What is an hourly rate?

An hourly rate is the amount a professional or company charges for one hour of work.
In software projects, it’s commonly used in time and materials (T&M) contracts, consulting, support, or maintenance.
The hourly rate represents the cost of the team’s time, including labor, expertise, and business overhead.

How hourly rate pricing works

In an hourly billing model, clients pay for the exact time spent on tasks or deliverables.
Invoices are usually based on tracked hours per role or activity.

Formula:

Total cost = Hours worked × Hourly rate

Example:

80 hours × $100/hour = $8,000
15 hours × $60/hour (designer) = $900
Total invoice: $8,900

Rates can differ by role, expertise level, or project complexity.

What influences hourly rates

Several factors affect how hourly rates are set in software development:

experience and seniority - junior vs. senior developers
location - cost of living, taxes, and market competition
technology stack - niche skills often cost more
type of service - design, development, QA, management
project complexity - higher risk = higher rate
business overhead - tools, infrastructure, management time
company reputation - trusted brands can charge premium rates

(Ranges are indicative and vary based on expertise, contract type, and region.)

Advantages of hourly rate pricing

For clients

pay for actual work - no inflated project estimates
flexibility - easy to adjust priorities mid-project
transparency - clear tracking of where time goes
low entry barrier - easy to start without full scope

For vendors

fair compensation - paid for every hour worked
less risk - no loss from underestimated fixed bids
scope flexibility - adapt as requirements evolve
easier collaboration - encourages ongoing improvements

Disadvantages of hourly rate pricing

For clients

budget uncertainty - total cost can vary
requires oversight - must review reports or timesheets
trust required - risk of inefficiency or overbilling

For vendors

administrative work - detailed time tracking needed
client skepticism - some perceive it as less predictable
less differentiation - focus shifts from value to price

When to use hourly rate billing

during discovery phases and research work
for maintenance, bug fixes, or support
in ongoing agile projects with shifting priorities
for consulting or audits where scope evolves dynamically
when client trust and communication are well established

How to set an hourly rate

1. Calculate costs

Include all operating costs (salaries, taxes, tools, rent, management) and divide by productive hours.

2. Add profit margin

Add desired margin on top of cost-based rate.
Example:

Cost per hour = $60
Target margin = 25%
Hourly rate = $75

3. Adjust for market position

Benchmark against competitors in your region and niche. Premium agencies can charge more for proven results.

4. Use blended rates (optional)

Offer a single rate (e.g., $90/hour) instead of per-role rates for simplicity in proposals.

Hourly rate vs. fixed price vs. retainer

Model	Description	Best for
Hourly rate	Pay only for hours worked	Flexible or undefined scope
Fixed price	Pay a set amount for agreed deliverables	Clear, defined scope
Monthly retainer	Pay a fixed monthly fee for ongoing hours	Long-term collaboration

Managing hourly rate projects

use reliable time tracking tools (Toggl, Harvest, Clockify)
review timesheets weekly
provide transparent reports by task and role
communicate regularly about progress and remaining budget
set maximum monthly caps if needed

Common mistakes with hourly rates

not tracking time properly - leads to disputes
unclear roles or rates - confusion on billing
no reporting structure - clients lose visibility
undervaluing expertise - charging too little reduces perceived quality
no contract details - rates or billing frequency not defined

FAQ

What is an hourly rate in software projects?
It’s the amount charged per hour of work by a developer, designer, or team.

When should you use hourly billing?
When project scope is evolving or ongoing, and flexibility is more important than fixed budget certainty.

How do you calculate an hourly rate?
Combine base cost per hour with a profit margin and adjust based on market benchmarks.

What’s a good hourly rate for developers?
Depending on region and experience, it ranges roughly from $25/hour to $150/hour.

Is hourly rate or fixed price better?
Hourly is best for evolving projects; fixed price is better for well-defined scopes.

Hourly rate