Hourly Fee

In the last couple of weeks I had to quote for a project against someone who was charging a suuuper low hourly fee and hire someone else for a small contract who was also charging a low fee so I thought I’d post a little calculation that I learned in a class a couple of years back (I’ve seen it since online too but haven’t kept the link).

It’s meant for someone freelancing full time but I think it should also be used for part timers, especially (duh!) if they are hoping to make the switch to full time at some point. The most important thing is to realize that you are not going to be billing 40 hours a week or at the very least you won’t bill 40 hours every week, sometimes you’ll be idle but more importantly you’ll also be networking, following leads, doing accounting, answering email, reading up on your field (a must in web work, ymmv in other fields), etc. The number generally used and which I agree with is 24 hours. Expect to bill 24 hours a week on average. From there;

  1. How much do you want to make in a year? (I’ll use 40k here).
  2. How many weeks (months?) off do you plan on taking? (4 weeks, you might want to add 1 for sickness, etc.)
  3. Add your business expenses. Here it varies a lot depending on your field and how you do business. Those are just the expenses you wouldn’t have when working for someone. Your day to day personal expenses are folded into the salary you were aiming for at item one. Lets assume you are purely a service company and you don’t spend much, we’ll put 5k of expenses. (we’re now at 45k)
  4. Divide 45k by the number of weeks left (47).
  1. Divide that by 24 and that’s the minimum you need to charge to reach your goals of yearly income and vacation time. In my example that would make it $40 an hour.

    Then of course you have to compare that to the market and your value in it. If you don’t think you can charge $40 an hour in your field, then you either need to reassess your salary expectations or get better in a hurry. You could of course decide to ramp up to that price over some months but then don’t expect to reach the 40k you were aiming for or don’t plan any vacation time.

    That’s just the basic calculation, you can make sacrifices to break into the field or charge more because you’re just that good but I think it’s important to make that calculation to at least know if your expectations are in line with reality and comparing the hourly fees you will charge with the hourly rate you are payed at a fulll time job just won’t work.

    On a related note, make sure your estimates are realistic, don’t aim for a lower hourly fee as a loss leader and then put more hours in your estimates. The quote I spoke of in the beginning? I’m able to match it because I’m listing a lot less hours. Might be that I work faster but it’s very possible that he was just compensating for a low fee by rounding up a lot. Better to be honest with your price and your estimates.

    If you are already working full time and/or wondering how much you can “get away with”, Anil has some thoughts on how to figure out the maximum. He’s being funny but it’s actually a better idea to look at the high numbers than the low, you can always come back down but it’s hard to convince someone of your value if you aren’t convinced yourself and charging a pitance.

    Finally, you’ll find that the type of work/project becomes more important than the fee you are getting. Matt Webb wrote about variable pricing a year ago and I’m starting to move into such a model myself. I’m using a different pricing for big, soul crushing agencies, another for smaller companies and independents and yet another for non-profits. And even that can vary for rushed contracts or situations where I know I’m sacrificing weekends if I accept it. It’s also not black and white as some non-profits are huge and some agencies are fun to work with.

    So calculate the basis and then, if you have the luxury of doing so, play around with what you can do and want to do to reach the best balance. That’s an ongoing process, believe me.


vieux bandit November 28, 2006

One thing I found helped me a lot when I started freelancing full time was to volunteer. Sounds weird, but a few hours here and there can add up to a better network, great references and even paying contracts. And my advice would be to treat the organization for which one chooses to volunteer the same as if they were paying customers – keep your word, be quick and friendly, and lo! They’ll pass your name and business card around.

I’m still struggling with pricing – I guess it is an ongoing process. It’s difficult (for me) to determine when I should stick to my guns and when lowering my price a little will end up giving me tons of business. 24 hours a week sounds right, and reading up/perfecting one’s skills is crucial in any field, I’d think (in translation/proofreading, you’d expect things to be set in stone, but they are so not! That, and the human brain being what it is… constant re-learning is a must. It’s really a wonder to me that (most) businesses don’t enocurage their employees to spend some time on that each day).

julien November 28, 2006

you should also include benefits in there (something like 15k of insurance is what i’ve seen for the US, but it’s probably less than that here).

Patrick November 29, 2006

v.b.: Absolutely right on all counts. I also volunteered at first and still do, although in a much much more limited fashion (to my disappointment). Great way to meet people and get some visibility while helping out.

I’m also astonished at how little time some people spend staying on top of their field not only is it dumb competitive wise, I also don’t understand how they don’t get bored. It’s part of why freelancers can work though, I’m there to do the stuff they can’t be bothered to learn ;)

julien: whaaa??

vieux bandit November 29, 2006

That, an businesses tend to take you when you’re hot, squeeze all the juice out of you, and drop you when you’re ten years behind in your field – niiiice. Did I mention I never want to go back and you can’t make me? ;-P

Patrick November 29, 2006

I ain’t going back either.

Montreal Hotel Guy November 29, 2006

I found your calculation very practical and have bookmarked the post. You might care to join the sitepoint forums and browse their articles on the topic; you’ll find a lot of help and like-minded people there.

Keep up the good blogging!

karl December 1, 2006

one of my previous bosses in a Web agency was saying. if you want to be able to make a living of your business, you have to bill 3 times your hourly rate, to take into account: electricity, buildings, computers, management of administrative tasks, transportation, etc. etc.

Patrick December 1, 2006

karl: Where “hourly rate” is the rate you are paid at a full time job?

If not, I’m not sure I get three times what. He bills three time what I charge to cover his expenses?

Zach January 7, 2009

It’s been a while since I read it, but I believe “What Color Is Your Parachute” suggests using similar logic for determining what salary to ask a potential employer for.

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