The Great Mystery Revealed: What Should I Charge My Clients? Part 2

Posted: April 24th, 2009

This is the second of a four part series where we explain the science of determining your freelance rates. Today you’ll see the true definitions of the hourly rate and calculate a competitive price for yourself.

Hourly Rates Explained

Coming up with an estimate for a client is simple, right? Just figure out the hours it will take to complete then multiply by your hourly rate. Well, not quite. It is quite a large misconception that project pricing has to be done this way. I’ll explain to you an essential use of an hourly rate calculation along with another important rate calculation, the break-even rate.

Your True Hourly Rate

First, your hourly rate calculation should not be used for pricing a project, but should instead be a guide to determine if you are in fact earning what you want to. Let me explain further with an example:

In the last post we calculated the total billable hours in a year to be 1,800 which averages out to 34.6 hours/week. We’ll round up to 35 hours/week for simplicity. Now let’s say that in one particular week, you worked 20 of those hours on a project and earned $500 (charging your rate of $25/hour) and the other 15 hours were spent on marketing your business and client searching. With a little math you can determine your true hourly rate for this week of work:

$500 earned / 35 billable hours worked for the week = $14.29/hour average for the week.

Now can you see that the hourly rate you charged doesn’t reflect your true rate per hour? In this case the $14.29/hour is a huge difference from the $25/hour you thought you were earning. That’s why the $25/hour you determined as your rate should only be a guide to how much you should be earning rather than an actual rate you set for any given project.

Keep in mind you probably won’t spend such a high percentage of time searching for clients (though a new freelancer will). It’s essential to know the time, however, that is spent on billable tasks and on non-billable work for your freelance business. The goal is to minimize non-billable time and maximize the income per project.

The Break-Even Rate

The break-even rate is simply the minimum you have to earn per billable hour in order for your freelance business to stay afloat. This takes into account all your business and personal expenses including taxes and those beers on Friday. In the above example, if your break-even rate happened to be $15/hour, then you either need to step up your business or cut costs somewhere (lowering your break-even rate) in order to keep on trucking as a freelancer.

Determining Your Rates

The first step in determining your project pricing is to know your desired hourly rate and your break-even rate. Freelance Switch has a great rate calculator to help you find both of these. There is also one other method you can use to figure out a desired hourly rate to compare with the rate calculation:

Go to CBSalary.com and enter your job title to find an average annual salary for the work in your field.

Divide this amount by the 1,800 billable hours estimate to get a rough estimate for a rate to charge.

Keep in mind that this doesn’t reflect the current market in your field and is limited to the U.S. market but it should give you a rough estimate.

Now that we have your hourly rate and break-even rate figured the next step is to figure out how to give an accurate estimate on a project while keeping your earnings consistent with that hourly rate. In the next part of this series, I’ll explain this process without having to do the dreaded guessing.

More on the author, Johnny Spence
Johnny is the founder of The Freelance Rant and a freelance web programmer with 8 years in the business. Have a visit at his company Oscarrr!web or see what he's up to on Twitter.

Comments are closed.