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Setting your hourly billing rate - Part 3

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

Setting your hourly billing rate - Part 3

How do we then determine an hourly pay rate?

To do that, you next need to determine how many hours per year you'll be working. Let's say in your previous job you took 3 weeks of vacation per year, and used a total of 5 personal and sick days, and also were entitled to 5 paid holidays. That's a total of 25 days off (15 + 5 + 5). In a typical work year there are 260 work days (52 * 5)-- with 25 days off, that means you worked 235 days. Assuming you'll need the same amount of time 'off' in your life as an Independent, and that you'll be working, on average, 8 hours per day, multiply 8 hours per day by 235, and you get 1,880 hours. Divide 1880 into $125,000 and the result is $66.48 -- and there you have your billing rate.

But there's one problem with this scenario.

As an Independent Contractor, you can expect to spend about 25% of your time in non-revenue generating pursuits. For instance, you'll need to keep up with the latest in technology, which may mean taking classes on your own time (and at your own expense.) You may also need to make proposals and presentations to potential clients which may not pan out -- and which are not billable (I try to bill for everything, but it's not always possible.). Also, as good as you are, you most likely won't be working all the time. One contract may end at the end of March, another one begin two weeks later in mid-April.

For this reason, you need to assume that of those 1,880 hours you are able to work each year, only 75% of them will be billable -- which results in about 1,410 billable hours per year -- divide that number into $125,000, and you get a more realistic billing rate of $88.

Now at this point, a lot of newcomers question their ability to command that kind of rate. If the rate you require seems too high to you, what can you do?

First, you can reconsider joining the ranks of the Independent Contractor. Independents, as you have seen here, have good reasons for charging the high rates that they do and usually have the skill sets to get them. If you don't think your skill set can command the rate you need to make, perhaps this is not a good move for you.

Secondly, you can lower your required 'take home' pay. In my experience, this is not a good idea. Under ordinary circumstances, you wouldn't leave one job and take another at lower pay, so why accept that scenario just because you're working on your own.

Thirdly, you can increase the number of hours you're willing to work in a year. Some Independents I know work 14 hour days to increase their billable hours, and in turn, charge a lower hourly rate. Some others give up vacation time in order to increase their billable hours. Again, I don't think this is a great idea. As an Independent, you probably were hoping to improve the quality of your life, but taking this approach is a sure way to ruin it.

Finally, you can 'skimp' on the benefits that you are now paying yourself. For instance, you can choose NOT to pay into your own 401K, or perhaps cut back a bit on the amount you contribute. This is a VERY bad idea. Your retirement plan is insurance for your future. Think how you would feel if your employer announced today that they were eliminating your pension plan, or no longer matching your 401K contributions. You'd be up in arms.

The bottom line is to find a billing rate that allows you to live as comfortably as you deem fit. For most people, that means earning a 'take home' pay that is at least as much as you earn now. If you can't do that as an Independent, then the lifestyle is not for you.

Please read "Setting your hourly billing rate - Part 1" at:


"Setting your hourly billing rate - Part 2":

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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