Are You Working for Free?
You could be. In fact, you probably are, and there is nothing wrong with that, as long as it is intentional. I’m down with investing my time, but I’d rather surf or nuzzle my wife than work for free. I’m sure you can all relate.
Let me share how this article came to be. I was about to write a carefully crafted argument on how tracking your time directly affects your income. Then I realized the dialog I just finished with my friend on IM says it better than any argument I might make. I asked for permission to post our chat, she reviewed, sealed, stamped and delivered.
So, to set the stage, we were gabbing along about life drama and all and suddenly, mid conversation, she pulled a little IM judo and slipped in some business:
Friend: is $2800 US too cheap for something like xxxxxxxxx.com?
Shane: all from scratch?
Friend: yep
Shane: how long did it take you start to finish
Friend: full time? I don’t know.
Shane: do you clock?
Friend: no
Shane: hmm … start clocking, it will help you define your rate
Friend: I usually work on a couple of different things at once
thought: aren’t women amazing. I tend to trip when I think. still, thats not a good enough excuse
Shane: I understand. When, I first started clocking, I realized I sometimes worked for less than $12/hr. Start clocking.
Friend: but, I tend to work on packages / fixed bid projects
Shane: I know how you feel. I felt that same way. I found that clocking turned my whole business around. It might be awkward but figure it out. Trust me, you need to, or you end up working for free
thought: hmmm maybe I should shut up and ask her for a few fixed bids …
Friend: LOL - is that a hint?
Shane: I can’t tell you if the work you did was too cheap unless I know truly how long it took, nor can you
Friend: well, it took about a month, but that was in bursts of time
Shane: so if you had to guess? how many real hours, design, code, planning, meetings, QA, the whole thing
Friend: probably about… 100-120, thats a rough guess
Shane: you do the math
Friend: do you think that it would be unreasonable to charge $3500?
Shane: seriously, you need to do the math
The conversation went on for a while. The point. If you don’t know how much time a project takes, how do you know what to charge? I don’t mean how much time you spent coding or designing. I mean the whole package. Once you have begun clocking, figure out your true hourly rate. Once you have that, you will either be pleased or, if you were like me, absolutely horrified. It’s sad when the kid at the local in-and-out burger has a higher hourly rate than you do.
How to Set Your Rate
Once the nausea passed, I realized I absolutely couldn’t keep doing the same thing. In my quest for guidance I was offered very valuable advice: work it out backwards. Instead of asking what will the market offer, I asked myself how much money do I really need to live, and what do I need to save to make progress towards my life goals. These formed i) my baseline target and then ii) my I-don’t-know-how-I’m-going-to-do-this-but-it-would-be-amazing-if-I-made-this goal. Just to let you know. Since the day I did that, I’ve overshot every it-would-be-amazing goal to date.
- I start with what I’d like to take home after taxes when it’s all said and done. I figured that out by reviewing our family expenses and then setting a goal for savings. For a long time early on my goal was a true take home of $5000/month.
- Then I figure out what profit represents pre-tax. Since that is about a 25% taxrate in California, we are talking $6250/month.
- Next I look at my expense basis (or guess) and tack that on to figure out my gross. I had few expenses early on - for the sake of easy math, let’s say for now $750/month (computer, software…), which brings us to $7000/month.
- With my gross revenue dollar figured, it’s then a matter of division. Figure out how many hours are you willing to put into your business and then subtract how much of your time is non-billable. When I was truly a one-man shop, I found that my time was 60% billable. I did manage to improve it up to 75% once I became aware of how high my non-billable time was. So, if I was working 50 hours per week on average (some way higher, some lower), then my billable time was 37.5 hours at 4 weeks = 150 hours. 7000/month devided by 150 hours = $46.67/hr.
- Once I had a rate to focus on, the next questions I had - what are my pivot points? Where can I improve the odds? With some experience and advice I began to work on tweaking my i) billable hours ratio ii) rate iii) taxes & expenses. I play with those consistently to this day. That’s what real business owners do.
Trust me, this is the most profitable little piece of math you’ll ever take the time to do. It pays really well to count your pennies and your minutes. For a nice little summary of other factors that you will eventually need to consider when setting your rate, check out Cyan’s post on FSw: nine factors to consider when determining your price.
Once you know what rate you need to make, then start asking yourself: what need is out there that I can fill and people will pay for? But that is a different article.
Hey, didn’t know if you were aware or not, but Freelance Switch has a rate calculator that takes all your expenses and tells you what you should charge. Maybe a good idea for your friends to take a look at. It’s located at http://freelanceswitch.com/rates/ Enjoy!
That rate calculator is a very cool & useful tool. Thanks!
thanks for the link - it’s a perfect fit for the article!!!
I also work on a couple things at once but it is more because I have the attention span of a squirrel in a walnut factory. One thing that has been a great help is a form called “The Emergent Task Timer” [1] from David Seah. I like it because I can keep track of my tasks in 15 minute increments for the day.
At the end of every week I fill in a larger spreadsheet that summarizes how much time I spend on various tasks throughout my week. It really is an eye opener when you notice you spent 4 hours to get prospect for a project that is only 3 billable hours.
Eric
[1]: http://davidseah.com/archives/2006/12/29/emergent-task-timer-2007-form-updates/
As a consumer, I’ve always preferred to pay a flat fee as opposed to an hourly rate because my fear was I would get “houred” (nickled and dimed) by the person I hired and it would end up costing me more in the long run. Paying a flat project fee, I believe, encourages and inspires the person to perform better and meet deadlines.
As a business owner, I’ve incorporated the things that are important to me as a consumer. I offer packages that have a fixed rate, yet flexible to meet the needs of the client. They can make changes to what’s offered in the package while still ensuring I meet the hourly rate I want.
When I started out, I checked with other business owners and researched the Internet to see what the market rate was at that time. The first few clients I had, I provided proposals that came in just under market because I wasn’t concerned with the hourly rate - I wanted to build my portfolio and brand.
One thing I do with every client is to go above and beyond what is expected or agreed upon - whether they are a paying client or if I’m doing charity work. That little extra something that doesn’t take me much time will make them very happy and drive additional business. Of course, that in of itself could be another article.
D.L, that is precisely where I am at, and precisely why I charge a flat rate. It encourages me to work smarter and more efficiently, and actually works for me.
The person that Shane was referring to in his post was actually me, and it was a discussion we had about what to charge etc.
As I have built confidence as a designer I have increased my rates. I think that my flexibility doesn’t necessarily make me silly or naive, but I do often wonder if I am undercharging (mostly because most freelancers don’t like to discuss what they have charged for X site, which leaves us to somewhat guess, based on the hourly rate calculator and other tools (for the record, according the hourly rate calculator, I am charging almost double what it says to charge, mostly because I have low overheads and a husband that works as well — the calculator is probably inaccurate in that sense)).
Philosophically, I feel the same way about billable hours. I don’t view my work as something that is on or off the clock. I actually think that I am creating a vibe where price doesn’t really matter, and people hire me for ME and not what my prices are.
They are too low, and I am revising them, but I don’t know that being so rigid about billable hours is necessarily the way to go. I will keep track of my time purely as a way to monitor my prices and how much time I am investing, but moving to the “hour” model fully is not really something I am comfortable with either.
The interesting thing about the hour model vs fixed model is who is assuming the risk. As D.L. said - the consumer usually prefers the fixed bid. Why? Simply because the contractor is absorbing the risk of doing business. What they often don’t realize is that it can be more expensive with fixed (if you are pricing things right).
Once you begin clocking and getting a sense of how that risk plays out over time, you can price fixed bid contracts appropriately to compensate for the variability that business often brings. We often see a markup of anywhere from 30% - 100% over the honest estimate. You have to. After all, how many of us have worked on something for 10 hours that we thought would take 3, but turned out to be way more complicated. These things happen and you have to account for them. In fact, our largest mistake has consistently been to not budget enough for QA and minor changes / updates. These have been killers for us and we did not realize that until we began carefully tracking.
The other problem we had with fixed bid was making sure the spec was well enough defined. Feature creep was deadly and continuous. People always want this little change and that addition and we are too nice and used to constantly say yes. If you plan to seriously pursue the fixed approach, then practice saying ” of course we can do that, for $xxxx” or “of course we can do that, but with your current budget you will have to choose between xxx and yyy.”.
The hourly model simply places risk in the clients court. Some times that is appropriate, other times it is not. We find the more abstract and loosely defined the project (especially prototyping) the more important to our bottom line that we fight for hourly.
As a designer that started out for years working on fixed rate bids and recently switched over to an hourly model (well, over a year ago), I’ve got to say that Shane’s perfectly on point here. What you present to the client is up to you, and D.L. is right when she says that consumers (especially small - mid sized ones) want and need flat rate bids to get their heads around it and find the budget, but by no means does that mean that those hourly calculations should disappear.
When I started doing the math, I found I was working for under $15 an hour. This was depressing, mainly because I had just quit waiting tables making $20/hr. Sure, I was “doing what I wanted to do”, but sorry - my landlord won’t let me get by on following my dreams coupons. The cold, hard fact is that as a freelancer, you WILL GET BURNED in the beginning as you learn how long it actually takes you to *finish* a project. I emphasize finish because there’s a huge difference between me turning in my final draft and when the client actually signs off, usually it’s 15-30 hours of difference.
What was the result? I found myself taking on too many projects at once to compensate for my monthly financial needs. I told myself that (6) $500 projects was just the same as (1) $3000. The reality was that I just spread myself too thin and the quality always suffered.
What’s more (and this is the bigger picture advice), by sticking with fixed rate bids where you sell yourself short, you’re also selling the entire industry of freelancers short. If Joe Shmo will build a decent site for $2000, people begin to expect that that’s the cost and it brings everyone else down. Respect the community by placing a premium on the work that we do and not undercutting to please cheapskate clients who undervalue marketing.
As a side note, Tea - your work rocks. My personal advice: Start placing “hour pools” inside of your fixed rate bids. ie: Flash based Calendar system: 20hours at $XX/hr. This will make clients happy to see transparency in your contracts and it will help you see exactly where you can adjust your bids for win-win situations with clients. With my small side clients I still provide fixed rate bids, but when things get out of control (ie: spending 40 hours on a 25hr bid), I can wave the red flag at them, point to the contract, and almost always squeeze out extra money or else have the project put on pause. Happy bidding!
@Brandon:
“by no means does that mean that those hourly calculations should disappear.” This is key point many people miss. I do fixed price work but it includes my hourly cost, time estimates, my profit, and time for managing the project. Fixed price work without data to back it is just a wild guesstimate.
I don’t agree with you about selling the industry short with fixed rate bids though. I understand your point but I think the cause of the problem isn’t fixed rate bids, but with perceptions about digital work (either websites, software programs, or digital media).
I also do fixed rate bids with smaller clients because I believe that most small business owners that I deal with need to see the cost up front so that they can prepare accordingly. But, because I clock my work and I have an idea of how long a project takes, I do give estimates based upon what I want my hourly rate to be. I just show them in flat rate terms. If the project goes beyond the scope of work we would have to re-negotiate the price and this is what I tell all my clients who I charge in this manner.
Thank you very much for this post. I am constantly working for free and underestimating the time that I am getting paid. I would imagine that I make somewhere in the neighborhood of $10/hour even though I charge upwards of $50. I’m not that angry about it though - This is all fly-by-night stuff on top of my “day job” (where I do the same thing, but with paid benefits), and it allows me to explore new techniques and stay sharp, and heck, money is money. But I *should* clock, for sure.
However, I most thankful for this article because you went into specifics. I’ve read countless other “how much should I charge” articles and they amount to “do the math”, but they never give you any variables to start with or end numbers to verify against. You’re openness with your numbers is appreciated. It makes one say “Yeah, $5000 is not that unreasonable and I *should* make that much” without feeling greedy or unrealistic.
Also I agree with padding “fixed” proposals, because in all reality nothing is ever fixed unless you’re selling design templates or other off-the-shelf, one-click-install, homogenized products.
For the record, I make an initial estimate, then triple it, then hem and haw over the seemingly high price (don’t want to loose the client, after all), readjust some numbers here, a price point there - and in the end I still consistently come up short. I should *really* start clocking…
(What is a good clocking program for the PC? Keep in mind that I’m like your friend in the article - working in small chunks of time on numerous things. Perhaps you could write an article about that?
Shane,
Thank you so much for a wonderfully concise explanation about billable hours. I immediately tested your ideas and came up with a figure I was comfortable with, but still felt slightly larger than what I thought my work was worth. (I can’t tell you how many women business owners I know who consistently under-charge their value…)I like the feeling, though, because I do believe that in the past, I’ve also undercharged for my services.
By the end of the year, I expect to see great results from this exercise. Thanks, again!