Freelance In 40 Days [Day 14]: Project Pricing, Not Quite An Exact Science

Posted: September 21st, 2009

Photo by LU5H.bunny (Flickr)

Photo by LU5H.bunny (Flickr)

This is Day 14 of the Freelance in 40 Days series where you’ll learn to freelance just by taking it one day and one task at a time. Today we’ll go in depth on pricing projects and optimizing your earnings.

So What Should I Be Charging My Clients?

This is probably the biggest question a new freelancer has when starting out. The simple answer to that is whatever your clients are willing pay. You see, it is not just settling on a fixed hourly rate and taking it from there since you could actually be leaving money on the table or find no takers for your services.

I’ll try to explain the science of pricing here as best I can. We’ll first start from square one.

The Billable Hours

Your billable hours for the year can be simply broken down with the following:

Working a 40 hour week, 52 X 40 = 2080 total hours.

Minus two weeks of vacation, 2080 – 80 = 2000 remaining hours.

Minus 10% of time spent on administrative tasks (emailing, billing, estimates, etc), 2000 – 200 = 1800 remaining hours.

Your billable hours may vary but we’ll use the 1800 hour total as a rough estimate.

Your True Hourly Rate

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.

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:

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.

The Myth

It is a common misunderstanding that you need to figure out an hourly rate and multiply it by those 1800 hours to come up with a yearly income you desire. For instance, if you decide to charge $25/hour:

$25 X 1800 = $45,000 yearly income

There are two issues with this, though. The first is that you are not likely to work and bill those entire 1800 hours. A good chunk of that time will be spent searching for clients, promoting your freelance business and developing a client base as a new freelancer

The second issue is that due to that time spent searching for clients, you’ll never reach your yearly income goal unless you charge more per hour. By charging more per hour, you then run the risk of appearing too expensive and find it harder to obtain projects. So what is a freelancer to do?

Well, there is a way to counter these issues and earn the income you desire… something usually you have to learn the hard way as a freelancer. Understanding the proper method can go a long way in helping make your freelance career profitable.

The Technique

The secret of earning your desired income does not lie in your hourly rate. It is throwing your hourly rate out the door when coming up with an estimate for any client. The idea is to provide a competitive price on a project which is profitable for you, but something you can eventually improve upon and do in less time. Let me explain:

Let’s say you give an estimate on Project X at $500 and you win it. Also, we’ll say you estimated 20 hours to complete it. Isn’t it reasonable to say that the next time you win a similar project for $500, it will take maybe 15 or less hours to complete it since your gain experience and can possibly reuse parts of the first project?

How about the next similar project after that? Maybe it takes 10 hours. You see, the profitability lies in concentrating your services around those skills you are good at or are continually improving upon. As in the example, the fee you charge for the project may not rise, however, the time required for you to complete it decreases and your per hour income increases. This applies to you whether you are a writer, designer or programmer. The better you get at something, the faster you do it.

In a nutshell, this amounts to doing work you really know how to do well (or learn to do well) as much as you can.

Your Hourly Rate, But As A Guide

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 is limited to the U.S. market but it should give you a rough estimate. We’ll be using this hourly rate calculation in the next tutorial on time tracking and evaluating your business so keep this handy.

Research Your Market

Now we want to do some research into what others are charging for the similar services that we are doing THEN calculate if this will be profitable for us by keeping in line with our hourly rate. First, we’ll take on the research.

The best places to research what other freelancers are charging are the major freelance job boards such as oDesk, Guru and Elance. Instead of searching the projects available, you can actually search for freelancers that work in your field and by keywords of the type of project you are doing (i.e. tech writer, PHP programmer).

The really handy part is that these profiles have available the projects that these freelancers have completed along with the amount they charged for each one.

Also don’t just settle on the first project that matches yours and think this is what you should be charging. The point is to keep digging and find up to ten similar projects (from different freelancers) and come up with an average from all of them. Though this may be a little time consuming, you can more accurately gauge your market price this way.

To see if a project is suitable for you, simply divide your market price by the estimated time to complete it. Ideally, it should be at or above your hourly rate calculation. It should definitely be above the break-even rate though.

Remember, the goal is to search out projects which you can repeat in the future and improve upon the time it takes to complete them. This effectively increases your hourly income while keeping your pricing competitive.

Your Homework For Today

There is a lot of information covered here today so take a break, read it over, digest it and refer back to it when your are coming up with prices on those projects. Also, if you have any questions or on this tutorial please feel free to leave a comment below which will be answered ASAP.

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.

1 Comment. Join In!

  • Freelance In 40 Days [Day 15]: Time Tracking… Proof You’re Not Goofing Off - The Freelance Rant

    January 9th, 2010 at 3:42 pm

    […] In the last tutorial we calculated your total billable hours to be roughly 1,800 and non-billable hours to be around 200 for the year. Also, it was explained that you are not likely to spend all the billable hours working on projects if you are new to freelancing. The reason being that time has to be spent promoting your business and developing a client base. […]