When starting out with your first few clients there can sometimes be a degree of finger in the air pricing. If you're doing the projects in your spare time for some extra pocket money or experience then this might not matter so much, but when you're a freelancer or contractor inaccurate pricing can leave you scratching your head as to why you're working so hard and still not turning a profit.
The key to quoting your clients correctly for freelance or contract work is understanding your salary expectations, overheads and your available billable hours - from this you can calculate your hourly rate. There's other methods of quoting clients beyond a simple hourly or daily rate (it might be by number of pages, or by project), but if you haven't worked out what hourly rate you should be aiming for, then you've got no basis for how accurate an overall project quote is.
Expectations - what is your target annual salary?
The starting point for calculating your hourly rate is your salary expectations - how much do want to be taking home per year? OK $1 million, me too, but this figure also has to be realistic and representative of what the going rate is for your market. The best way to get a feel for what is appropriate for your role or skill set is to take a look at job boards or job salary trackers - in the UK for example IT Jobs Watch is a great way to see the breakdown of going rates for programmers by different technologies. Once you get a feel for what is appropriate you'll need to ask yourself what salary you're happy with, and trade this off against what will be competitive.
Don't sell yourself short
If you're starting out it's often affective to be a bit more competitive, and then raise your rates when you've built up a client-base, but don't sell yourself short either. You might hear prospective clients ask why it will cost that much when "It'll only take you a week", yes it might take a week - and several years' of experience. Your skills are an accumulation from the time you've spent learning them, so don't undervalue the service that you provide.
So as a starting point, let's say you want a take-home salary of 35,000
Tax, dreaded tax
If you haven't already included it in your salary expectation above, remember there are additional costs for freelancers and contractors. Specifically, you'll want to add on an appropriate figure for tax and national insurance (or as appropriate for your country). This figure is going to vary on your personal circumstances, so you can either do your homework on this one, speak to an accountant or take a ball-park figure to get you started.
So far that gives us:
e.g. 35,000 + 20% = 42,000
This is an area where people and even large companies often go wildly wrong. It's easy to gloss over certain costs when doing quick calculations - you buy a product at price A, sell it at price B and boom there's your profit. But take into account your rent, travel, services, utilities, insurance, accounting fees, marketing... you get the picture - suddenly that profit isn't looking so big, or worse, you're making a loss. It's basic business calculations of gross and net profit, but it's important to get it right.
So for the purposes of this example, lets just take a look at some of the monthly big hitters and put some rough examples against them:
- Office Rent - 1000
- Travel - 100
- Software & Hardware - 100
- Utilities - 50
- Insurance - 20
- Accounting fees - 10
- Marketing - 50
So that comes to 1330 per month, giving us total expenses of 15,960 per year. If you're working from home you can obviously remove or reduce a lot of these, though keep in mind you can offset some of these bills as business costs even if you are. As you can see that's a significant addition to our original salary value. Add these together:
42,000 + 15,960 = 57,960
So now that we have a target figure to aim for annually, how much time do we actually have to generate that revenue? Here's the questions you'll need to ask yourself:
- How many days do you intend on working per week?
- How many hours do you intend on working per day?
- How many days holiday will you be taking a year?
- How many sick or personal days are you going to allow for?
So let's say you intend on doing a fairly average 5 days per week, 8 hours per day, and will take a reasonable 20 days holiday per year and will allow for 5 sick days.
52 x 5 - 20 - 5 = 235
235 x 8 = 1,880
Great, so we've got 1,880 hours per year to earn 57,960. But there's one more thing, are you actually going to spend all of those hours religiously working? Or are you going to spend some of that time doing the admin work, sending out invoices and looking at cats on the Internet? How much time you're going to spend doing these things will be down to personal habits, so let's say a generous 30% non-billable time.
1,880 - 30% = 1,316
Christmas bonus anyone?
One last thing before we get to the final figures - profit. If you're a freelancer you may just wish to take the salary value at this point, but to drive your business forward you really want to be adding on a good 10% - 20% profit.
Your hourly rate is...
So finally we divide the total income we need by our billable hours and we have an hourly rate to help you quote your clients.
69,552 / 1,316 = 52.85
Rounding up that gives you a rate of 53 per hour.
Save yourself some time and use our hourly / daily rate calculator: