Author Topic: How to establish an hourly rate  (Read 4858 times)

Spork

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How to establish an hourly rate
« on: May 12, 2015, 09:00:34 AM »

I'm a little under 2 months to FIRE and there's been strong hints they might want me to do short gigs (or part time) in "the afterlife."  I'm not 100% opposed to it -- as it maintains friendships, provides a side gig and leaves relationships open for any unforeseen future work.

What I'm wondering is...  Is there a ballpark hourly rate for contracting?   In other words, for converting "full time salary with benefits" into "part time hourly with no benefits."


dandarc

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Re: How to establish an hourly rate
« Reply #1 on: May 12, 2015, 09:53:54 AM »
In reality, it is whatever you can negotiate.  But as a starting point:

A.  Figure how many hours full time means.
B.  Figure how much the benefits cost the employer.  This can be tricky, but a lot of employers will tell you exactly how much your health insurance cost, and similar.  Remember to account for things like disability insurance, or business liability insurance if you would need that.

C.  Divide (B + salary) / C
D.  Divide C by .9235 to account for paying the employer half of FICA taxes.

This gives you a roughly cost-neutral to the employer hourly rate (mostly depends on accuracy of step B).  All things being equal, I'd ask for more than this figure -> you don't need the money, so it should take more of it to convince you to work.  You're also taking some risks off the employers hands related to your employment.

ender

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Re: How to establish an hourly rate
« Reply #2 on: May 12, 2015, 10:02:56 AM »
Close to your yearly salary, divided by 1000, per hour. This week be ballpark (less accurate the higher your salary).

Decrease this if your job has minimal benefits.

My conversion for last year and including all time off and benefits would have been yearly salary / 1250 per hour worked.

TheAnonOne

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Re: How to establish an hourly rate
« Reply #3 on: May 12, 2015, 10:49:53 AM »
I generally take....

Full time salary = 120k as hourly rate 120/hour +- a bit. (115-135) I generally will go a bit lower on rate if I know the hours count will be high. 50-65 hour weeks are some sweet paychecks.

Your going to want to make a ton more contracting due to less hours, no benefits and higher taxes.

Source: I have been doing consulting for 6+ years.

Spork

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Re: How to establish an hourly rate
« Reply #4 on: May 12, 2015, 12:15:56 PM »
I generally take....

Full time salary = 120k as hourly rate 120/hour +- a bit. (115-135) I generally will go a bit lower on rate if I know the hours count will be high. 50-65 hour weeks are some sweet paychecks.

Your going to want to make a ton more contracting due to less hours, no benefits and higher taxes.

Source: I have been doing consulting for 6+ years.

I'm really not looking to go into contracting.  I want to be FIRE ... and I believe I've got the math worked out so that I am okay there.   But... that said.... It's hard to turn down easy money from people I already know.  I just want to limit it. 

I'm going to aim for the high side.  But I needed a good starting place.  The "salary/1000" is a good start.  But... salaries here are under market.  And I don't want to encourage "the long goodbye". 

bogart

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Re: How to establish an hourly rate
« Reply #5 on: May 12, 2015, 12:37:34 PM »

I'm really not looking to go into contracting.  I want to be FIRE ... and I believe I've got the math worked out so that I am okay there.   But... that said.... It's hard to turn down easy money from people I already know.  I just want to limit it. 

I'm going to aim for the high side.  But I needed a good starting place.  The "salary/1000" is a good start.  But... salaries here are under market.  And I don't want to encourage "the long goodbye".

It sounds like you wouldn't be sad (or suffer) if you don't get the consulting work.

Think of a number you know you'd enthusiastically accept.  Say it's $500/hour.  Now start dividing (or substracting from that number).  Would $400 still leave you joyful?  $200?  $125?  $33?

If $33 is too small but $125 is enough, is $120 enough?  $115?

When you figure out what the too-small number is, ask for a number a bit bigger than that.  You know your prospective employer, so you can probably figure out whether you need to pad your ask or not.  But if you're comfortable walking away if they don't meet what you want, it's no big deal -- just name something you know you'd be happy about and turn it down if they won't pay that.  You'll still be ahead of the game, because you'll have your time free, since someone wasn't willing to pay enough to claim it.  Or they were, in which case, you're also good.  Win/win. 

Axecleaver

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Re: How to establish an hourly rate
« Reply #6 on: May 12, 2015, 02:36:21 PM »
Having done contracting for a majority of my career, the salary/1000 rule is pretty sound advice. Benefits usually cost an employer somewhere around 40% - but this obviously depends on the package and the base salary. You will be paying for both sides of your social security and Medicare taxes, and your own benefits.

As someone who used to do a lot of "salaried overtime" when I worked for The Man, it's awfully nice to be paid hourly when they need you to put in 60 or 80 hours a week for a while. I find that's a no lose situation, too - either I'm making bank, or they hold me to 40 a week and I have a work/life balance. Either way works for me. If your customer wants you to do work you don't really want, never tell them no. Just follow bogart's advice, figure out what number would make you happy to do the work, and give them that number.

Exflyboy

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Re: How to establish an hourly rate
« Reply #7 on: May 12, 2015, 03:54:06 PM »
Yes it also depends on how they want to employ you.. Through a contract agency which pays your FICA  and HC bennies for example.

I got a little more per hour than what I made when salaried.

But when I occasionally get sent to Brazil and paid a work week plus 35 hours to sit on an airplane at time and a half.. Yeah I'll take it..:)

Now I'm doing between 4 and 8 hours per week.. even at $52 an hour that adds up!

MLKnits

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Re: How to establish an hourly rate
« Reply #8 on: May 12, 2015, 04:03:15 PM »
Everyone else has given you great advice, I'll just add one small piece: don't undercut others in the field. In the long run (honestly, even in the pretty short run) it will hurt you by bringing down the average pay, and bringing down the perceived value of your work. If no one is charging less than (for instance) $40/hour, make that your minimum, too.

Spork

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Re: How to establish an hourly rate
« Reply #9 on: May 12, 2015, 06:23:32 PM »
Everyone else has given you great advice, I'll just add one small piece: don't undercut others in the field. In the long run (honestly, even in the pretty short run) it will hurt you by bringing down the average pay, and bringing down the perceived value of your work. If no one is charging less than (for instance) $40/hour, make that your minimum, too.

LOL.  Not a problem.  If I do it, it will be doing them a favor.  They pay me now 30% less than I made 15 years ago (before adjusting for inflation.)  If I take them up on it, it will be at a market rate.

This is also one thing I've been trying to impress on them when I leave:  You need to pay your people better.  They can move 2 hours away and possibly double their salary.  It's very hard to attract/retain good people.

protostache

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Re: How to establish an hourly rate
« Reply #10 on: May 12, 2015, 06:32:29 PM »
I'm really not looking to go into contracting.  I want to be FIRE ... and I believe I've got the math worked out so that I am okay there.   But... that said.... It's hard to turn down easy money from people I already know.  I just want to limit it. 

I'm going to aim for the high side.  But I needed a good starting place.  The "salary/1000" is a good start.  But... salaries here are under market.  And I don't want to encourage "the long goodbye".

Here's how you pick a consulting rate:

  • Look yourself straight in the eye in a mirror and say your starting number.
  • Add 10%.
  • Repeat steps 1 and 2 until you can't keep a straight face because it's too ridiculous. Add another 10%.

Remember that you're dealing business-to-business now, and businesses don't think like people. A typical consulting rate can and will feel astonishingly high compared to a yearly salary broken down to hourly. Also, attempt to bill daily or weekly instead of hourly. It really helps when you try to get the client to focus on ROI instead of cost. Some clients will refuse but in my experience many will go for it.
« Last Edit: May 12, 2015, 06:35:58 PM by protostache »

Syonyk

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Re: How to establish an hourly rate
« Reply #11 on: May 12, 2015, 10:13:44 PM »
^^ That's about right...

I definitely agree that twice your salaried hourly wage is a good number, and go up from there.  If you happen to be a subject matter expert who can do the work in half what other people can... asking for a lot is totally fair.

You can also do fixed bid projects, if you trust the people involved not to scope creep (or you're good at pushing back on that).

It's not as relevant with a single company taking your services, but never be afraid to add a "You're a pain in the ass to deal with" factor when calculating wages.

Also, I've gotten in the habit of making my hourly rate "what I actually want + 15%" or so - and then adding a 15% discount for payment on net 15 terms.  I used to have some clients who were really bad at paying me on time, and this seems to help.  If they pay you quickly, awesome.  If they drag their feet, you get more money to compensate for it.

Then, if you don't feel like taking work, you can add an "emergency rush" fee on top of stuff.  "I'm busy with other stuff, and can get to this in 3 weeks.  If you need it in 1, that's rush rates, +$50/hr."

... basically, raise rates until the amount of work you're getting matches your desired amount of work.  In my experience, the number required to do this is radically higher than most people think it will be, and if you're good, there's an "annoying valley" where you raise your rates and get *more* work for a while.

And don't forget to save about 40% for taxes.  Self employment taxes suck, but on the plus side, you can deduct a whole lot of stuff (computers, internet, cell phone, part of your mortgage/utilities/etc if you have a home office, miles driven, etc).