Freelance Q: Client wants lower fixed price - I want hourly rate

Question

I worked for a client's contact in January on a 300 page submission in the 1st round of 2 to win a project (8 candidates).  The submission involved designing and doing the production work on 32 separate segments of the submission, with lots of text, images, and diagrams.  At the time my fees were based on an hourly rate up to 120 hours (my estimate of how long the job could take).  Beyond that I had to gain permission to continue.
Production went very smoothly and my relationship with all parties was excellent throughout, with the client, contact and other contributors sending content really fast.  Through the 160 hours there were probably up to 40 hours spent editing and re-editing text, and adapting layout with the contact's rep sitting with me.
I reached the 120 hours ceiling at 75% complete, got permission to push on, and eventually finished on 160 hours.  Hourly rate was paid the whole time.  I worked on average 9 hours per day.
The submission was successful, and proceeded to the 2nd and final round (3 candidates).
I've now been asked to take part in the 2nd round, and the deadline is 14 days away (including 2x weekends and 1x national holiday). The submission will comprise 9x documents, each ranging from 30-100 sides of A4 or A3.  Total page count will be 500 sides.  I've been given a brief with the names and major headings of each of the documents.  Some of the content, as yet an unknown % but certainly no more than 30%, will come directly from the 1st round submission.  There is no real re-design, the client is happy with the design - it's mostly a production task.
I was asked to submit an estimate to my client, which I did, and then got passed on to the contact.  I set a ceiling of 120 hours (8.5 hours per day at this stage) to do the work.  The contact has responded to my client saying he has a budget of X for the work (less than my ceiling), and if I can do it for that I will get the job.  The budget equates to 100 hours of time (7 hours per day at this stage). 
Based on how the contact edited and re-edited the same information for 40 hours in the 1st round, I'm loathe to end up working for free once we go beyond 100 hours.  I also would like to get this project, and help complete what I started.
Does anyone have any advice on how to go forwards with this?  Any help much appreciated.
Take the project as offered at 100 hours, and swallow any extra time?
Lower my ceiling to 100 hours, but need permission to continue and charge at hourly rate after that?
Offer 5% discount on hourly rate beyond 100 hours?

Answer 1

I use freelancers almost exclusively. The biggest problem with hourly rate is that freelancers milk the job to death. That's the reality with hourly rate. I've figured on 12 hours, doubled it to cover myself and I get an invoice with 60 hours and I take a bath.
So what I do with my freelancers and clients is this: I agree to pay freelancer a flat rate (say $800 for a brochure) that includes up to 12 hours and 3 ronds of revisions. After that I pay $40/hr. With the client, I give them the same parameters: $1200 for brochure includes up to 12 hours which include 3 rounds of revisions. After that I invoice at $75 hour. Client is notified in writing at the 9 hour mark and signs off on paying the hourly rate after 12 hours.
As an employer, I have to protect against a freelancer taking forever and as an agency, I have to protect against clients doing revision and revision after revision without compensation for my extra expenses.
In your case, you have to decide if this is going to be long term relationship. If you think it will or would like it to, you may need to negotiate a middle ground. And in this economy, someone will gladly do the job at less than you're getting paid. But as a professional, you should be fairly compensated.
Edit: Generally speaking, the longer the project goes on, the lower the rate. Similar to buying an item in quantity. Gets much cheaper as the hours mount.
For instance, On an advertising campaign I charge $150/hr (or project rate) to come up with a concept, then $100/hour for 2-3 mockups. Once client approves look, I charge $75 hour for production. Mind you, I'm hiring people to do whatever: PS, layout, illustration, etc. If you're over the 100 hour mark this has to be straight production which I wouldn't pay a freelancer more than $20-$30 hour.