Tips for Setting Rates as a Freelancer or Independent Consultant

Setting freelance fees can be difficult for a lot of new independent professionals and consultants. Common mistakes are made, and those mistakes contribute to burnout and even failure in a freelance career when professionals realize they underestimated their needs and they can’t raise rates quickly enough (raising rates can be hard and can take a while, as it often means targeting a completely different client market).

Keep these things in mind when setting your freelance rates, and you won’t have to worry about raising fees in the near future:

Know What You Need

Before setting freelance fees, know exactly what you need to earn throughout the year. Figure out your personal expenses, any money you want available for savings, emergency funds, or large purchases, and all expenses.

Understand Salary vs Cost

A freelance salary does not directly equate to a similar employee salary. Don’t underestimate what you’ll need to earn by thinking a low overhead means you don’t have to account for expenses.  Freelancers will pay for their own insurance, they pay additional taxes (in the US at least), and there are day-to-day expenses of running a business (even from home).

Don’t think “I earned $50,000 at my day job, so I want to earn the same as a freelancer.” You’ll set yourself up for failure. To be in an equal situation to your full-time job, you don’t need to match the salary; you need to match your “cost” as an employee to that employer. Salary is only one part of it. The employer also paid a portion of your Medicare and social security taxes that you’re now responsible for. They put money towards your retirement and or health insurance. They paid for your basic office necessities. They paid your bonuses. Think about how much money it cost that company to hire you to do your job, and that’s what you need to try to match with a freelance income. It may be a large difference. For example, to have all other things equal with that $50k per year job, you may need to earn $70k per year freelancing. Your rates have to account for that.

Know that All Hours Aren’t “Billable Hours”

Sometimes freelancers set their rates based on an expected 40-hour work week. For example, let’s use the $70k per year gross income goal from the above example. Someone might assume they would figure out an hourly fee by dividing that total by 52 weeks per year and then again by 40 hours per week (which comes to approximately $34 per hour).

That would be a huge mistake. In reality, you have “working hours” (40 hours per week) and you have “billable hours” (which can be as little as half of your working hours depending on your marketing and administrative duties that will take the rest of your time). Using the same example, and assuming only half of your hours are billable, you have to charge clients twice as much per hour for that same yearly goal – approximately $68 per hour – that’s a big difference).

You Won’t Always be Working

We still have a problem with our above example. It’s based on 52 weeks per year. Almost no one will work a full week every week of the year. You need to account for time off – holidays, vacation time, sick time, etc. Let’s say in this example then that we’ll account for seven weeks off between holidays, vacation time, personal days, and sick time. We’re now down to 45 working weeks in the year. $70k now gets divided by 45 weeks and then by 20 billable hours per week, to give you an hourly rate estimate of approximately $78 per hour.

You Have to Account for Down-Time

If you’re new to freelancing or independent consulting, you can’t generally assume that all of your available billable hours are going to be filled every week. You’ll very likely have slow times. You should account for this by adding a buffer to your rate – I suggest tacking on 10 percent.  That would now take us to an hourly rate estimate of approximately $86.

Factor in What You Want

All of those things simply help you find out what you need to charge to earn the same as you did in a full-time job. Anything you want to earn over that now needs to be tacked on. For example, perhaps you feel that you were worth more than your company paid you. Or maybe you want better insurance or more for savings and retirement. If your experience and credentials (not to mention marketing abilities) back up an increase to earn what you want instead of what you need, then by all means, increase that hourly rate. But decide what your time is worth to you before you’re fully immersed in a freelance career, as raising those rates significantly later can be a career-killer for many.

This post was originally featured on July 11, 2008.

3 thoughts on “Tips for Setting Rates as a Freelancer or Independent Consultant

  1. That is a very interesting nad useful piece written by Jennifer Mattern.
    I would like to add one further point – apart from working out what you are worth as advised by Jennifer, you could also try and see the value you are delivering to the client. If you can do that – it is often difficult to do, especially before you take on the assignment – you will often find that you are delivering far greater value than your own calculation of your worth. You may therefore try and take a share of the value delivered.
    Of course, the scenario will depend on supply/demand and what the market will bear.

  2. I liked both the info from Jennifer and Ujjal, I was wondering if it would be acceptable to place a % of award clause in the price. IE: if the proposal is successful, a % of the award is to be paid sort of as a performance award.? Any thoughts on that?

  3. Jennifer Mattern

    Yes, you can certainly always charge more than the minimum rates the post is designed to help you determine. That’s where your credentials, experience, and marketing skills really come into play.

    As for a “performance award,” they’re perfectly acceptable in some kinds of work. For example, many marketing copywriters charge a flat fee up front with a performance bonus / commission based on the increased conversions their copy leads to. If you’re working in independent sales of some sort, commissions are a pretty normal thing as well. It would really depend on your industry, and what those “best practices” are – look at how competitors are charging to get an idea of whether or not this billing style might be a hard sell to clients.

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