Top 5 tips for setting your contract rate

Knowledge base from Boox

By Lynne Gowers on 22nd May 2014

Top 5 tips for setting your contract rate

So you’ve finally decided to step out on your own and become a freelancer. Well congratulations, this is probably the most difficult decision for you to make. But now there are a few things that you’ll have to take care of in order to work in this way. Once you’ve decided how to run your business, be it through an umbrella company or a limited company with an online accounting firm, it’s time to start thinking about setting your contract rate.

Tips for setting your contract rate

1) What’s your minimum rate?

Firstly, you should work out the minimum rate you can charge that will allow you to live comfortably. By calculating your personal requirements (rent, food etc) and your business costs you can get a rough example of how much you will need to charge to operate and live as a freelancer.

Once you have this lump sum – e.g £35,000 – you can then divide this by the total hours of work you intend to do over the course of the year. So if you’re going to work an average of six hours a day over a 48-week period, you will work 1,440 hours.

This calculation should be taken as a rough estimate as you can never guarantee how much you will work over the course of a year but it’s helpful to know what your minimum rate should be. It’s worth pointing out that tax deductions should also be taken into account here.

2) Assess the market rate

Finding the going market rate for your industry will depend upon the sector you work in and a number of other factors. Supply and demand, your experience and worth of your skills will all play a significant part in determining the market rate and, as a result of this, the rate you end up charging prospective clients.

There are a number of ways you can gain a rough insight into the going rate, most of which involve using the internet.

Some online salary calculators can be used to work out the amount someone in a particular role, sector and location can command. However, these are to be used as a guideline only as they are limited to the information you can input into them. For example, it will not be possible to measure experience and skills in relation to rate.

Job boards are also a useful way to gauge the going rate. What are people willing to offer someone with your expertise for the types of projects you would be willing to work on?

You can also use freelancer forums to ask questions to your peers. Avoid directly asking questions about how much someone is paid. Use round about questions such as ‘is X amount a decent salary for an X freelancer working in the X area’.

3) Decide how you’ll charge

Determining how you charge a client is perhaps a trickier question than you may think. Many believe that freelancers should charge by the hour, however, this may not be the best option for you.

While it’s common for a freelancer to sell their time by the hour, it could be better for you to try selling your services instead. By asking a client about their end goals and what they hope to achieve on a project you can determine how much your service will cost, without the client watching the clock and trying to reduce billable hours.

However, if you are new to this way of working it may be better to stick with an hourly rate at first. When you have then gained experience you can decide which option works best for you.

4) Supply, demand and your skills

As we mentioned earlier, supply and demand play a big part in setting your rate. If your skills are sought after you may be able to charge a higher rate. Even more so if someone with your expertise is in demand but there aren’t many of you around.

For example, there is currently a shortage of skilled workers facing the UK engineering economy and so, in theory, contractors and freelancers with the relevant qualifications and experience could step in and fill the void. Because they are needed, these kinds of professionals will have more power when negotiating their rate.

5) Monitor your competition

Your competitors should not directly influence the rate you set but it is wiser to keep an eye on what they are doing and the prices they are charging for their services.

Other freelancers may be operating at a reduced rate in order to undercut their competition. You must also take into account the different level of skill that each person is operating at.

What’s more, if you are comparing your competitors, make sure you are looking at others in your area. There’s no point a freelancer from Manchester comparing their rate to someone operating in London as there will be significant differences due to living costs in the capital.

If you’re an experienced freelancer, what other means do you use to set your rate?

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