What goes into an hourly rate?
How do you justify charging someone $85 per hour to design and implement a web site? All you’re doing is typing stuff on a keyboard. It’s not overly hard or dangerous … so why do you charge $85 (or whatever) instead of $20 per hour?
OK well obviously you have your time cost - just a base fee for giving your time to a client. Then you have your overheads: electricity, hardware, software, stationary, travel, car, accountant, solicitor, financial advisor, internet, phone etc.
But the sorts of things that might not immediately come to mind are the thousands of hours you’ve spent accumulating the professional expertise, experience and knowledge that enables you to do your job and to do it well. The thousands of hours putting together your own frameworks, design patterns, processes, shortcuts - even if they’re not actually physical files they’re at least in your head. Intellectual property. You charge for that. The thousands of hours you’ve put into developing your professional social networks that mean you can call upon people to help you with tricky problems you might encounter during projects or people you can farm various bits of work off to or ask advice on that all enable you to deliver a better quality product to the client.
As my financial advisor said to me on Monday, my ability to generate income is my biggest asset. That ability includes all those things I’ve just mentioned and you’re entitled to collect on your investment.
October 2nd, 2008 at 8:37 am
Also, consider this: You have two designers … one is a junior designer with little experience charging $30 p/h. The other is an experienced designer who’s been doing this for 5 years and charging $85 p/h. Now let’s assume that the junior designer is even capable of doing the work that the more senior designer can. Unlikely, but just assume that. It might take the junior designer 20 hours to do something that takes the senior designer 5 hours. Final cost to client? $600 for junior designer, $425 for senior designer.
October 2nd, 2008 at 9:23 am
You’ve forgotten to mention one vital aspect: not every working hour is a billable hour, and not every week is a working week.
During the course of a 38-hour working week — yes, we all agreed years ago that 38 hours is about right for “work”, leaving a whole human with enough time for rest, recreation, family and other contributions to a healthy community — you won’t just be “doing stuff for clients”. You’ll also have to find those clients, pitch and sell your services (which won’t always be successful), discuss things with them before what they perceive as “the work” starts (even though you’re giving attention to their needs already), bookkeeping, planning your workflow, maintaining your computers, learning new skills etc etc — or you’re paying someone else to do those things for you.
Then, of course, you’re entitled to annual leave and sick leave and (may the gods forbid!) compassionate leave or time to deal with emergencies.
In amongst all those things, you will find maybe 15 or 20 hours a week of billable time, which must pay for everything else.
5% of the time you won’t get paid. And maybe you’ll stuff up and have to offer a client a discount, or maybe you want to do that to win the job. You need to leave headroom for that too.
Typically the charge-out rate for a service is 3x what the employee “doing the work” gets paid as an hourly wage. If a client baulks at that, well, they’re welcome to recruit, train and resource their own staff. If the employee thinks he or she is being “ripped off”, well, they’re free to take on the risk of selling their skills in the marketplace instead of having the comfort of a regular pay cheque.
One of the biggest mistakes new freelancers make is under-pricing their services. Never be afraid to charge the going rate for your skills.
An acquaintance of mine almost doubled his rates for IT support — and got more work as a result. The hourly rate was an indicator to potential clients that he was a professional, not someone doing it as a hobby or on the cheap.
October 2nd, 2008 at 10:02 am
Paragraph three about-summed it up. I’m still a pretty “junior designer”, but I’ve also upped my hourly wage a few times over the last two years, simply because I earnestly believed I had acquired new skills, knowledge and know-how that allowed me to not only do a better job, but to do it faster—an also expanded my skill set that allowed me to take a on a larger breadth of work (thus avoiding pulling in extra persons who had those skills).
I’ve had one client question my wage thus far, simply because I lack a degree on paper. Hoping to overcome that shortly.
Have you had to explain to a previous client why your wage has increased since you last worked for them?
October 2nd, 2008 at 10:05 am
Very true on that last point - that’s something that Ben Kopilow (a professional photographer in Canberra) said at a presentation to the Canberra flickr photography group a few weeks ago. He put his wedding photography fees up by a few thousand dollars and got swamped with work.
Good point on the unbillables too (sorry just invented that word after hearing “unannounceables” on Hollowmen last night).
I remember a company I used to work for had to incorporate into their costings the overheard of maintaining compliance with the ISO 9001:2000 quality assurance framework … and while most freelances won’t or can’t go as far as a formal quality assurance framework like that they still have the overheads of more processes that ensure a better service and outcome that minimise risk.
October 2nd, 2008 at 10:32 pm
Finding the “happy medium” between what clients are willing to pay and what you want/need/are worth is In my experience one of the hardest things to get right.
I find alot of people also forget to take into consideration the whole tax and super thing as well (especially if you are working for yourself)
October 3rd, 2008 at 6:45 am
Agree with your approach to billing Nathaniel, but disagree with your Financial Advisor!
An ability to generate income is a useful and important foundation, but most useful is the ability to leverage income into an a cash stream you do not have to generate by constant effort.
You can only up your hourly rate so far before pricing yourself out of the market. You can leverage investments to make much greater returns.
For example, a basic web design/business context - being a solo designer means you are limited to the hours you can charge. Building a business where others design for you ramps up your number of chargeable hours (cashflow), plus creates saleable value for the enterprise.
Of course it requires different skills to build a business than to work in one - but they are learnable.
October 3rd, 2008 at 7:50 am
Perhaps he was referring to just my current situation - because yes assets like investments, property, businesses etc are worth far more.
Yep, building a business is hard … and I learned a billion lessons during my 5 year attempt at it. Obviously the most important lesson was the last … don’t go into business with other people. Ever. Yeah, it’s true.