When working out your hourly rate for contracting, what you’re really trying to work out is this:
How much is your time, your energy, and your talent worth?
These are difficult questions for anyone to answer. So instead, when working out your hourly rate, think in more grounded terms. Think about how many hours you might conceivably work in a given period of time, and determine just how much it costs to do what you do while accounting for future growth.
This is easier said than done, of course. So in this post, we’ll show you how to work out your hourly rate as quickly and easily as possible.
Things to Think About When Setting Your Hourly Rate
How much money do you want to take home each month? It’s important to think in monthly terms rather than annual terms, as it makes budgeting easier. Consider your monthly personal expenses – rent, mortgage, bills, food, etc. Then think about how much disposable income you’d like to have on top of these expenses each month. Be reasonable. Once you have a monthly figure, multiply it by 12 to get your desired annual salary.
How many hours do you intend to work each day? Depending on your commitments, you might want to average this out per week or month.
How many sick days will you give yourself each year? Because you’re your own boss, you can give yourself as much sick leave as you want. But to keep things simple, stick to the government’s statutory limits.
How many days’ leave will you give yourself each year? Again, you can take as much annual leave if you want if you’re self-employed, but it might be easier to stick to the government’s statutory limits. Don’t forget to account for bank holidays too.
Business expenses – Determine an annual amount for every penny you need to spend to keep your business running. This will vary depending on who you are and what you do. But things to think about include taxes, rent, utilities, travel, staffing, stocking, software subscriptions, and so on. For a more detailed overview of the sort of business expenses you might consider, check our guide to setting cashflow forecasts.
Reinvestment – If you want your business to grow, you’ll have to invest in it. That’s why you should also account for reinvestment when working out your annual expenses. Set aside an amount each year that you might invest in new equipment, recruitment, training and development, marketing, and other things that could help your business grow.
How to Calculate Your Hourly Rate
With your desired monthly take-home pay in mind, accounting for the time you can commit to working, leave and expenses, you’ll now need to work out what percentage of your time will be billable and with all these figures to hand, you can calculate your hourly rate.
Work Out Your Billable Hours
In a given year, you might get:
- 28 days’ holiday ( including public and bank holidays)
- 8 sick days (or none at all – but it’s important to set a figure, just in case!)
- 104 weekends
So that’s 140 days each year when you won’t be working. Which means that you will be working up to 225 days each year.
Next you need to work out your capacity:
- How many hours will you work? A standard working day in the UK is 8 hours. So with 225 working days every year, you might work up to 1,800 potential billable hours.
- How many non-billable hours will you have? Like it or not, all contractors will have some hours that you’re unable to charge for. This might be writing proposals, meeting prospective clients, general business admin, sifting through emails, doing your accounts and everything else a contractor has to manage. If we allow a generous 1 hour a day, this gives us 225 non-billable hours.
- What is your expected capacity? Balancing your time between too busy or not busy enough can be tricky for freelancers. So you need to take into account that sometimes you might not have enough work to fill 100% of your time. Let’s say you’re able to fill 75% of your time across an average year.
So, we have:
Potential hours: 1,800
Non-billable hours: 225
Which leaves us with 1,575 billable hours.
If we presume you’ll be able to, on average, fill 75% of this with paying client work, that leave you with a prediction of:
Predicted paid hours: 1,181.25
Work Out Your Hourly Rate
By now you should have worked out your desired monthly take-home pay and, by extension, your desired annual salary.
You should also have worked out your annual business expenses, accounting for reinvestment costs.
Add your desired annual salary to your annual business expenses and you’ll work out just how much money you need to make in any given year as a freelancer or a contractor.
Divide this sum by your total annual billable hours and you’ll get your hourly rate.
Simple, isn’t it?
How to Work Out Your Hourly Rate – An Example Calculation
- You’ve set your desired annual salary at £32,000.
- You’ve worked out that annual business expenses amount to £10,000, including reinvestment costs.
- This means that your total annual costs – your personal salary plus your business expenses – will be £42,000.
Working with the sum we’ve already established for your annual predicted paid hours (1,181.25), you can work out your hourly rate through simply dividing 42,000 by 1,181.25.
This gives you an hourly rate of £35.55.
Which seems reasonable, doesn’t it?
Of course, your figure might differ completely. You might have different business expenses to work with, or different expectations when it comes to how many hours you’ll work in a day, how busy you’ll be or how much money you’ll take home each month. But as a means of working out your hourly rate, this technique at least ensures that you’ll be able to take care of all of your expenses while setting enough aside for both business and personal growth.
Working Out an Hourly Rate As a Contractor – Other Things To Think About
- The Market Rate. You can bypass all of these calculations by simply basing your hourly rate on the market standard. This site gives you up-to-date average rates for a range of professions in the UK. You can also check this site, which does essentially the same thing but for tradesmen, making it an essential resource for new contractors. Just make sure you don’t sell yourself below your break-even point.
- The Competition. How much are your competitors charging? It’s worth a look so as to ensure you’re not charging too much, or too little. But make sure you use these figures as a guideline and nothing else. Avoid the temptation to simply undercut your competitors. We explored the perils of underselling yourself above.
- Your USP. Maybe you’re better than all of your competitors! You might have a specialist qualification, or a bulging portfolio of glowing client testimonials. If you feel you can offer more than your competitors, then you should feel justified in charging more than them too. Just make sure you can demonstrate to your potential clients that they’re getting a lot of bang for their buck, whether it’s through reviews, case studies, accreditations, or otherwise.
- Other Ways to Charge. Ultimately, you may feel that it’s simply too complex to charge by the hour – especially when accounting for travel times, your admin and accounting responsibilities, and other times when you’ll be working but not earning. You might prefer to charge by the project instead, or to set a day rate.
Common Mistakes When Working Out an Hourly Rate
You might be tempted to set your hourly rate low, to help you find more clients. In the early days of freelancing or contracting, this might seem like a sensible strategy. But undersell yourself and you’ll never make a profit. You’ll work endless hours just to break even, and your business will never grow.
Speaking of business growth – if you want to enjoy long-term success as a freelancer or a contractor, then you need good clients who understand the value of what you do. Some potential clients may obsess over the price of your services. These are not the sort of clients who’ll help you secure sustainable long-term growth. Because what really matters is the quality of your services.
So if you’re worried that your hourly rate will put off potential clients, don’t! Understand your value, and understand that there will always be someone charging less than you. But clients who continuously opt for the cheaper option will eventually realise that they get what they pay for. They’ll eventually learn that, if they want the best, then they should be prepared to pay for it.
And that’s where you come in!
One Last Thing That No Contractor Should Be Without!
Contracting can be inherently risky work. This is why it’s important to account for sick days when setting your rates. But for total peace of mind, consider investing in specialist contractor insurance. With the right cover, you can rest assured that, should anything happen to you or your business, then everything will be taken care of.
At Tapoly, we specialise in offering bespoke insurance cover for contractors, with cover starting from as little as 35p a day. There are no hidden fees and we’ll only cover you for the things you need covering. Head here to get a free quote online in just one minute.
If you have any questions or would like to discuss your options please contact our Tapoly team at firstname.lastname@example.org, call our help line on +44(0)2078460108 or try our chat on our website.