Choosing between an hourly or daily hire rate can be tough for contractors. Will a daily rate be simpler? Will you benefit more financially with an hourly rate? Which will get you the most for your time?
Whether you’re currently considering the move from permanent employment to contracting, or you’ve been contracting for a while, it’s important to consider all the pros and cons of both options…
Contract rate ranges
Contract hire rates will vary from industry to industry and, of course, the level of skills you’re offering. A lot of the time, your rate will determine whether you should quote hourly or daily, as typically those with a higher rate will quote per day.
It’s important to note that it is also possible to do work for a fixed price. This is where you quote for a specific piece of work to be completed. However, this can sometimes be tricky to accurately estimate how much time it will take you and how much you should quote for.
Do your research
Your daily or hourly rate is a key part of your contractor finances going forward. Before you make any decision, do some research into what other contractors are offering in your industry. You need to ensure that you’re aligning with other competitors in your market to put yourself in a prime position for securing work.
Too high or too low
There are potential consequences if your quote is too high or too low, so be prepared. Go too low and you could end up missing out on a higher income or even come across as less skilled. Or, if your quote is too high, you could simply be disregarded.
This can be the case regardless of whether you charge hourly or daily, although it is more noticeable when charging by the hour.
Compare to permanent roles
Something to consider when deciding your rate, especially for those new to contracting, is that contracting rates are normally higher than the earnings of those in permanent employment.
As a result, your absolute minimum rate should be based on what you’d get as a permanent employee.
This is important when considering IR35. Depending on whether you’re inside or outside of it, it could have a huge impact (25%) on your take-home pay.
The pros and cons of daily rates
Once you’ve settled on the amount you want to be charging, it’s time to decide as to whether you want to quote hourly or daily.
One rule of thumb is simply based on how much you charged. If your hourly rate works out at more than £40 an hour, it’s advisable to go with a day rate. But sometimes, it’s not quite as simple as that.
With a daily rate, you’re paid for a set number of days. For the client, this can be favourable should they need to ask you to work a few more hours every now and again. Compared to an hourly rate where costs can spiral, there’s more flexibility regarding time on a day rate.
However, there are some cases where this system can be abused, and you could end up being expected to work long hours frequently. An hourly rate can deter clients from taking advantage in this instance.
The pros and cons of hourly rates
Hourly rates are currently the most common choice for contractors. But again, this can be risky for the client as costs can build up. It’s advisable that a cap on the number of hours allocated are placed in these instances.
When it comes to overtime, this will then have to be approved by the manager. This means that you’re less likely to have extra things dropped on you last minute. But, if you’re not managing your time correctly then it won’t be long before the client notices and starts asking questions.
Hourly rates are often preferred as it’s explicitly clear what’s expected from all parties.
What’s the best contract hire rate?
The answer to this question is entirely subjective and should be based on your situation.
Expectations are a lot clearer when it comes to an hourly rate. In this scenario, you can manage the output your client will expect to see. If you have a good working relationship, then there should be no issues operating on this rate.
On the other hand, it’s argued that billing hourly can act as an incentive to work less efficiently. The focus is on your time rather than the outcome which can sometimes lead tasks being completed over a longer time period.
But, with more flexibility surrounding your time, it could work the other way. Some contractors may be inclined to work more productively knowing that you’re going to be paid for the day even if you complete the tasks in less time.
What do clients think?
There’s a reason why it’s more common to see day rates when people are charging a higher rate of pay. A high hourly rate can act as a big psychological hurdle for clients. Having it broken down in this way compared to a day rate can have very different reactions.
Put yourself in the client’s shoes. In one situation, you quote them a day’s work at £50 an hour, which based on an average working day of eight hours, working out at £400. In another situation, you quote them £400 for a whole day.
The client will have to put more thought into the hourly rate to work out what a potential day would cost, which could make it harder to negotiate rates. But the client is also aware that there’s more flexibility with a daily rate and should any amends to work need to be done. It will be a more cost-effective option to go with a day rate to avoid having to pay for extra hours for the amends to be completed.
Because of this, creative industries are most likely to prefer this method. However, when it comes to administrative work, you may find the client is comfortable with an hourly rate.
