How do you figure out your Billing rate?

[hakuna matata]

As a follow up to this poll question from awhile ago http://www.early-retirement.org/forums/f28/go-into-business-for-myself-or-not-55721.html I have indeed went into business for myself. Question sort of got decided for me as the mother ship decided that all 'on-call' people should be laid off. Not a big deal as I got a nice severance package and it forced the decision. I was leaning heavily this way anyways and am very happy that I have opted to go this path.

So I opened up a new Architectural practice, well almost there, should be sending my announcements out this week. Very excited about the whole deal and fully recognize that initially things will be slow and fully expected to possibly do contract work for other Architects as I get this thing off the ground. Of course if any of you lovely people here need an Architect, give me a shout!

But of all ironies---I get a call last week from one of the Principals at my last office and they will be my first client! They have a project they want my expertise on and so it should be a 2-3 month assignment as a contract employee! I am fine with that as this allows me to keep my office going and running with some cash coming in. I liked my old office but no longer wish to work there as an employee but as a contract person I am fine with it. Just seems funny they pay me all this money to go away and then hire me back for even more money. No wonder the economy is in the tank if corporations can't plan better than this!

However what do I charge them for my hourly rate? Now as a contract employee I have to pay all of my FICA, I have E&O and other insurances along with overhead. I know they won't pay me what they were billing me out before as (3.3 x/hourly rate) but I think they should be able to pay me 1.5 to 2x my previous hourly rate. Just not sure how to figure out my billing rate! Any suggestions?

 

[mystang52]

In this scenario I can think of nothing worse than billing too low and in the end you lose money. So, I'd work up from the expenses (FICA taxes, insurance etc) so you kniow your base. Then add the value you want for your time and expertise, and then "profit margin" above that.
I have no direct experience in this, so this is just my 2 cents on the approach to take.

 

[SunsetSail]

You could determine a fair annual salary for your industry, skill level and experience, , add the previous amount of subsidized health and related benefits, divide it 2080 (hours) then gross it up by 7.65% to account for the self-employment taxes.

I did this when leaving a very large firm and starting my own consulting practice. However, it turned out that I was billing out way too low for what the market would pay in my industry. I started out at $175/hour (I was billing out $475/hour at the large firm). I had long-term clients tell me my rates were too low. I raised the rates on new engagements to $250 which I thought was pretty high for a three person consulting firm, but companies willing paid it. Your industry might work differently.

Good luck in your new endeavor!

 

[Texas Proud]

One of the things that I would do is see what 'market rate' is....

As mentioned, I would not want to go to low.... but I also would not want to go to high either... if your rates are in line with other people who are doing the same thing... they will not balk at hiring you over and over... if you are to high, they might go with someone else...

 

[Aiming_4_55]

Congrats on your new venture!

I've been doing some research on this topic previously and just gun shy myself at the present for various reasons (family time, increase in travel, healthcare cost, etc).

I bookmarked this article previously as I thought it contained some good considerations.. provoked some thoughts to consider.

Consulting fee rates | Consultant fees

A few questions, does your expertise deserve a premium? Will there be other / ongoing projects you want them to offer you as a package deal? Retainer possible in your industry?

When I was with a management consulting firm, our bill rate was 3x salary with 75% utilization rate. As a smaller boutique shop, 2X might work for you.

Personally, I would look at what they paid other consultants/vendors and charge the same or more as you have the expertise. Don't forget the entertainment budget as you now have to wine and dine for future business... lunch status meetings, project completion dinner. Be sure to build in a payment schedule based on time or % of project completion as now you have to focus on cash flow management.

Best of luck.

 

[chinaco]

Make sure you consider you liability!

 

[hakuna matata]

Make sure you consider you liability!

Oh I already have my professional liability insurance in place for my business and it covers this, but thanks for the reminder! Thanks also to all those folks here in this thread for their insights. I just got the call this afternoon and I am going in tomorrow. I have a figure of 2x my hourly rate in mind, we will see what HR has to offer and go from there. Right now it is only a few week project but it can potentially turn into a 3-4 month assignment so I don't want to go too low on the number.

Wow sometimes the world works in odd ways!

 

[BigNick]

I just got the call this afternoon and I am going in tomorrow. I have a figure of 2x my hourly rate in mind, we will see what HR has to offer and go from there.

Are you sure you will be talking to HR? I ask because I'm in HR at MegaOrg and we have complex rules about hiring, so departments tend to make an end-run around them by bringing in people who are clearly doing employee-type work, but calling them consultants, etc, because they can write consultant contracts without talking to us.

 

[FUEGO]

Are you in essence a contract employee for the old architecture firm? Then maybe 2x your old salary.

Or are you a subconsultant to the old architecture firm? Then maybe closer to the 3x that is roughly standard for A/E/C consulting (in my experience).

 

[Aiming_4_55]

Are you sure you will be talking to HR? I ask because I'm in HR at MegaOrg and we have complex rules about hiring, so departments tend to make an end-run around them by bringing in people who are clearly doing employee-type work, but calling them consultants, etc, because they can write consultant contracts without talking to us.

Agree with BigNick.

In my megacorp, Procurement handles this as the contractor is viewed as a 3rd party vendor. If this is the case, read your contract very carefully as an extension of megacorp vendors have to comply with various regulations which can add to your overhead (time and out of pocket expenses).

 

[hakuna matata]

No I will be going through HR as I was told this directly by the Principal. I will be a contract employee for the firm. And it was how I asked to be employed as I didn't want my old job back, I figure I am down this new path, but this will help with that transition.

The odd thing is that my severance is paid out over the next 4 months as well. So I will in essence be getting a twice a month severance check AND a twice a month contract employee check. Sweet!

 

[SunsetSail]

The odd thing is that my severance is paid out over the next 4 months as well. So I will in essence be getting a twice a month severance check AND a twice a month contract employee check. Sweet!

Make sure you didn't agree to forgo the rights to your severance if you find employment during the severance period. My company includes this provision in all our severance agreements (I understand that it is a common practice many places). We just assume no one will tell us if they become employed. However, in your situation they would know. Maybe you could negotiate a waiver of this provision as part of the terms of your contract if applicable to you.

 

[hakuna matata]

Make sure you didn't agree to forgo the rights to your severance if you find employment during the severance period. My company includes this provision in all our severance agreements (I understand that it is a common practice many places). We just assume no one will tell us if they become employed. However, in your situation they would know. Maybe you could negotiate a waiver of this provision as part of the terms of your contract if applicable to you.

Nope I reread the severance agreement before I agreed to go back, and I don't find any reference to termination of severance if I find employment. I had the same thought so I wanted to make sure as that would be a bad decision on my part!

 

[Aiming_4_55]

Nope I reread the severance agreement before I agreed to go back, and I don't find any reference to termination of severance if I find employment. I had the same thought so I wanted to make sure as that would be a bad decision on my part!

It would be sweet!

I would ask HR tomorrow if this impacts the severance package at all and confirm it in writing as it’s been a standard clause with my last 3 megacorp org. over that last 9 years.

 

[seabourne]

I would start with a higher multiple than 2x. I work at an A/E/C firm in Illinois, and we bill from about 2.6 to 3.2 multiplier. Since it sounds like they will bear some of the overhead costs (desk, computer, phones, etc) I'd look for around 2.5x hourly. Obviously in tight times you may need to compromise, but they know you, want you back, and someone is going to be feeling guilty for pushing you out the door. Your first rate is going to inform you future rates with them, so be careful about undercharging to start with - it's not easy to move it up.

 

[target2019]

Who are you a contract employee of? Very confusing. If you are an employee, why E&O insurance? If you are an employee of some company, that company pays insurance.
In any event, good luck.

 

[deserat]

There's another way - project pricing - essentially firm, fixed price. You are limited in the number of hours you can work, however, you are not limited in the number of projects you can finish......it's difficult in some areas to go to this model of pricing, but if you are persistent, you can prevail. I've got most of my business that way now and it is easy - you don't have to track your hours (unless you wish to for your purposes) - you just manage your costs.

Alan Weiss of Summit Consulting has been advocating this for years - and he's written books about it.....again, it can be difficult at first, but once you move towards that, it can simplify your work-life....and move you more quickly towards FI.

 

[Ed_The_Gypsy]

2 to 2.5 x

 

[FreeAtLast]

I was a computer software contractor for over 20 years and there is no magic number especially when you are starting out.

You can often get a feel for what a customer is willing to pay in final negotiations. Sometimes it is more that you would think to charge. I always tried to push for the max and be willing to back down when I saw discontent.

 

[kcowan]

2.5 x covers time required for vacation, sickness, marketing the next assignment, insurance costs....

 

[pb4uski]

Where I worked standard billing rates were typically about 3x salary cost per hour by staff class (1/3 for staff salaries, 1/3 for benefits and overhead and 1/3 for profit). However, the standard bill rate was commonly discounted some in competitive situations so the net was commonly less than 3x.