Charge Out Rate Calculation - Sole TraderTechnical/Engineering/others
Kerry C
The following was sent to me a couple of months ago by an engineer who was
made redundant and decided to set up a small consultancy business. Since
then quite a number of people wanting to do a similar thing have shown
interest and one suggested it be posted to a local newsgroup or two. I
though this a good idea bearing in mind our current times.
Apparently it originated from an Oz newsgroup so some of the so called 'On
Cost' figures shown may not apply &/or would need to be modified. It's
pretty basic and clearly meant for the 'sole trader' person who probable
works from a home office and has a minimum of overheads, ie. someone with
pretty well only technical knowledge and skills, to sell. At least it might
be a start point to be refined for a specific situation.
Hope it's of some use to someone. I'd appreciate comments for passing on.
Calculation for CHARGE OUT RATES
1. AVAILABLE ANNUAL HOURS
At 7.5 hours per day, 5 days per week, 52 weeks per year
Total available annual hours = 1950.00 hrs
2. DEDUCTIONS
(a) Public Holidays, 12 days = 90 hrs
Annual Leave, 20 days = 150 hrs
Long Service Leave, 15 days = 112.5 hrs
Sick Leave, 10 days = 75 hrs
_______
Deduction (a) = 427.5 hrs
PRODUCTIVE BALANCES
Long term work = 1950.5 – 427.5
= 1522.5
hrs
Short term work (20% deduction = 304.5
hrs)
= 1218 hrs
(b) ON COSTS
Workers Compensation 3%
Superannuation 10%
Professional Indemnity Insurance 3%
_____
Total Oncosts 16%
3. APPROXIMATIONS
Long term contract 1300 hrs
Short term contract 1050 hrs
EXAMPLE: Target Salary = $50 000,
Long term = 50 000/1300 = $38.50 per hour approx.
Short term = 50 000/1050 = $47.50per hour approx..
___________________________________________________________________
From the target salary, you'd still have to pay rent, purchase technical
literature and equipment for a small office, run your vehicle(s), etc - all
legitimate tax deductible business expenses. As such, there should be a
factor for these in 'On Costs", or at least a set sum allocated on top of
target salary, IMO.
Kerry C.
xtr12426801
Basically these are a good set of calculations, except for the complete absence
of office overheads. Also, I do not think that $50,000 is an adequate annual
earnings for the independent professional worker. Try $80,000, and add 25%
overheads. The 1300 hours is not too bad a figure in my view. Now your hourly
rate is up to about $75 - $80. If your prospective client won't pay this, then
he or she is probably not worth working for. Don't forget that the same client
probably pays $150 per hour to a lawyer without blinking.
If your client balks a bit, offer them a fixed price for a job. OK every so
often you will get it wrong, but at $75 per hour +GST, you can afford to take
extra time to get it right. Whereas at $38-50 per hour, you cannot muck about
for long, and they will always balk when you try to tell them that it took
longer than you thought and that you want more money.......
Do not think that a client respects you for charging a low rate! Quite the
opposite, they probably think you are a bloody fool...............
Bill
Kerry C wrote:
> <snip 'cos the bloody newsreader won't accept more repeat than comment>
>
> Calculation for CHARGE OUT RATES
>
>
>
Brian
On Wed, 25 Mar 1998 08:44:19 +1200, "Gavin Jolly" <ga...@nospam.com>
wrote:
>I agree. I calculated the charge out rates for my company and based on
>calculations based on information available from IPENZ and ACENZ.
>
>When you work out your costs add on rent, phone, power, anything you do not
>directly charge for like equipment/computer updates, INSURANCE (Don't forget
>that one). Work out what you are going to charge your clients for directly,
>Stationary, photocopying, Testing or other equipment (Say $50 every time you
>take a soil probe onto their site as it helps pay for the damn thing),
>Allow for some profit in the business. Allow for the fact you will not be
>100% chargeable.
At the end of the day, you've got to be competitive, give good value
for money.
Otherwise the above is little more than self justification for plushy
offices, the costs associated with attendance at talk-fest conferences
and so on.
>Also ask the question - Why will my client pay their Lawyer or Accountant
>large hourly rates that do not get discounted.
Comparisons with lawyers and accountants and teachers and nurses and
the police are meaningless. As much as any profession looks over the
shoulders of people in other professions and sees their supposed
perks.
> Why don't these same people
>under-cut their competitors like Engineers do. Your time is valuable
The problem is when an engineer perceives his time as valuable, and
nobody else does.
> and you add value to their projects.
Most do. Some dont.
> Dont undervalue yourself and think people will respect you.
Or overvalue yourself, and think you're important.
> Charge them appropriately and through your work prove that you are
> worth it.
Reminds me of extremely good advice I once heard: "Charge them
appropriately and through your work prove that you are worth it" :-).
> Yes you will get clients who will argue.
Rarely, without some substance.
> Generally you get more arguments out of a home owner over $300 than for
> a larger acvcount to a company or the like for $5000. If you dont want
> to work for someone dont. Why work for nothing when you know the
> Bastard who is your client wont pay.
If your relationship starts off with your client being anything else
than a person that you respect, you're in the poo.
Stay away from Bastards.
If you do have to work with bastards, nothing I say is relevant.
Instead buy much red tape, or if it's cheaper, some white tape, and
much red crayon. Learn to cry. Think about becoming a lawyer.
> If so give him a fixed fee and demand cash up front. If
> they need it done they will pay.
>
> And the best advise available - Get a fee Agreement SIGNED by the client
>before commencing any work.
For 15 years 90% of the work that I've done has been done with nothing
signed.... completely on trust. No problems. Yes, risky, but that
risk is more in theory than in fact if you do your job right.
Clients appreciate the lack of red tape and bull shit, and the implied
committment to take such risk.
> Itemise the work to be done and your charges and any penalty interest
> chargeable.
Start charging "penalties" of any sort, even if warranted, is the
quickest way to doom. Not a smart move to get your pound of flesh on
the current job, and miss the whole carcass on the next.
If you or they are in the shit, share the load. Learn to enjoy it as
it oozes between your toes. And you'll get the *next* job.
>Saves any arguments later as they know
>they have signed it. Has saved my employers many arguments. We implemented
>this as part of an ISO policy and it works. In the same way sort out any
>Variation to Fee Agreements before you do the work and get them to sign for
>it.
Look at the smart prospering companies, and not the Granny consulting
firms for guidance. They do not piss around with all sorts of
variation agreements unless they're forced into it.
>If anyone wants it I have a Word Document Template based on an IPENZ
>document "Short form agreement". Works well. If you want a copy mail me.
Thought about registering with the organisation nearly 20 years ago.
Listened to a discussion from the engineer in a suit (an oxymoron)
explaining how low fees were "unethical". My mind wandered to
thinking about how his ethics were more wrapped up in his flash house,
car, and his boat, than perhaps considerations to ethics about
"people". Never joined.
Dipped my toes into thinking about registering again more recently.
The IPENZ cost plus mentality is still alive and kicking. The
membership fees are probably twice to five times as large as anything
that can be justified on the basis of what they deliver. A little bit
of restructuring would seem to be necessary within their midst! I
felt no incentive to join, simply for the dubious privilege of having
MIPENZ after my name!
>My 2c worth.
>Gavin Jolly
>ga...@isp.co.nz
>
Brian
Mine was only 1c worth!
How did you justify your exorbitant charge? :-)
Gavin Jolly
I agree. I calculated the charge out rates for my company and based on
calculations based on information available from IPENZ and ACENZ.
When you work out your costs add on rent, phone, power, anything you do not
directly charge for like equipment/computer updates, INSURANCE (Don't forget
that one). Work out what you are going to charge your clients for directly,
Stationary, photocopying, Testing or other equipment (Say $50 every time you
take a soil probe onto their site as it helps pay for the damn thing),
Allow for some profit in the business. Allow for the fact you will not be
100% chargeable.
Also ask the question - Why will my client pay their Lawyer or Accountant
large hourly rates that do not get discounted. Why don't these same people
under-cut their competitors like Engineers do. Your time is valuable and
you add value to their projects. Dont undervalue yourself and think people
will respect you. Charge them appropriately and through your work prove
that you are worth it. Yes you will get clients who will argue. Generally
you get more arguments out of a home owner over $300 than for a larger
acvcount to a company or the like for $5000. If you dont want to work for
someone dont. Why work for nothing when you know the Bastard who is your
client wont pay. If so give him a fixed fee and demand cash up front. If
they need it done they will pay.
And the best advise available - Get a fee Agreement SIGNED by the client
before commencing any work. Itemise the work to be done and your charges
and any penalty interest chargeable. Saves any arguments later as they know
they have signed it. Has saved my employers many arguments. We implemented
this as part of an ISO policy and it works. In the same way sort out any
Variation to Fee Agreements before you do the work and get them to sign for
it.
If anyone wants it I have a Word Document Template based on an IPENZ
document "Short form agreement". Works well. If you want a copy mail me.
My 2c worth.
Gavin Jolly
ga...@isp.co.nz
Gavin Jolly
Brian wrote in message <35182178...@news.wave.co.nz>...
>On Wed, 25 Mar 1998 08:44:19 +1200, "Gavin Jolly" <ga...@nospam.com>
>wrote:
>
,Snip
>
>>Saves any arguments later as they know
>>they have signed it. Has saved my employers many arguments. We
implemented
>>this as part of an ISO policy and it works. In the same way sort out any
>>Variation to Fee Agreements before you do the work and get them to sign
for
>>it.
>
>Look at the smart prospering companies, and not the Granny consulting
>firms for guidance. They do not piss around with all sorts of
>variation agreements unless they're forced into it.
>
I disagree about the Granny Consulting Firms opinion. When dealing with
private and commercial clients it is well worth your time to get both fee
and variation to fee agreements sorted out. I would be interested to hear
if you, Brian, deal with say 4 invoices per month or issue 40. Are your
clients new clients or all existing?
5 minutes getting an agreed fee and scope of works before you start is well
worth it. Also with the variations to fees, saves you having to justify
yourself to a client who just does not want to pay any more. When a portion
of your business is new clients they feel safer dealing with you having such
an agreement. When you client keeps asking for changes are you going to say
yes and issue an account with an extra $3000 that they will be happy with.
They want to know during the job their request means additional work or some
rework that you should get paid for.
This is taking more time than expected.
My 5c worth.
Gavin Jolly
ga...@isp.co.nz
Bob Curwood
>> <snip 'cos the bloody newsreader won't accept more repeat than comment>
Good! I didn't want to read it all again anyway....
Eric Stevens
it probably is not your news reader. It will be your ISP.
Eric Stevens
Give a man a fish and you feed him for a day.
Teach him how to fish and you feed him for the rest of his life.
Patrick Dunford
Verily, verily stev...@iprolink.co.nz (Eric Stevens) didst write on
Wed, 25 Mar 1998 08:31:06 GMT in
nz.comp:<351bbe3c...@news.iprolink.co.nz>...
>On Wed, 25 Mar 98 06:32:50 GMT, r...@caverock.net.nospam.nz (Bob
>Curwood) wrote:
>
>>>> <snip 'cos the bloody newsreader won't accept more repeat than comment>
>>
>>Good! I didn't want to read it all again anyway....
>
>it probably is not your news reader. It will be your ISP.
Used to use NS3, from memory it will not let you post a message if too
much is quoted.
---
Patrick Dunford, Christchurch, NZ
http://www.caverock.net.nz/~pdunford/politics/
To e-mail me, replace nospammers with xtra
The Ur
Kerry C wrote:
> .... interesting snippet on slef employment charge rates...
The Ur's "Entrepreneur's Business Viability Check":
Start with the salary you want to make - call it I (for income) (say
$50,000)
Multiply by the Efficiency factor (happens to be 2.2 for 1 person) =
110,000
Divide by average gross profit (hourly rate as in your example - call it
$40)
Means that earning $50,000 would take about 2750 hours.
This is the number of hours you need to work to get the income I.
Now: take 2000 as the number of hours you can work per year
Estimate how many hours you need to sell a number of hours of production
(for an engineer, that usually works out as 3 hours for 5 chargeable
hours - from experiences talking with engineering consultants). Thus,
the best the person would do in a year is charge for 5/8 of 2000 hours,
or 1250 hours. If is also very unlikely that this person would be able
to do more than 70% of this thus 975 hours.
Which is about 1/3 of the number of hours needed.
So, rework the whole thing based on 975 hours, which means charging at
least $50 per hour, and more likely closer to $100 per hour.
Quick estimate: if you can charge $100 per hour, the you can afford to
pay a salary of $49 per hour. 70% of total time available for work times
70% of what is actually earned for salary -- the other 30% is used for
expenses.
Believe it or not, this works - been teaching it for years, and tested
it out for years befoe that.
The Ur.
Brian
On Wed, 25 Mar 1998 16:47:57 +1200, "Gavin Jolly" <ga...@nospam.com>
wrote:
>
>I disagree about the Granny Consulting Firms opinion.
Was an uncalled for description.
I'll take it back with a sincere apology
> When dealing with private and commercial clients it is well worth your
> time to get both fee and variation to fee agreements sorted out.
A lot of the emphasis of what I said was related to sole traders.
I'll agree that fees are very important, and my previous post may have
implied that fees are not.
>I would be interested to hear
>if you, Brian, deal with say 4 invoices per month or issue 40. Are your
>clients new clients or all existing?
>5 minutes getting an agreed fee and scope of works before you start is well
>worth it. Also with the variations to fees, saves you having to justify
>yourself to a client who just does not want to pay any more. When a portion
>of your business is new clients they feel safer dealing with you having such
>an agreement. When you client keeps asking for changes are you going to say
>yes and issue an account with an extra $3000 that they will be happy with.
>They want to know during the job their request means additional work or some
>rework that you should get paid for.
>
>This is taking more time than expected.
>
>My 5c worth.
<grin>
you deserve it.
>Gavin Jolly
>ga...@isp.co.nz
Eric Stevens
>Verily, verily stev...@iprolink.co.nz (Eric Stevens) didst write on
>Wed, 25 Mar 1998 08:31:06 GMT in
>nz.comp:<351bbe3c...@news.iprolink.co.nz>...
>
>>On Wed, 25 Mar 98 06:32:50 GMT, r...@caverock.net.nospam.nz (Bob
>>Curwood) wrote:
>>
>>>>> <snip 'cos the bloody newsreader won't accept more repeat than comment>
>>>
>>>Good! I didn't want to read it all again anyway....
>>
>>it probably is not your news reader. It will be your ISP.
>
>Used to use NS3, from memory it will not let you post a message if too
>much is quoted.
>
Another point of view is that it will not let you post a message if
too little is written.
Kerry C
Gavin Jolly wrote in message <6f963n$bg3$1...@newsource.ihug.co.nz>...
<Big snip >
>If anyone wants it I have a Word Document Template based on an IPENZ
>document "Short form agreement". Works well. If you want a copy mail me.
>
>My 2c worth.
>
>
>Gavin Jolly
>ga...@isp.co.nz
>
Tried to email you Gavin, but messsage got bounced due to "non-fatal" errors
in address, whatever that means.
Would very much appreciate looking at "Short Form Agreement" for passing on.
Please remove the xyz from my email address.
Many thanks,
Kerry C (k.coo...@clear.net.nz)