As a contractor, you’re allowed to charge what you want for your services. Set it too low and you’ll be missing out on extra income. Set it too high and you’ll be pricing yourself out of work. So, how do you decide?
Look online and you’ll find countless magical equations for working out your daily rate. Some contractors even look at what others are charging to determine their own rate. However, in truth, there’s no one-size-fits-all formula.
As we know all too well at Umbrella Broker, every contractor’s situation is different. So, it’s important to consider everything from overheads and expenses to the time, effort and skills you’re putting into the job.
Read on as we look at 10 key considerations to help you calculate the perfect contractor daily rate…
- Expenses
From your computer, phone and cost of internet access to travel expenses and marketing costs – everything you use to complete a job counts as an expense. If you’re working from home, these may not affect the price so much.
However, it’s important to factor them in when you’re working from an office as they will soon start to shrink your take home pay. As most of these costs are monthly, it’s best to work out what they cost on a daily basis and add them as a daily rate to different contracts depending on the length.
- Pension and health insurance for contractors
As a contractor, you benefit from a higher rate of income. What you lose, however, are employment benefits like your pension and sick pay. It’s important to plan ahead and consider these while you’re working to avoid problems further down the line. Nobody wants to be left out of work and out of money after a serious injury.
The best way to prepare is by putting some money aside each month as a fund for illness or retirement. Factoring this into your daily rate will make it easier and ensure your current rate of income doesn’t suffer.
- Outsourcing
Whether it’s specialist assistance or just some extra help, you may need to outsource some of your work to other contractors to get the job done. Outsourcing might also help when it comes to taking time off or could become a permanent part of your contract work if you find yourself taking on bigger jobs. In any case, it’s important to factor in the cost of outsourcing as it will significantly increase your daily rate.
- Urgency
How quickly does your client need the job completing? If something is urgent, you will need to sacrifice your free time in the short term and potentially put other projects on the back-burner to meet their deadline. This comes at a cost, and clients will expect to pay more for the additional demand on you.
- Value-add
How much impact will your work have? In some cases, your services could save your client from forking out – or even make them more money – in the future. If this is the case, you can justify charging more per day, especially if they wouldn’t be able to save or make that extra money without your work.
Calculating your day rate
Once you’ve considered your outgoings, expenses and additional value to the client, you can begin to work out your daily rate…
Market research
While you shouldn’t base your daily rate on your competition alone, it is useful to get a broad idea. Firstly, look on recruitment websites and job boards to see what other contractors are charging and clients are paying.
Following this, try asking your own contacts, trade bodies or even potential clients to help you determine how much people are willing to pay. Remember that the quality of work, location and level of competition can affect these figures.
- Compare to permanent work
Almost every contracting role is available somewhere as a permanent job. And this can help you gauge the going rate for your services. Take the salary of an equivalent position – ideally one requiring your level of experience in a similar location – and add on a monetary equivalent for benefits like a pension scheme, health care and paid leave. This will give you a rough idea of your base salary over the course of the year.
- Time
It’s all good and well charging £200 per day when you only earned £100 in permanent employment. But what if you’re working twice the hours? You need to estimate how many hours you’re going to work each day and factor that into your daily rate.
On top of this, it’s a good idea to factor in the amount you’ll be working over the course of the year. As a contractor, you won’t be working on contracts all year round and you’ll want to take holidays, but you still want to get to your desired salary. Estimate a timeframe to achieve this and use it to calculate your daily rate. If you expect to earn £50,000 from 200 days of chargeable work per year, you would need to charge £250 per day.
- Underlying costs
As well as your expenses like a computer, workspace or mobile, you’ll have to fund outgoings like accountancy costs or umbrella fees as a contractor. It’s easy to forget about these and have them eat away at your income after clients have paid. Instead, try to estimate the cost of them over the course of the year and translate this to a daily rate.
- Profit
Everything above should help you work out how much to charge for your contract as a base rate per day. But let’s not forget the profit. Contracting should allow you to make the most of your time and earn more than you would as a permanent employee. Add on around 10 – 20% to begin with… But be wary of pricing yourself out of contracts.
