Finance · Runway

Negotiating freelance consulting rate

Dhruv Vasishtha Product Management at Medidata Solutions

January 7th, 2014

Hey FD,

I was approached by a competitor of the old consulting firm I used to work at for a freelance contractor position. I am currently negotiating my hourly rate. I know that they will not pay me the hourly rate my old firm billed to my client, they will still want a margin on top of that. At the same time, I need to compensate for having no fully loaded costs (benefits, desk space, etc.)

If my previous billable rate was $X, is there an adjustment factor that is considered rule of thumb for this type of negotiation? Any other factors?

Thanks!
Dhruv

Adam Altman Head of Product at Automatic Labs

January 7th, 2014

rule of thumb:  1.5x what you would expect as salary if you were fulltime there at your current senority.  if this is purely gravy for you, may want to ask for 1.75x, or for a target 20% end-bonus type of thing, but 2x is pushing it in my experience.

Luis Avila Owner/Fullstack Architect at IdeaNerd LLC

January 7th, 2014

I've read people recommend salary/100 to calculate hourly rate. For example, a salary of $100k/year would mean an hourly rate of $100/hour.

When I was freelance I would typically get anywhere from 1.5X to 2X of salary depending on the client and availability of other consultants. At the very least you want to get 1.3X of salary so you can cover your self employment taxes, health insurance, IRA, etc... 

Marcus Matos Software Development & Information Technology Professional

January 7th, 2014

I think you'll find this calculator helpful:
http://www.freelanceswitch.com/rates/

It asks some things that you may not have considered. I personally wouldn't base my rate based upon my previous rate - I'd base it on what I want/need to learn and what the market will bear.

Marcus Matos Software Development & Information Technology Professional

January 7th, 2014

Correction: I meant "earn" in my previous post but "learn" does apply in a sense.

Tim Scott

January 7th, 2014

I was an independent contractor for many years, and I sometimes subbed with a boutique firm in my town. Your costs and your wants to the rate you end up with, only to whether you decide to do it or not.

When subbing my rate was pretty much the same as I charged as indie. That's because the firm can charge more because their website has a pretty diagram of their process and their sales guy, accountant and rent need to get paid. In my experience I was getting maybe 15% below what they were charging which was about 100% of what I was charging when working directly for the client.

Keep in mind, they sold a project that they cannot fulfill, and so they are desperate to staff it, and you are the perfect fit. If that's not the case, you might pass on it. If you really need the work, and nothing else is forthcoming, then work for less.  Negotiating 101 I guess.

Tim Scott

January 7th, 2014

Oops, I mean to say, "Your costs and your wants are irrelevant to the rate you end up with..."

Dhruv Vasishtha Product Management at Medidata Solutions

January 7th, 2014

Thanks guys, all the different calculations are landing in the same general range so I have my directional answer.

Ken Woodruff Software Architect

January 7th, 2014

Instead of negotiating your rate negotiate their margin. That aligns your interests--if they bill for more you get more and they get more. You may also want to set a floor on the minimum you're willing to work for.

Jake Carlson Software Development Manager at Oracle

January 7th, 2014

2x salary is usually the benchmark, then you go higher or lower depending on the circumstances. I go lower for volume (e.g., maybe 1.5x for a fulltime gig). The market and their needs should factor in as well, but 2x is a good starting point for part-time work. It is true that agencies get away with charging more because of overhead, but that overhead is also a benefit to the client in that they have more than one person to contact and recourse should the individual contractor can't continue, etc.

Candice Hughes, PhD, MBA

January 8th, 2014

I suggest talking to other people consulting at your level. Some industry associations perform salary surveys (including for consultants) that can be used as a guide.

Going by a prior salary may result in underpayment. For myself, I found that when I became a consultant I was able to increase my income by 300%. The increase in income was due to several factors: 1) I discovered I was underpaid in my prior role 2) I was also "underemployed" so I was able to work at a much higher level than I had been when employed so my consulting roles were also worth more 3) I hustle and as a consultant I was paid for all the "overtime" I put in.

So take a broader more comprehensive look at your skills and type of work required before setting a fee.