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Setting your hourly billing rate -- Part 1

This three-part series discusses methods to establish your own personal billing rate.

Setting your hourly billing rate

In my September 21st Developer Career Tip entitled, "Consulting--Getting Started," I discussed how to get started with Independent Contracting and Consulting work. Let's assume for the moment that you've found someone who wants to hire you. The next major step to take is to determine how much to charge.

There are many schools of thought on what newcomers to the consulting business should charge their clients.

One theory (to which I do NOT subscribe) is to offer to do the job for a rate that reflects your relative inexperience. While I think it's important to be honest and "up front" with your prospective client about your consulting experience, I think it's a BAD idea to charge a "below market rate" to get your foot in the door. In my opinion, doing so sends a subtle message to your client that, just as your rates are below par, maybe your work is also. If you believe that your skills and services are worthy of selling, then you must also take the tact that they are worthy of being paid for at the market rate.

In some cases, you may not have the option of setting your own rate. In many of my consulting jobs, the client tells me what they are willing to pay for my services. Of course, I'm free to make a counter offer, or even to walk away, but a lot of the 'guess work' is taken away when the client states the rate up front. In actuality, most times I'll accept the rate, as most times clients have a strong feel for the current market rate and are willing to pay it for experienced consultants and developers.

On the other hand, suppose the client asks you to name your rate? How then do you establish what to charge your client?

I've seen consultants do this in a number of ways. One way is to join an association of computer consultants. One such association is the Independent Computer Consultants Association (ICCA).

Membership in an organization like the ICCA has many benefits, one of which is the ability to ask other members what rates they are charging in your area. You can then use this as the basis for your billing rate.

You can also find out what your competition is charging, and use that as the basis for your own billing rate. I know of a consultant whose husband (and billing manager) on a quarterly basis calls consulting firms in her area to find out what they are charging per hour for contract programming in Visual Basic or Access. This market research can help you establish your own billing rate.

Another way is to perform some mathematical calculations to determine your optimal billing rate. This method, in addition to helping you set your billing rate, also forces you to make some assumptions about the nature of your lifestyle and business as an Independent Contractor or Consultant. For instance, you'll need to answer questions such as:

-Will I be working 40 hours per week, 50, 60 or more?
-Will I be taking time off for a vacation, if so, how many hours?
-Will I be contributing to a Simplified Employee Pension Plan?
-How much do I hope to 'clear' after taxes?

I'll be illustrating this method in next week's tip.
Written by John Smiley, MCP, MCSD and MCT, author, and adjunct professor of Computer Science at Penn State University in Abington, Philadelphia University, and Holy Family College. John has been teaching computer programming for nearly 20 years.

John Smiley is president of Smiley and Associates, a computer consulting firm located in New Jersey.

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