I did and threatening to post negative reviews on Yelp.com. They have offered to pay me $1,000 to settle, which is an insult given the amount of time I put into this project.

“I have since learned that they have approached two of my competitors asking for quotes to implement the design I prepared for them, so I know they were satisfied with my work.

“I can sue them in small claims court but would be limited to a $2,500 recovery. Also, the courts are backlogged here due to the COVID-19 pandemic and it will take months before the case gets on the court calendar. What should I do differently to avoid these kinds of situation in the future?”

As you have learned the hard way, not every client you deal with is nice, honest and reputable. Sadly, there are some people in this world who will sign contracts without any intent to comply with them, calculating that they can bully you into a better deal later on. This is especially true when the amounts involved are relatively small.

In most states, the threshold for small claims actions is $5,000 or less. Since it costs anywhere between $10,000 to $15,000 to bring a “real” lawsuit in state court, it wouldn’t make sense for you to sue your client for a $6,000 recovery, and your client knew that when signing your contract.

I would hire a local lawyer to send your client a threatening letter (this should cost no more than one hour of the attorney’s time) demanding payment of $6,000 but offering to settle for $5,000. There will be some back-and-forth discussions, but you will probably get a settlement between $3,000 and $5,000, which is better than where you stand now.

Going forward, you need to do business differently.

I personally never charge a flat fee for work unless I know exactly how much time it will take to do the work based on past experience and that I will be in control of my time. Situations such as the “design phase” of your contract — during which there will inevitably be discussions and negotiations with the client that are unpredictable and outside of your control — should always be billed hourly or at a daily (per diem) rate. Knowing that the clock is running, clients will be incentivized to keep your fees as low as possible and be less likely to play the games your client did.

Since it appears you are more in control of your time during the implementation phase, I would have done exactly the opposite of what you did, as charging a flat fee for design opened the door for your client to play that game.

While it’s OK to give a client an estimate of your time, your contract should clearly state that you will stop work and give a revised estimate should the client’s behavior or “circumstances beyond your reasonable control” make your initial estimate unrealistic.

Your contract should also require your client cooperate in the process and to return all phone or email communications within 48 hours, and give you the right to terminate the contract if the client is consistently unresponsive.

Finally, whenever I quote a fee of any kind, I always ask for 50 percent to 100 percent of the flat fee or estimate upfront. Low-balling the initial advance, as you did, almost always leads to trouble later on and encourages the “bad intent” clients you never want to have.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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