How to Determine Hourly Rate
There are basically two ways in which most freelancers charge for projects. The traditional method of a “per project” fee is often referred to as a fixed price contract while charging by the hour is often referred to as time and materials.
In either scenario, it is very important to work out what your minimum hourly rate should be. This way, you can track your progress against this minimum rate in the case of a project fee, or know what to charge as an hourly rate. (determine your hourly rate.)
Now, there are five steps to determine your hourly rate.
Step One: Determine Your Overheads
Using the spreadsheet you have created, you can now determine the annual costs per year, which we’ll use in this calculation. It’s prudent to add a further ten percent to this total, just to cover any unforeseen costs.
Step Two: Allocate Your Salary
There are a number of ways to calculate this figure, and you need to take into account your own particular expectations and lifestyle. However, a good yardstick is to look at what you could expect to be paid for doing the same work for an employer. (determine your hourly rate.)
Perhaps you’re already underemployment, or have only recently left your job; if so, consider what your salary expectation would be in twelve months’ time, including all taxes and employer contributions.
If you don’t have this point of reference, look around a few employment-listing web sites and resources, or ask your peers in the business what they would consider being a desirable salary for the work that you do.
Weigh up whether you wish to add a little more, to acknowledge that you’re taking a risk in opting to work for yourself. This way, you really can create a desirable figure.
Step Three: Decide on a Profit Margin
In all businesses, large and small, the aim of the game is profit. Being a freelancer should really be no exception. You’ll want this margin for those times when cash flow is tight; moreover, by allowing for this profit now, you’ll have some money saved for hiring staff or expanding the office when your business grows.
Step Four: Work Out Your Realistic Hours
Let’s imagine for a moment that you could work 40 hours per week, just as a starting point. Theoretically, this means you have 52 weeks multiplied by 40, which comes to 2,080 hours per year.
Now, if you were an employee, you’d likely have a number of federal or public holidays (roughly 11 in the United States, 10 in Australia, and 9 in the United Kingdom). Let’s make this 10 days per year for the sake of the exercise.
Now, none of us likes the idea of being ill, but it’s an inescapable fact of life; we’ll allow a week off for sickness per year as well. And of course you realize and respect the importance of achieving work-life balance when freelancing, so you’ll want to allow at least three weeks of vacation leave on top of it all.
So we have 52 weeks, minus two weeks for public holidays, one week for sick leave, and three weeks for holidays. This calculates to 46 weeks of actual work, or 1,840 hours if we work 40 hours per week.
It is unrealistic to imagine that you are able to charge out all 40 hours a week if that’s the sum total of the time you spend working. There are a number of unchargeable tasks, such as administration, sales, meetings, travel, lunches, and other duties that will crop up in the best-run business.
A conservative estimate for these duties might reduce your billable hours by a further 25%, leaving you with 1,380 hours of billable work per year.
Step Five: Calculate Your Hourly Rate
Armed with the information from the four points before, we can now apply the following formula to create your hourly rate:
|Pre-tax hourly rate = (Annual Overheads + Expected Salary + Profit) / Billable Hours|
For example, let’s say we calculated $20,000 in overheads plus $40,000 salary, and we’d like a 10% profit margin; we divide $66,000 by 1,380 hours, which equates to $47.83 per hour.
Now that isn’t the end of the equation. We may have a (fairly) scientifically calculated figure, but what we need to do now is to compare this against the range of rates in your local industry, and determine whether it is competitive.
Is it cheap?
This is a good situation to be in. You now have an opportunity to raise your hourly rate, and earn more income. You don’t want your hourly rate to be significantly less than others, as it may make prospective clients start to wonder why you are so cheap, and doubt your abilities.
Don’t Be Cheap
Don’t, whatever you do, try to win work by being the cheapest. This devalues your work, does your wider industry no favors, and means you’ll have a tougher time convincing clients of your value when you start raising your rates.
Many freelancers undercharge when they start, due to a lack of confidence or because they haven’t considered all of their outgoings. You are taking this leap because you’re worth it, so don’t cave into that inner demon of self-doubt!
Is it the middle of the range?
Well done! This is the sweet spot—there are freelancers who charge more than you, yet you aren’t in the bargain basement, either. This is the price area that most freelancers should really aim for in their first few years.
Is it higher than average?
If your rate is higher than most, you need to look at what the factors are. You don’t want to be the cheapest; however, being the most expensive may make life a little tougher, if you’re finding clients resistant to the idea.
Review all of your figures from above. Did you exaggerate any overheads too far? Have you added a very large profit percentage? If so, perhaps you need to consider tuning down slightly, to make your rate more realistic and attractive.
Many freelancers complain that people new to freelancing attempt to attract clients by offering considerably cheaper rates. This practice ends up representing a danger to these newbies rather than the freelancers whom they undercut, as they’ve very likely failed to consider their overheads sufficiently. The bright side for seasoned and reasonably priced freelancers is that their fresh-faced competitors may not be freelancing for very long! The unfortunate aspect, however, is that this situation can cause other freelancers to panic and reduce their pricing, thereby creating a spiral towards low costs and a resultant reduction in quality.
Don’t get caught up in the same game—it’s far better to stick to your guns and maintain that you need to be reasonable in your charges so that you can assure clients you’ll still be freelancing in a year to come.
Also, remember that not all new clients shop around. In some situations, it may be common to find that a prospect has had no other quotes than your own before they make a decision in your favor. This will often become evident during the sales process.
Bartering Your Skills
To increase your billable hours, consider outsourcing your low-paying, repetitive tasks to allow you to focus more time on the more specialized work you excel at. Smarter still, find a freelancer with better skills in server administration and arrange to swap services, such as your legendary proficiency in graphics preparation. They’ll be quicker at their area of expertise, and vice versa, so both parties win!
This post contains the content of book The Principles of Successful Freelancing By Miles Burke below is a link of the complete book The Principles of Successful Freelancing