How to Charge the Right Money For a Job!
I know some here are involved in, or want to become involved in doing work for hire – contracting and consulting. On a discussion board I posted about the topic of calculating the right money to charge for a job. here is that post, I hope you find it useful.
Re: How to determine hours for budgeting social networking
I was responding to a poster who was suggesting that consultants should charge based upon the number of hours in the week and then dividing by the hours worked. This is a simple method but flawed, the slightly edited post follows:
The danger of this approach is that one is starting out by undercharging!
Once one is undercharging it can be very hard to get the ‘right’ price for the job because one’s clients come to know how much output you get for so much dollar input.
One way to tackle this is to look at the job tasks and these are NOT just doing the work.
First concept to address is that of ‘billable hours’ these are the hours of work for which you charge the client and they are the only hours which will pay for you to live.
Consultants who get a utilisation rate (another concept – related to billable hours – the proportion of a week’s time that is used in billable hours) of over 80% are doing really good.
As a one man band you should allocate about 40% of your time to marketing and business building. Your utilisation rate is thus a max of 60% and you can manage in a ‘normal’ working week of 40 hours about 24 billable hours.
So, being really simplistic, if your income need is $5000 per month then you must charge $52 per hour. 5000/96 = 52
I have excluded vacations, sickness and inefficiency slack from this example, but they are easy to add into a real life calculation.
When starting out you will not be as effective as a more experienced hand and thus you will give a lower output per hour. If a ‘market rate’ for your work is $50/hour then you need to discount your rate by the factor that you estimate you are inefficient. So, of you are only 80% efficient then your hourly rate should be $40 per hour and you will be competitive with hands working at full efficiency and charging $50 per hour.
The task will cost the same whether you are hired or your more efficient competitor gets the job.
Now, as you get better you increase your internal hourly rate but the time taken goes down; net result is the same money for less work without having to change the prices that you charge your clients!
When you have the ‘internal’ hourly rate for the job you can start to give quotes based not upon time but upon objectives. So, if a client wants 500 links building and you know it’ll take you 20 hours then you can quote a price for the task and avoid hourly rates. This is more simple for the client and is less risky for them because they can measure a tangible – output as against an intangible – time taken.
This is why quoting for an objective achieved is seen as more professional by experienced buyers because it shows that you know your cost factors and efficiency and account for them yourself rather than leaving the prospect guessing.