Your success in winning new projects may be due in part to the rate you charge for your services. Set your rate too high and you won’t win the business. Set your rate too low and you’ll be leaving money on the table. Somewhere between the high and low extremes is the right answer, but how do you find the sweet spot?
Here are 3 steps to determine your optimum billing rate.
Needs and Assumptions
First, you’ll need to document your current financial needs and make some assumptions about your availability and the number of hours you will be able to bill in a year. Answer the following questions, but be realistic in the assessment of your needs and expenses.
SALARY: state your desired salary in annual terms, for example, $75,000 per year. Be sure to include any taxes you will be responsible to pay.
VACATION: usually 2 weeks per year.
TRAINING: usually 2 weeks per year.
SICK: most freelancers add 2 sick weeks per year even if they have no history of taking time off due to illness.
HOLIDAYS and other time not available: we average 10 holidays per year in the United States. 10 days at 8 hour each is 80 hours or 2 weeks per year.
UTILIZATION: this is an estimate of how much you will work during the year. It’s unlikely that you will bill every available hour, so use a realistic number, say 75 , that is to say that you expect to bill 75 of your available hours.
EXPENSES: an estimate of the cost of tools, computer, software, telephone, internet, email, licenses, insurance, rent or other related expenses needed to produce the contract deliverables, for example $2,500 per year.
The Calculation
Here are the 4 formulas used to calculate an hour rate and a worked example using the assumptions documented above. We will base our calculations on a 40 hour work week x 52 weeks in a year or 2,080 hours available to work in a year.
AVAILABLE HOURS = 2080 hours in a year – VACATION – TRAINING – SICK – HOLIDAYS
AVAILABLE HOURS = 2080 – 80 80 80 80 =1,760 AVAILABLE HOURS PER YEAR
BILLABLE HOURS = AVAILABLE HOURS x UTILIZATION
BILLABLE HOURS = 1,760 x .75 = 1,320 this is the number of planned billable hours per year.
HOURLY BILL RATE = REQUIRED REVENUE / BILLABLE HOURS
BILL RATE = $77,500 / 1,320 = $58.71 per hour
This means that if you bill 1,320 hours at a rate of $58.71 per hour, you will be able to pay your annual salary, take vacations and time off for holidays, and pay your consulting expenses for the year.
Don’t be afraid to modify the assumptions and rerun the calculations until you have determined an hourly rate that meets the needs of your situation. I suggest using a spreadsheet to perform the calculations. It makes it easy to modify the assumptions and rework the numbers until you have determined your optimal hourly rate.
The Competition
Now that you have calculated your hourly rate, it’s time to analyze the rates of your competition for bids on similar work. It is important to carefully analyze your competition in local, national or international terms. If you determine that your primary competition is local, then it’s a safe bet that the local competitors will be making many of the same assumptions that you made in your calculations and that their rates may be similar to your rate. The primary differences, if any, may be due to differing SALARY requirements and the expected UTILIZATION rate. Reconsider your assumptions and adjust your bill rate if necessary to bring it in line with the local or national competition, if needed.
Competing with international based competitors may be more challenging. You may find it hard to compete if your international competitors are charging the equivalent of $15 per hour when your bill rate is over $58 per hour. Or conversely, you may find it easier to undercut your international competition by charging lower rates because of differences in monetary exchange values and living standards.
Lowest bill rates are not always the best. If you decide to charge higher rates than the competition, be prepared to distinguish yourself with a better proposal, higher quality deliverables, or superior references.
Author Resource:
About the Author: Ray Myers, Jr. is a PMP certified project manager with over 20 years experience planning and managing technology projects. Contact Ray at http://www.pmservicesnw.com Article Source: http://www.pmservicesnw.com/2009/11/freelancers-the-art-of-setting-your-hourly-rate
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