Whether you work as a contractor or are looking into becoming one, learning how to set the right prices is of the utmost importance and should be done sooner rather than later. Starting your very own business is exciting, but it’s crucial not to get caught up in all the excitement and forget this key fact, which comes from being your own boss.
In our extensive years as contractor accountants, we’ve seen many self-employed individuals charging the wrong amount for their services; after all, knowing how to price your rates can be difficult if you don’t have a fixed list of services to refer to or an idea of the duration of the project.
However, Gorilla Accounting is here to help, whether you’re a contractor or a freelancer; you can figure out how much you should actually be charging below.
Start By Calculating Overheads
Calculating your overheads is key to knowing how much to charge your clients. This means being aware of your outgoings, so you understand the cost of running your business. This includes workspace costs, accounting and bank charges, company car costs, website costs, marketing and advertising and any equipment you need to use.
When you’re just beginning your contractor journey, it can be difficult to be exact about these expenses, since you don’t have a lot of experience to base yourself on. To circumvent this, make sure you’re doing a lot of research into each element, from insurance to stationary costs, and ask other contractors and freelancers what their outgoings are, so you can more easily estimate your own.
Do Market Research
It’s important to note that you should do some market research before setting your prices. This way, you see what others in the same industry are charging for their products or services and can adjust accordingly. You should also attend trade shows and conventions, since these can give you a clearer picture of what your competitors are doing and, potentially, how much they’re charging their clients.
When doing your research, don’t forget to factor in your experience, your skills and the quality of work you offer. Charging the right amount doesn’t have to mean matching your rates to other people’s in the industry; on the contrary, it can mean setting higher prices but also providing more value to your clients. Customers are willing to pay more if it means better quality.
Should You Charge By the Hour, Day or Project?
No matter what you sell, whether products or services, it’s important to think strategically about pricing. Should you charge an hourly or daily rate? Should you charge by project or job? Decide which price structure is best for you early on, so that you can make the right decision.
While this may boil down to preference, one thing is certain: you should always charge for your time, especially if the project takes longer than expected through no fault of your own. If the initial brief doesn’t reflect the scope of the job, clear it up and explain that you will have to add that extra time to the invoice.
If you opt to go with an hourly or daily rate, you will have to make sure the figure you choose gives you a nice income while covering your expenses and bills. If you’re unsure how to reach this number, don’t hesitate to ask for professional advice. At Gorilla Accounting, we provide accounting for contractors, so we understand what it takes to make a profit.
It’s advantageous to charge by the hour or day. If you end up doing extra work, you can charge for that additional time. Unless you know a client very well and have worked with them before, you can’t predict their behaviour; for example, if they start demanding changes in the middle of the project, you want to make sure you’re protected and are able to charge for the extra hours or days of work.
A quick and simple way to calculate your hourly rate is to divide the annual wage you want by the number of hours worked. For example, if you plan on working 40 hours a week for 50 weeks out of the year and wish to have a salary of £100,000, then your hourly rate should be £50 per hour. The formula is similar if you wish to charge by the day: if you want to work 330 days out of the year and receive a salary of £100,000, your daily wages should be around £300.
However, some contractors and freelancers believe that a flat rate per project is better. After all, you will earn the same even if you complete the project quicker than expected, and your clients will know from the start how much work will cost, which will eliminate opportunities to nitpick your invoice. This method of payment also means that, should you get sick or take a holiday, you’re still getting paid.
At Gorilla Accounting, we have a contractor tax calculator that will help you to figure out your take-home pay. If you have any questions about this subject, don’t hesitate to contact us.
Figure Out Your Annual Salary
Determining your annual salary is another important step to knowing how much you should charge your clients. For starters, ask yourself how much you want to get paid; some contractors wish to make enough money to be able to travel the world, others want to build the house of their dreams, and others want to make a very comfortable living for their family. So, figure out your life goals and what is it that you want to get out of contracting. You should also check out similar positions and roles and use those salaries as a guide. You want to make sure that the annual wage you choose not only reflects your skills and experience but is reasonable as well.
Of course, you need a clear picture of your overheads to determine this annual number, since you want to make sure you’re making a profit while still covering all of your outgoings.
Learn to Negotiate
Negotiation is a big part of the contracting and freelancing world. While you may think that your potential client holds all the cards when it comes to how much you’re getting paid (because they already have a figure in mind), the truth is that you have a lot of power in the relationship too. The prospective customer is interested in your services, so it stands to reason that they are impressed by your previous work and skills – which you can leverage during negotiations.
When you show a client exactly how you will bring value to their project, it’s unlikely they will dispute your rates. You can read more about this in our article “11 Sure-Fire Negotiation Tips Every Contractor Should Know“.
Plan for the Future
As a contractor or freelancer, you will need to prepare for the future too. Having a pension plan is crucial for this, as you need to start building it now. Individuals in permanent employment are contributing to their pensions through their employers (as well as through their salaries), but the self-employed need to take care of it by themselves. You do get tax relief on your contributions, but this doesn’t change the fact that the money toward your pension is coming out of your pocket only.
For this reason, you want to make sure that the rates you charge allow you to not just save for your pension, but also give you a nice retirement fund you can enjoy once you decide to stop working.
Charge for a Quick Turnaround
While you are under no obligation to do a job or task in a rush (or out of your usual work hours), it can show your clients that you are indispensable and reliable. However, you shouldn’t do this for every customer; on the contrary, a client that has been shown to be reasonable and friendly can probably be trusted not to request urgent work regularly. If it’s a one-off, therefore, you should definitely consider it, especially because it can help you to build a stronger relationship with your client.
But don’t forget to charge for a quick turnaround either. Make it clear that you charge an additional amount if the client requires a faster delivery of services or products. What’s more, this is especially useful if you choose to work with clients that do push boundaries, since they are unlikely to change their minds at last minute if it means they’ll incur additional costs.
Get a Good Grasp of the Job
Understanding the job in its entirety will help you to estimate prices more accurately and to prevent you from surprising your clients with extra costs due to unexpected work. No one is perfect, so don’t beat yourself up if this happens from time to time – learning as you go is very much a part of being a contractor or a freelancer, as each project and client will be different.
To ensure you understand the project completely, don’t hesitate to ask questions and clear everything up. Many individuals worry about upsetting or annoying clients with their questions, but they are likely to become truly upset if the job isn’t delivered or completed to their specifications because of a misunderstanding, for instance.
How Can You Increase Your Rates?
Do you wish to set higher rates – be it hourly, daily or by the project – but are not sure how to go about it? You may be afraid to raise prices because you worry whether your existing clients (and even potential ones) will walk away and you’ll lose business; however, you shouldn’t let this hold you back. The key is to make sure you can back up your rate increase. For instance, you can develop your skills, acquire new ones that businesses are willing to pay more for, search for clients with larger budgets or start to work faster than your usual pace so you can work on more gigs.
Ensure that you’re getting more return on your time investment. This means finding more lucrative jobs, spending time creating a killer CV that will land you the projects you truly want to work on, investing in marketing (learn how to promote your business to get your name out there), refining your craft, and networking with other professionals and forging business relationships.
Of course, you should also consider requesting the services of professional accountants. After all, your time is better spent running and growing your business so, instead of pouring hours into your accounts or into tax forms, why not let someone else do it for you? From paying the right amount of taxes to keeping track of all of your expenses, engaging the services and advice of limited company accountants can help you to handle the financial side of your business.
Contact the Gorilla Accounting team for more information on what we can do for you and we’ll be more than happy to discuss your needs.