When I help people start their business I am often asked how I calculate my hourly rate. With that said I wanted to create a post that explains how I calculate my hourly rate. There are 52 weeks in a year and if you calculate an average work week of 40 hours that comes out to 2080 hours. Now you need to deduct two weeks for holidays and floating holidays. Those are the days prior and after the actual holiday. Then deduct three weeks off for vacation. That is approximately 5 weeks or 200 hours of time off. This leaves a total of 1880 hours of actual work. There are other factors that take away from this number such as bench time, sales, marketing, accounting, training and seminars. When you work for yourself as a consultant you have to be realistic how many hours you can actually bill and what clients are willing to pay. So how many hours can you expect to bill in average year? Here is the breakdown:
2080 hours in 52 weeks for a year.
2080 hours – 200 hours (5 weeks Holiday, Vacation & Sick Time) = 1880
1880 hours – 440 hours (non-billable business activities) = 1440 Yearly Total billable hours
I have found that you will spend approximately three months out of the year performing miscellaneous non-billing business activities give or take a week. The total hours billed might seem pretty lean at this point. However you will make up for it in your hourly rate.
When you work for a big consulting company you have the backing of the company should you need additional help. The company already has a proven reputation. That is why some companies will only hire well known consulting companies because they are buying into an established name brand. If you work for yourself as an independent IT consultant you do not have company backing or big name recognition. So your billing rate will have to be less to be competitive. You only have your reputation and prior work experience to fall back upon when convincing a client to hire you. So the ultimate question remains how should you calculate your IT consulting rate if I am working for myself? I have discovered how-to calculate your IT consulting rate if you are an independent contractor. This will also work if you are not in the IT business. There are two ways you can calculate your hourly rate:
First Method – Use this if you know your hourly billable rate at your previous employer:
Take the rate your employer bills you out at and divide it by three and multiply the result by two. For example if you employer bills you out $150 per hour your hourly rate would look like this:
$150 / 3 = $50
Next take $50 and multiply it by a factor of 2 to get you billable hourly rate. So in this example it would be $50 * 2 = $100. I would round up to the next whole number if the rate does not end in a whole number. If you can convince a client that they will receive the same service at 1/3rd off the price you will make an excellent case for you client to hire you.
Second Method – Use this if you do not know what your previous employer charged for your billable hourly rate:
Take your existing salary plus benefits write down the total.
$75,000 + $12,000 in benefits = $82,000 in Yearly Total Wages
Now divide your Total Wages by 1880 hours.
$82,000 / 1880 = $43.62 is what your employer pays you per hour.
Now take your hourly rate and multiply it by two and round up to the next whole number.
$43.62 * 2 = $87.24 Rounded up would be $88.
Now that we know the hourly rate we can easily estimate the gross income. Here is an example:
1440 (Yearly Total Billable Hours) * $88 = $126,720.00 would be the estimated yearly gross income.
That is $44,720 of additional income if billed out in nine months of the year. As you can see you can easily increase your gross income by more than 50% per year. Another aspect to consider is that hardly anyone works just 40 hours per week. Most employees are working 10 hour days plus Saturdays which significantly decreases your hourly rate your employer pays you. If you work for yourself as an independent contractor those additional hours are for you.
This article and the numbers I produced here are estimates of how I calculate my billable rates and hours. It is meant as a reference only. If you have any questions or comments please leave them in the comment box below.
Wishing you ultimate success in your business!