Almost never take a fixed bid contract. They're pretty much always a net negative.
Give clients discounts for paying early. Everyone loves a discount. Never discount your hourly rate though, because once you do that once for a client they'll never stop arguing with you about it. There's a line on Schedule C for recording discounts.
If you turn over raw source code to a client, stress (in written, contractual form) that if any other contractor/employee changes the code, then you will charge them a premium rate for any changes or fixes.
This is not the best approach, honestly.
No one would pay me the effective hourly rates that I make off fixed rate projects, and everyone is happy. Clients almost always prefer to know what they’re going to pay upfront.
Additionally, hourly seems simpler and low risk, but it’s all downside for you. If you’re way more efficient, you get penalized. But if it takes longer than your estimate, clients get pissed. At extremes, they may just refuse to pay. Tell a client your estimate is $10k and then try to bill $30k, tell me what happens :)
Just like value-based pricing, flat rate takes a bit more skill to learn, but it’s dramatically more profitable in the long run.
In some industries, you cannot avoid flat pricing. E.g. bidding on any sort of construction or renovation project. You may have workers under you who work by the hour, but that's your problem.
If a critical security patch requires a change in the code, your client is going to have to either change it themselves or get you on the job pronto... and do you really want to set the expectation that you will be available pronto, forever?
I think the days of write the code, launch, then ride off into the sunset are over. Code should be considered temporary and perishable, and IMO consultants should acknowledge that upfront and help their clients plan for it.
I'm hugely in favor of charging more as a freelancer or consultant, but this isn't accurate. In general, software devs have very low overhead, don't spend half their productive time on marketing and promotion (perhaps they should), and the additional taxes you pay when self-employed in the US are either small (other half of SE tax, max ~8% but usually lower for high-income) or negative (you can write off a lot more).
The reason to charge more is because you're delivering more value, not because you need more money. Clients don't give a shit what you need to make. Charge them based on the value you produce, whether that's 2x or 10x what they'd pay an employee.
And yes, you pay income tax, but no more than you pay as an employee, so it’s not relevant here.
In fact, you now almost certainly have a huge advantage if you’re self-employed: in addition to being able to write off more and save more for retirement pre-tax ($55k), you now get a 20% deduction of your net profit if your taxable income is below $157k single / $315k married, which most self-employed folks will be.
Healthcare is still by far the biggest cost difference most people will face but even if you add all these things up, they don’t represent anything even remotely close to 50%.
Healthcare is still by far the biggest cost difference most people will face but even if you add all these things up, they don’t represent anything even remotely close to 50%.
I beg to differ. For a family of four in Texas, we paid nearly $15,000 per year for insurance and that's deemed a "good policy" (not great) meaning that it has a good PPO, most docs are in network, and most medications are $10-$50. Insurance premiums don't scale with income and that's not accounted for if I read your arguments correctly. If we compare two families of four led by "a freelancer" (as we're talking about here) in Dallas and one freelancer makes $100k but another makes $200k, both have to pay the same $15,000 per year in health insurance premiums. For the $100k freelancer, his health insurance takes up 15% of his gross revenue - that's absolutely going to get him close to or above @ollerac's 50% figure. Maybe not so for the $200k freelancer who only has health insurance account for 7.5% of gross revenue.
Two of my coworkers are based there and it's come up in the past...iirc when they were purchasing monitors for the office.
I made ~$400k last year. I'm a consultant and I don't have a college education, any meaningful certifications or pedigrees and I don't even have a website.
The fact is, the money is out there. In my experience there is always a client out there willing to pay whatever you think is exorbitant, and most clients are terrible at judging which vendors are worth their rates.
If you don't get sick with fear inside when you name your rate then it isn't high enough. Keep asking for more money and I promise you will make more. It isn't unfair dealing if your client is happy to pay it, instead it's foolish if your client would have happily paid more and you didn't find out.
From an economics perspective it's an impure market. Nobody knows what the price should be for your services, including you. What makes you think the client is any better a judge of value than you?
Absolutely spot on. I sat in a meeting with a client and another consultant who named a price for some work. The client’s immediate response was “when can you start?”. My immediate thought was “You could get twice that”. When it came around to my turn to name a price I went in high, and spent the next half hour arguing my value.
So I would put it another way; if the client doesn’t balk at your rate and try and negotiate it down, it’s too low.
You absolutely have to specialize if you want to charge higher rates, if you’re not in a niche then what are you? A commodity.
That's not a custom dev rate, that's a you have a track record of doing something very niche and valuable and usually domain specific. I.e. you have a portfolio or set of recommendations that you delivered successful financial plug-ins for oil and gas ERP systems.
People will pay a premium for something they value. In that instance I actually won out eventually. It turns out the agency was really shitty at managing projects and that particular client got in touch with me directly. He agreed to pay me $400/hr if I gave him priority. I did, and he started referring me to other businesses who would also pay that rate.
So don't kid yourself about how much people will pay.
Edit: These clients weren't in the Bay Area.
If you're willing to get someone to pay you 400/hr, I bet you're not billing/marketing yourself as a developer.
And I'm not kidding myself. Most companies know they can get good devs for significantly less than 400/hr.
The naive answer I would have given at time was: "I'm a software developer who builds ecommerce and CMS sites."
And it's funny that you ask "What do you do?" At the time I had starting taking on projects from a friend who had been doing development contracting for about 4 years. One time when a client told me my proposal was priced too low and passed on my bid I was baffled.
I told my friend about it and he asked me the same question, and I gave the above answer more or less. He corrected me and said "No! You're businessman enabling a national sales channel for a local or regional business who wants to increase their revenue."
So never define your price by what you do, rather define it by what the value of thing is you're delivering to the client. This requires some research on your clients and a realignment of your thinking. When you're contracting as a developer, you have to start considering yourself as becoming a successful businessperson and not (just) a successful software engineer.
I started charing on a per week and per month basis, which was good because I stopped getting bothered with tiny projects.
Also I could choose how much hours per week I was willing to work, as long as the clients are happy they don't care if it took me 40 hours that week or 20. This also increased my effective per hour payment and my work life ballance.
It is also important to sell yourself with a higher value proposition. If you say "I'm a freelancing front-end dev who does JavaScript" they won't pay you as good as when you say "I'm a mobile consultant, who designs and implements apps", even if you do basically the same thing, people suddendly realize that you are a specialist and not some code monkey...
You can get a great dev for much, much less than $400/hr. You're right. However, should I charge less than that to do a few hours of work for you? Absolutely not.
If I'm doing a small project for a few hours for you I have to charge a lot to cover the business costs.
Nope. It is close to what I just paid a plumber. The plumber wanted $5000 for 16hrs of work to redo my piping ~$300/hr. (The cost materials: plastic PEX was probably $40, small house a one guy job). Remember this is a residential plumber - not a commercial electrician. WHY SO EXPENSIVE? You might ask? Try outsourcing my plumber.
I had my plumber fix a pipe that broke inside the foundation for a $1100. And that involved 8 hrs of 4 guys digging a long and deep ditch, as well as chiseling out foundation.
It's really really hard to get people right now. As bad as I've ever seen it.
Yes, you will pay a premium. If you can stretch it to 1k hours or 6 months, you will be able to get cheaper prices. I doubt you'd be paying over $200/hr.
As a one-person shop the value you can bring is probably lower because you don't have the synergies of a team and you will have to spend some of your time doing junior BA-type work. You can't charge yourself out at the full rate of an architect-level resource because you're not spending all your time doing architect-level work. However as a one-person shop your overhead should be lower (e.g. no HR people or other cost centers to support with your billings).
$75/hour seems awful low as a 1099/consultant, so it's no wonder businesses are happy to pay that.
I think I'd find it impossible to charge more than $200/hr for embedded firmware (Boston), but could probably get $400/hr for systems engineering or industrial design to develop an integrated complex solution to a business problem that they don't have the in-house expertise to deal with.
If, as a contractor, you are professional, easy to get a hold of, and treat your work seriously you'd be invaluable to any company who could hold onto you and a lot of hiring managers secretly know this.
And then there's the question of why hire a contractor in the first place if you already have a strong team of devs — why not just hire another full-timer? Most likely you're having trouble filling out your team or filling a crucial role. That would probably be worth a little extra to you.
Plus, there are tons of companies out there who don't need a full dev team of a dozen people, but know they could benefit a lot from hiring contractors for 3 months at a time for one-off projects. These companies are more than willing to pay a little extra to get a job done well on short notice.
Probably raising my rate to $350 soon.
Most of my inbound comes through referrals. I've been at this for about 8 years, so my referral network is pretty healthy. First few years were rough though!
In general, the real "trick" to a successful network (as least for me) is just to be friendly and do good work. Lots of coffee meetings, phone calls, and lunches. :)
Most people who are referred to me know what I charge, so there's not much haggling. People want results and I have a reputation for delivering them.
Assuming you have a creative, a project manager, delivery manager, and a sales manager in the agency, each task/project has to go through each of their hands.
That's an hour each for the managers and how ever many hours for the actual work itself as the base delivery price. Then the internal back and forth between the delivery manager and the creative to insure that everything is "to spec". Then the project manager to report on status each day and the sales manager to take you to lunch and discuss the how amazing everything is with the project, and that the BEST people are working on it.
So 3-4 hours of work can turn into 20 hours of billing (plus expenses).
I also know they want all the work you can throw at them, but just getting a sense of whether this is a 1 hour or 5 hour gig so I can evaluate the ROI before briefing it in is impossible.
This is one of the things I want to address (my side-gig doing marketing consultancy) - one rate, whether that's strategy or design work, up to the client how to use it (and telling them to use someone else if not good value).
Different companies are wildly more efficient per hour of work never mind that many just do much better work.
Rates are kind of ethereal. Maybe they are padding. Maybe they are just slow. Maybe they are throwing several resources on it. I don't know.
This is a big problem with procurement. People fixate on hourly costs and not total cost of project.
That seems pretty good to me for Houston.
As for the hourly rate, I would always accept more but have no real complaints. Getting back to the original post that made me comment, 240/hr for a freelance web designer seems unrealistically high, especially in Houston. I dont know the market well enough in other parts of the country though.
But suffice it to say, if I went out on a gig that was being billed at $200.0 / hr, I wasn't making anywhere close to $200.00 / hr personally.
For example in the United States, employees in many states have much less security than those in countries like Australia. My experience is that freelancers can charge 1.2x to 1.5x the hourly rate of their full-time employee counterparts.
In places like Australia, where employees have a lot of security and there's no such thing as "at will" employment, freelancers are able to charge 2x minimum the hourly rate compared to their full-time employee counterparts. This is because employees get a lot of benefits, like 4 weeks of leave, premium health insurance, sick leave, up to 6 weeks notice for dismissal and redundancy payouts etc.
I'm in a high-demand, high-value technical role and able to go above those multipliers here in Australia - but on average, say for a middle-tier generalist Java developer, 2x is very common.
The only way I find you're able to charge 4x or more your hourly rate, is if you do public speaking, write books, author a blog and participate as a (dear I say it), "thought-leader" within your local tech community. At that point your title becomes consultant and you generally only cater to clients who are hopelessly clueless in your area and want the best advice, or those with a large bank-roll to "get shit done, properly, fast".
Company you worked for might have proprietary tech, patents/IP, massive clients you'll never be able to get, etc and thus can pay you more.
If I work for Google as a search engineer making $200k it doesn't mean I can leave and then suddenly earn $800k selling search consultancy services to DuckDuckGo and AskJeeves.
If I'm an accountant at Deloitte making $120k auditing Fortune 10 companies it doesn't mean I can leave and make $480k revenue auditing sandwich shops and I probably won't be able to take any of my previous clients.
However, starting out as a consultant, it's unrealistic to expect that much. Unless you're already a star employee. But it is possible to get there, within a few years, if you're successful, and build a good reputation.
I started out billing my first clients at about 2x what I'd earned as salary. Once I started getting inquiries from new clients, I negotiated for more. I negotiated the hardest when I had lots of work from old clients.
What I billed new clients became my standard rate, going forward. Every year or so, I renegotiated rates with old ones, more aggressively when I had more work from new clients. But they always got a discount off my standard rate.
How to find private sector clients willing to pay good rates? I have no idea.
My personal style is to avoid getting into bidding contests. I've invested years into building my personal network. That means enthusiastically following up with strangers that I meet to turn them into acquaintances and semi-friends. It's exhausting, but has paid off. For example, sometimes I get a call out of the blue from someone I haven't spoken to in 3 years asking me to help with a project.
Don't expect people to sign contracts right away. Give them time. Years, perhaps. Just put the word out there that you're skilled and available for work.
Edit: Also, you need a specialty that allows you to accomplish something useful in a few months by yourself.
I agree that failure to understand costs is a common cause for undercharging. Same thing with other fields though : construction, remodeling etc.
When I must travel for on-site consultation, I soften the blow of travel time by charging the client 50% of my lowest hourly rate for that time.
The only instance where I tried to charge for travel time was an engagement where I had to travel to Atlanta to do a very small amount of work for a very big law firm. Since it was going to take me a day to get there and a day to return, to do at best one day's work, I said I needed to charge for my travel time. They informed me that lawyers NEVER charge for travel time (assertion mostly disputed by my lawyer friends, but...whatever) and so they couldn't bill my travel time back to their clients. They said however that they could consider a higher rate for my billed time. This discussion went on for a while with the end result I billed them at something like 3X my regular rate but no travel time. They thought this was just fine.
Together we beat a patent troll so I probably would have done the work for free ;)
A: If I’m doing something for a client that keeps me from working for one of my other clients, I charge them.
B: The exception is when working for a client out of state. Sometimes the hassle of doing state taxes just for a few hours work in the clients state is more hassle than it’s worth (to me). I price into my rate one on-site visit to the client a month.
I worked in a computer repair shop for a while. The boss charged the customer $75/hr. I got paid $10/hr. Later I was an auto mechanic. Shop rate was $80/hr. When I left, i was getting paid $16/hr.
So basically I learned that if I was working for myself, I could charge 5x the rate I was being paid, and customers won't think it's unusually high.
For the most part, what you make isn't derived from how much revenue you make your company. It's derived from what the market will bare. Even if you are independent, people who are hiring you are going to try to find the largest spread between what they have to pay for development and the profit they can make based on the development.
On the other hand, what are the real cost of being an independent developer? Health insurance, a computer (that we would probably have anyway) and any development tools. We can usually get away with Fred development software.
A bureau helps me out finding contracts so I spend very little time on self promotion. Also, I don't spend more money on equipment than I would otherwise have done (although, with tax deductions and all, I buy nicer equipment these days). Income tax is unavoidable either way.
I'm charging market rate, which is about 1.5x to 2x what I would get in a regular job with the same amount of vacation and sick days. On top of that, the bureau takes a cut, the details of which I don't know (I invoice them, and they invoice the customer).
On the negative side, being a freelancer is less secure and I may lose income between contracts. This hasn't happened to me yet, and in the current job market, it doesn't feel like an overhanging risk. I think the pay compensates.
Disclaimer: Danish job market, YMMV
W2 contracting means they take care of employment taxes. I am officially working for them.
Recruiters mean that jobs usually just fall in my lap without any major marketing.
I get insurance through my wife.
This makes my calculation much simpler.
2080 total weekday hours -80 hours paid holidays -120 hours paid vacation -120 hours gap in employment.
Desired market based salary * 1.04 (usual 401K match) is the minimum I'll accept.
There is a premium for doing work based on technology I already know well and have experience with vs. using technology I want to learn.
There is also a premium for commute distance, and if it's something I know but really want to avoid (project management, anything dealing with stored procedures, out dated technology, C/C++).
Where in the world is your office???
As a freelancer, I always worked from home. Sure, you have taxes to pay, and some supplies. But as a coding freelancer, I cannot imagine spending much on an office at all.
Do you get to skip on meals and furniture if you don't freelance though?
You’re talking about $1-2k per year for someone earning 100x - 300x that.
So, if you normally make $60/hr working full-time (converts to $120k/year), then as a freelancer I'd suggest charging at least $240/hr if you plan on having anywhere near a similar lifestyle.
This is because 50% of your working time goes towards marketing, self-promotion, and other things clients don't pay you for. And 50% of your revenue goes towards taxes, office space, and buying products and services to support your business.
It's a rough calculation, but I think it explains why a lot of freelancers massively undercharge when first starting out. 4x your normal rate just seems so high until you think of the real costs.
[1] https://blog.artisfy.com/2017/04/13/charge-at-least-this-muc...