Whether you charge clients by the hour or by the project, you need to know if you are charging enough to make a living. Calculating an hourly rate is one of the best ways to ensure you aren’t undercutting yourself. But you also must consider what the market can bear in your region, how fast you work, and what’s your experience level. These will severely affect what you can realistically charge and be able to pay the bills.
But first, how to calculate your base rate.
1. Consider how much you want to make in a typical year.
This will include your salary, expenses, and taxes. For a hypothetical example, let’s say you want to make about $50,000 in a year.
First, determine how much it’s going to cost to do business. Put down your best estimates in a spreadsheet for the cost to maintain your office, computer, advertising, and any other expenses in a year. (For your computer you can estimate having to get a new one every 4 to 5 years or so. Just take the cost of that new computer and divide it by the number of years you think it will last, and you will get the yearly sum you need to make in order to purchase a new one at the end of that period.) Let’s say you come up with the sum of $2000 worth of expenses.
Next, for taxes, you can simply estimate about 30% of you income will be necessary to pay your taxes at the end of the year. Just add that on to your base salary of $50,000.
Add them all up, and you get the amount you need to make in a year to break even.
$50,000 + $2000 + 30% = $67,000
2. Add a modest profit.
To be able to stay in business, it must be profitable. A standard rule of thumb is to add 20% to your breakeven amount.
$67,000 + 20% = $80,400
3. Determine your billable hours for a year.
If you plan to work a 40 hour week, the calculation is pretty simple. You just multiply 40 x 52 (amount of weeks in a year) to get 2080 hours. But nobody really does that. We take days off, get sick, take vacations, etc. Then there are non-billable working hours, like when you write invoices, do minor accounting, filing, writing up proposals and quotes, and so forth. A good estimate would be to subtract 3 weeks for vacation and reduce your billable hours to 60% of your total working hours to arrive at a more reasonable number. I know that many freelancers, like me, work a whole lot less than 40 hours a week. But for clarity’s sake, I’m using the typical 40 hour week as an example.
(52 weeks - 3 weeks vacation) * 40 hour week * 60% = 1176 billable hours
4. Put this all together.
Take the amount you need to make in a year and divide that by the billable hours you plan to work.
$80,400 / 1176 hours = $68.37 hourly rate, which we’ll just round up to $70 an hour.
5. Last, compare your rate with those of your similar skill set, experience, and residence.
This can be difficult to do, but you can start by checking with your local library. Then you can try to reach out and communicate with other designers and firms in your area. (Good luck with that.) As you compare, consider what you simply can’t afford and how long you can really work on projects.
Remember, your hourly rate is a guide.
Do not base your project estimates only on your hourly rate. The hourly rate helps you estimate what a project is worth doing, but it doesn't tell you the value the project should hold.
For instance, a logo for a mom and pop non-profit will be of less value for the client than a multi-million dollar corporation’s logo. Price your work according to the value that work will bring to the client. A good rule of thumb is valuing your work at about 5%-10% of the profit the project is expected to make. This isn’t always easy to figure out, but you can start by asking the client what they expect the job to return in investment. Other than that, check with your local library to find out what certain businesses take in on a yearly basis and multiply it by 5-10% as a starting point.
The base salary only makes it less likely to undervalue yourself. But, it is only the baseline. The value a project has for the client is the real measure of a good project estimate.
Photo courtesy dhester of morgueFile.com