[GUIDE] Decide your hourly rate?

All right then, the question is quite simple. The answer is not so simple but tricky.

How do you decide your hourly rate? How do you justify it? Doesn't matter what field you are working in, just use the expense & other factors related to your field.

For the record I am a senior developer so I am going to use factors related to me.

I am going to use a $100000/Year + Super as a base [NOT MY REAL SALARY, JUST A NICE ROUND NUMBER].

For consistency let’s say you are working full time and you want to leave that to be working on $/Hr basis. Basically become a full time contractor.

Let’s start with $100000 base salary. In Australia we get 9% standard Superannuation. So that is $9000/Year on top of the base salary. You get 4 week of paid leaves. 2 weeks of sick leaves. 10 days of public holidays. Workday is 7.6 Hours (Whatever time you take for lunch is on top of that). 5 days a week. 2-3 weeks for training and getting to know new things.

So out of 52 weeks in a year, one can take 4 (Paid leave) + 2 (Sick leave) + 2 (Public holidays) + 3 (Self Training), one would need to work 41 week in a year to earn $100000 + 9% Super. My work pays for road toll so if I am contracting then it's my own expense. Based on those numbers there are 1558 Hours in a year one has to work to earn that money (7.6 Hours/Day * 5 Day/Week * 41 Work Weeks/Year).

So the way I would calculate my hourly rate is:

$100000 Base Salary
$9000 Superannuation
$3000 Road Toll
$4000 Fuel
$4000 Parking
$10000 PL, PI, Work Cover, Income Protection, Life Insurance, MISC like anyone sues you for the loss of their data, damage to their property. Basically all kind of insurance to protect your own ASS!
$2000 Car Rego, Service, Depreciation (I know this number can grow!)
$2000 Computer Hardware (e.g. Laptop, Printer, Scanner, Fax, PDA, Printer Catridges)...One can argue that this is not enough for all that hardware but you need to assume those costs as a business setup costs (You are essentially running a business working for yourself!)
$5000 Mobile, Internet & Software Licenses (MSDN Library & 3rd Party Development Components)
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$139000 – Total

1558 hours assuming you are billing 100% which you can't so let’s assume 90% which comes to 1402 (~1400) hours.

One has to make $139000/Year before tax to cater for $100000 base salary of a full time job. So the hourly rate I would work for is $139000/1400 Hours = $99.28/Hour. Let’s make it $100/Hour. Now anyone earning over $50000/Year has to pay GST (10%) in Australia so this rate is ex GST.

So my hourly rate would be $100/Hour ex GST or $110/Hour inc GST.

If one charges anything above this rate, then it's purely one's expertise (and/or greed!).

I have done a lot of research and found this to cover pretty much all the basis.

Does this sound like a good assessment?

Have I missed anything or have I over calculated anything. Keep in mind that as a Full Timer you get paid even if there is a slow week or two but as a contractor you get paid what you can work and what work is there for you.

Many would argue that they are working as full time contractors but not using their cars and taking public transport, you can very well deduct those expenses from the calculation. This was based on situation where car travelling can't be avoided.

I would love to hear from those who have made this move in past or considering the move.

Hope this can help others.

Cheers :)

For a bottoms-up perspective, your reasoning seems about right except from the part in which you're assuming billing 90% instead of 100%. Basically you're assuming that you'll have contracts 90% of your time, which is quite high for anything I've seen in the past. Some contractors assume that they'll be working on a job 3/4 of their total time but I've also seen 1/2 of the time being assumed. That's not so unreasonable if you think that you want to make allowances for a time when no job comes up - this is something that you need to do because as a contractor there is an upper limit of income you can get and you might not want to go under if you end up without a contract for a few months.

Once you finish your calculations, you need to also look at your hourly rate from a top-down perspective. Say you find out that your bottoms-up rate is $100 per hour. First mode of top-down perspective: is $100/hour something that your targeted market in your country can bear? Second mode of top-down perspective: are you leaving any money on the table?