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How To Calculate Your Contractor Day Rate

How To Calculate Your Contractor Day Rate

As a seasoned contractor, it’s really important that you get the pricing for your services 100% right.

 

There are lots of “equations” out there to help you calculate how much you should charge, but ultimately everyone’s situation is different. When working out your day rate, you have to think about things like your overheads, expenses, how many hours you actually want to work, the skill set that you can offer and how unique your services are. Not forgetting the ever important matter of the taxes you will need to pay on your earnings.

 

Because of this, simply looking up what others are charging might not be the best way to work out how much you should charge for your services. At the end of the day, their advertised day rate can hide many different factors, so it’s important to look beyond the obvious when setting your charge out rate.

 

We’ve put together a few business tips below about how to successfully calculate your rates and how to price your work as a contractor.

 

What to consider when calculating your day rate.

 

Before you actually start calculating how much to charge per hour or per project, you will need to think about the following:

 

Business expenses

Business expenses for contract work will include costs of office equipment including your laptop, printer, internet access, invoicing tools, marketing costs, travel expenses and your business phone.  The cost of these should be heavily reduced if you’re working from home but if you’re working in an office you might find yourself eating into your day rate to afford these extras or the additional  travel. A lot of these business costs will be monthly so you must factor them into your day rate from the start. And because each contract is different, simply charging the same amounts as you did on your last project won’t be sufficient, as your specific base costs to fulfil the work will have changed.

 

Tax and National Insurance for contractors

Don’t forget to think about how much tax you will pay. As a self-employed contractor, you can choose how you decide to pay yourself, whether through a limited company or an umbrella company. You might be responsible for paying your own  National Insurance as well, and these outgoings all add up.

 

If your contract involves a significant amount of travel you might find yourself better off with a Limited Company rather than an umbrella company as you can reclaim a wider range of  expenses. Alternatively, if you have fewer expenses or your contracts are caught by IR35 you might consider using an umbrella company for greater ease and simplicity.

 

What happens if you are caught by IR35 because your new client is in the public sector?

In this event you’ll need to process your new contracts entire day rate through PAYE (which makes an umbrella company your likely option as it’s the easiest way to facilitate this). If you’re moving from a limited company set up, through which you’ve lowered your tax payments via dividends on your previous contract, then if your day rate remains constant your net take home will actually decrease; meaning you’ll want to charge more to compensate.

 

Pension and health insurance for contractors

After making the jump to contracting, the issue of what’s going to happen to your pension is often far from your mind. But once you’ve got some initial contracts under your belt it’s incredibly wise to put aside money each month for your future retirement planning.

 

Health insurance is also important. As a contractor you will not be covered for sickness or health emergencies. Contracting by its very nature is a less guaranteed source of income, so while you might not have had any problems to date, finding yourself unable to work would significantly impact your livelihood. In this event who will cover your contract and ensure you bring in the money your family needs? While no one likes to think that they will get ill, it’s essential to cover all eventualities.

 

Outsourcing to other contractors

In some circumstances, such as needing specialist help on a specific task or an extra pair of hands to meet a deadline, you may need to outsource some of your workload to someone else. This isn’t something that most contractors think about and it comes with other costs like ensuring subcontracting agreements are in place, yet it’s actually something you should consider, especially if you want to take extended periods off work.

 

Most contractors think that leaving permanent employment means working alone, but in the event that you have too much work to handle it’s worth considering if you can build your business into a consultancy longer term and ultimately do less work for more income.

 

Of course this does also bring additional costs, so be prepared to factor these into the day rate that you charge.

 

Urgency or value added pricing

Another point to consider is how quickly the client needs the project completing or how much impact your work will have. If a project needs to be completed quickly, you can normally charge a slightly higher rate than usual as you may have to sacrifice your free time to meet the project  deadline. Simply put, if they need your services urgently they will have to acknowledge the additional demands placed on you and therefore pay a higher rate to compensate.

 

Alternatively you could try to focus on offering additional value. Work out how much you will save your client in the long run or how much you could potentially make your client through the work that you do and it will be a lot easier to justify charging a higher day rate. Particularly if you know that without you they couldn’t make the savings or profit boost that you offer.

 

For more tips on charging a competitive rate as a contractor, check out our tips on earning more in 2018

 

So how do you calculate your day rate?

 

Ok, you’ve had a look at your outgoings and expenses, now it’s time to work out how much to charge. Here are a few ways to calculate and benchmark your day rate:

 

Conduct some market research

One of the best ways to get an understanding of what to charge is to analyse your competition. This means looking on recruitment websites and jobs boards to see what your clients are willing to pay or what your fellow contractors are looking to charge. It’s important to remember though that not all contractors can be placed into the same bracket. There will be a range of factors that can affect your prices including the quality of your work, your location and even the level of competition.  So while this is a great way to see what’s happening in the market it shouldn’t be your only indicator when it comes to setting a day rate.

 

Once you’ve exhausted recruitment websites, you could also try asking contacts, trade bodies or potential clients as this will help you gauge both demand and how much someone might be willing to pay.

 

Find out what you would you get if you were employed

While it might be pretty obvious to look online at similar contracting roles and their day rate, most contractors still forget to factor in what they would get if they were to be a full time employee. The trick here is to take the salary of an equivalent permanent positon as a base, and then add on the monetary value of any additional benefits you might get as an employee, such as a pension scheme or  health care. By combining all these elements you will get a more accurate impression of what your base “salary” should actually be.

 

Work out how many hours you’re actually going to bill for

It’s really important that you understand how many hours you’re going to work and relate that back to your day rate. It’s all very well figuring out how much you would earn as an employee but what if you end up working twice the number of hours for the same pay?

 

Sometimes it’s hard for contractors to think about not working! But in reality you won’t want to be tied down with contracts 365 days a year, nor will contacting offer the same structured hours  of that as an employee. Working out a realistic timeframe to achieve your desired income will give you a more accurate means to calculate an hourly or daily rate.

 

You will also need to factor in things like holidays because as a contractor you won’t get paid for the days you don’t work. Rather than resent your holiday as a time when you’re not earning, calculate how many days holiday you would like to take during the contract and factor them into your day rate. That way, even if you take time off, your earnings from the days you actually work should cover the days you don’t.

 

Consider your underlying costs

Unlike being a permanent employee, you’re probably not going to be provided with a workspace, computer, mobile or other benefits. This means to a certain extent you’ll have to fund these yourself. Sometimes these costs might be reclaimable from your client, but other times they won’t be. Therefore you need to pay attention to the fine print of your contract in order to assess how the costs involved in fulfilling your role will impact the amount of money you walk away with.

 

When considering your outgoings, it’s also important to look for the hidden costs of being a contractor such as accountancy or umbrella fees, insurances and crucially, travel expenses.

 

Check out our 8 Ultimate Finance Tips for Limited Company Contractors

 

Figure out how much profit you want to make

All of the above should have helped you figure out how much your contract is worth and the likely costs you need to factor in to your day rate, but thus far we’ve negated to mention actually making a profit. When figuring out how much of a profit to make on top of the day rate you’ve calculated, a good rule of thumb is to aim for 10-20% as a starting point; but remember not to price yourself out of the contract.

 

Next Step – Contracting Scout can help

 

Well there you have it, our business tips on how to calculate what to charge as a contractor. If you’re not sure whether you’re getting the most from your contracting income, contact Contracting Scout for a free personalised illustration

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