088.365 - March 29, 2010

One of the struggles that many beginning freelancers face is determining their hourly rate. They may be coming from a more conventional job where they earned a steady salary or a set hourly wage, but those figures don’t translate directly into the freelance environment.

When you are in business for yourself, you have many other factors to consider. Remember that there is a difference between the rate that you charge your clients and your true hourly rate, because there is the concept of non-billable hours. You know all that time you spend answering emails, completing invoices and marketing your services? Those are working hours, even if you’re not getting paid directly to do them.

It’s Not Just an Hourly Wage

As a general rule of thumb, I try not to charge by the hour for a number of reasons. I make exceptions, to be sure, but for me it makes more sense to charge by the word or charge by the project. When I do charge by the hour, though, I have to consider the various factors that are outside of a usual hour of work. This list isn’t exhaustive, but it should give you a good idea of what should be on your mind when you provide that rate quote.

Factor #1: Infrastructure Costs

When you work at a conventional office, you don’t have to worry too much about the infrastructure. The company is paying for your computer, your cell phone, your Internet access, your software, your heat, your electricity and so on. When you’re freelancing, all of these costs fall on you. The rate that you charge your client isn’t the amount of money that will ultimately end up in your pocket. You have to take care of these expenses first.

Factor #2: Overtime

Individual laws will vary from jurisdiction to jurisdiction, but it is generally true that you are entitled to overtime pay when you work more than eight hours in one day or more than 40 hours in a week. However, freelancers and outsourced workers typically don’t get overtime pay. Whether you work for two hours that day or 16 hours, your hourly rate remains unchanged.

Factor #3: Sick Days and Personal Days

It’s inevitable. You’re going to pick up a cold or you may have an unexpected emergency on your hands. At a regular job, you are usually afforded a certain number of paid sick days for these circumstances. As a small business owner, you don’t get paid on sick days if you don’t actually put in some work. As such, the “cost” of these sick days has to be factored into your regular rate.

Factor #4: Stat Pay

In Canada, there are a number of statutory holidays where employees are either given a paid day off or they are given premium pay for working that day. Again, if you’re freelancing, neither of these is going to be true. When you are comparing your annual salary against someone who has a more conventional job, these kinds of considerations have to come into play.

Factor #5: Vacation Pay

You usually get at least two weeks of paid vacation at a regular job. Some jobs offer a wage premium for working evenings or weekends. Much like stat pay, vacation pay simply does not exist for freelancers. Instead, you have to learn to prepare for a vacation ahead of time and, in effect, roll those costs into the time that you are working.

It Takes a Different Perspective

Some people will say that they should only pay for the time that you are working. In the strictest sense, that is true, but you have to consider how every other business operates. When you go to a restaurant, are you really only paying for the food on your plate? Or is the menu price also factoring in the rent, utility costs, and maintenance costs? And let’s not forget that labour costs would also include stat pay, vacation pay, overtime and sick days too.

When you’re in business for yourself as a freelancer, the same kinds of rules apply. It takes an entirely different perspective from that of the typical employee, since you have now taken on the roles of employee, employer, supervisor, manager, and owner all at the same time.