A rule of thumb on how much to charge per hour for contract work.

When I graduated from college and began looking for full time work, I made ends meet by doing freelance contract work. Mainly I did web design and development. The biggest obstacle I ran into (besides finding work) was determining how much I should charge after I found it. There are several methods of billing clients for contract work, but for this blog post, lets say you and your client agree that you’ll be paid hourly. How much should you charge? It’s very hard to find a good answer for this on the internet. But I’m gonna’ break down what I’ve learned into a relatively simple formula.

The first thing you need to do is define what you are doing then figure out the equivalent title for your job in the salaried world. So let’s say you are building a website for a local small business. In the salaried world your title would likely be “Web Designer”. Now you need to find out how much other Web Designers are being paid. If we use salary.com and look up Web Designer, we find that that Web Designers in our area get paid somewhere around 51k to 70k per year.

Now you need to pin down a number in that salary range. Lets say, like I was, you’re fresh out of college. In the salaried world your pay would probably be close to the 51k side of the spectrum. So let’s stick with 51k per year. Your first impression may be to take that 51k and divide that by the amount of working hours in a year. But there are a few perks that come with that 51k that need to be taken into consideration. Things like health insurance, vacation time, sick leave, expense accounts, and et cetera.

Let’s say we want 3 weeks of time off for vacation and sick leave. There are 52 working weeks in a year. We need to subtract 3 of those from our year to cover our time off. So we’re left with 49 working weeks.

Next we need to cover health insurance costs. Let’s say we found a policy for $200 a month. Multiply that by 12 months and we get $2,400.

Finally lets consider hiden expenses that a salaried employee may take for granted. Things like pens and paper, toner, and binders. For a nice round number lets estimate we need 5k per year to cover things like this.

So now we just need to do the math.
$51,000(salary) + $2,400(health insurance) + $5,000(supplies) = $58,400
49(weeks) * 40(hours) = 1,960(hours)
$58,400 / 1,960(hours) = $29.80 per hour

It’s pretty simple when you think about it. But it can be difficult to figure out where to start when you’re new to freelancing. I hope this is helpful to someone. Leave me a comment if you have any philosophies of your own for calculating an hourly rate for your work.

** UPDATE **
** 8/8/2006 **

Wow! Mike Costello wrote a really cool web calculator based on the formula / strategy I wrote about above. Check it out here. He was also kind enough to reference my blog post. Thanks Mike!

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8 Responses to A rule of thumb on how much to charge per hour for contract work.

  1. Anonymous says:

    Nice post, I’ve never seen anyone explain that topic so quickly and straight-forward before. Nice.But, I’ve been in this business for almost 10 years now…in the real world of workign stiffs, 51k to start (in any area of the USA) is way to high!Many professional web designers will retire just above this figure…and it’s only getting harder as more-and-more trade schools pump out new “designers” every two months.So for anyone else reading this post…you should calculate your figures as stated above…THEN gauge what your client can afford, and charge accordingly.Also, for large projects many clients will want a per-project fee that possibly turns into hourly once the project is complete, or if they require features not outlined in the original proposal.So take what you can get, without being greedy…after all, Capitalism isn’t illegal.

  2. Dusty Reagan says:

    Thanks for the comment.You make a couple great points.One that 51k is probably a little optimistic for someone just entering the field, though possible if you can sell it.And two, many clients will want a flat rate for a large project. This, of course, is a much harder formula to dream up. Since the formula for determining the amount of hours a project will take has many more variables than determining your rate per hour.I hope to post a few thoughts on billing using Time and Materials and using a Retainer soon.Again, thanks for taking the time to post such an insightful comment!

  3. verbose-forex says:

    i found out that half of your salary disappears into some hidden eductions…so really it is about 25-35K a year.if u found your job through an agency, u might have to pay that agency every time your paycheck comes

  4. mariowarner says:

    thanks dusty! now i need to translate that into a Philippine-version one, based on my basic necessities, miscellaneous expenses, taxes, insurances, and savings for system upgrades.

  5. Justin says:

    As you mentioned to me, I wonder how taxes figure into the equation, especially if you are self-employed.I would also agree that salary range is a bit high. My first web design job 4 or 5 years ago right out of college was much less than the low end range.I even think the high end is dropping as schools pump out more and more students who are web-savvy, who’ve grown up with the web….who think that just because they know a smidgen of CSS and can use Photoshop to crop an image that they are “web designers”.

  6. Ejudicator says:

    Verbose-Forex hit the nail on the head, I work for an agency that farms me out and they take on average of 1/3 my hourly rate, if they didn’t I’d be at around the midrange. As it is I’m under the start figure.

  7. Jaime says:

    This is a great starting point, and I love that everything is very math based – very easy to calculate, and you’re pulling your salary numbers from real world, credible data.

    I do think you’ve left one thing out of your formula, however. When you work for yourself, not all 1,960 hours in a year are billable. In the freelance world, much of your time is spent outside billable development. These are admin/business owner tasks such as getting business in the door, billing, and so forth.

    I found if you’re lucky, you can spend maybe 75% of your time as billable hours. Considering most people say these salaries are on the high side, maybe these two things cancel each other out, and leave you with a nice, neat formula. But definitely consider the benefit of a guaranteed 2000 hours a year (salary) and make your hourly rate reflect this. So if 2000 hours a year results in 1500 billable hours, divide your hourly rate by 0.75, and you’ll have your true cost.

    Of course, I understand in the real world all the justifications in the world won’t convince a client to pay more than they want 🙂

  8. Allison says:

    This does not take into account the extra taxes you wil have to pay as a contractor vs. a full time employee! That’s a huge expense. You pay the FIDC tax, be aware that about half your income will go to taxes. (That’s an extremely rough estimate, ask a tax professional.)

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