Neil Tortorella
writes on April 21, 2014
(Figure out how to fill up the freelance pig. Photo by Mike Tungate / Flickr)
If there’s one question I’m asked by web designers and developers more than any other, it’s how to figure out what to charge for a freelance project. Sure, we want to be fair to the client. But we also want to be fair to ourselves and make a reasonable profit. It’s never a happy time to finish a design or development project and realize we lost our shirt.
There are several ways web freelancers estimate projects. They can charge by the hour, by the project, by retainer, by bartering, by cost per page, or even by a percentage of sales.
The most common methods, by far, are by the hour and by the project. Retainers are less common, but certainly a method to consider for site maintenance, updates to code and designs, email marketing and other ongoing projects and tasks. Bartering is less common, but it does tend to come up, especially for startup clients that are, shall we say, budget-challenged.
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Page rates can be easy to estimate, but there’s always the real risk of scope-creep that eats into profits. That can easily happen when there’s a poorly written contract or, worse, no contract. Being paid a percentage of sales may sound attractive, particularly when the client is selling high-end (read: expensive) products or services. But that type of arrangement can come with a nagging notion in the back of one’s mind that’s difficult to police: Is the client telling the truth about sales numbers?
Contents
Winning the Freelance Estimating Game
Whether you plan to bill by the hour, project or retainer, you must know your specific hourly rate to generate accurate estimates. Not the other guy’s or gal’s. Not the going rate. Your rate.
You need to recoup the cost of your time, overhead and also make a profit. In its simplest terms, profit is the money that’s left over after paying yourself and your bills. It allows your business to grow, buy a new monitor when the one you have flickers its last, buy other needed items or put it away for a rainy day.
For many designers, billing a website design project by the hour makes a lot of sense. It’s easy and doesn’t require a lot of arithmetic. Some designers take their best guess at what others are charging or what they think the client might be willing to pay. Others simply pull a number out of the air. All are bad ideas.
Why?
You’re unique. Yup, just like every other web designer or developer out there. We all have different setups and our costs vary. Calculating your true hourly rate is a critical exercise to ensure your success and profitability. Your hourly rate should address your target salary, called a draw if you’re a sole proprietor. Sole proprietors don’t usually have a regular salary. Your rate must also account for your overhead and profit target.
Figuring your hourly rate isn’t too tough, but it does require tapping into some of that elementary school math you complained you’d never use.
The Place to Start Is You
What’s your target salary? Even if you’ll be taking a draw, it’s a good idea to have a pre-set amount you’ll draw from the business on a regular basis. It makes both your business and personal money management easier.
Be realistic when coming up with a salary number. Sure, you’re in business to make money, but shooting for a six-figure salary might not be in the cards, at least for your first few years in business. If you’re currently gainfully employed, start with a target that matches or is slightly below your current position’s salary. For the purpose of the following example calculation, I’ll use $40,000.
Keep in mind that the figures I’m using for this example may not match what you make or what you pay for overhead in your life. But they should give you great insight into the process.
On top of your target salary or draw, you’ll need to figure in other associated costs including taxes, FICA (Social Security in the United States), insurance and more. A safe figure is 25 percent to 30 percent. I lean toward 30 percent. The math looks like this:
Salary: $40,000
Associated costs at 30 percent of salary: $12,000
Total: $52,000
Next, we’ll need to know how many hours there are in a work year. I’ll save you the trouble of digging out that calculator. It’s 2,080 hours.
If you’re like most people, you probably would like to spend a few holidays with the family and you may get a bad cold now and then and need to take a day off. Let’s factor those things into our equation.
7 legal holidays (U.S.): 56 hours (8 x 7)
2 weeks vacation: 80 hours (8 x 10)
5 sick days: 40 hours (8 x 5)
Total: 176 hours
Subtract that from the total hours and we’re left with 1,904 billable hours. But you probably do other things around the office, such as invoicing, sales calls, surfing the internet and playing solitaire. You can’t bill for that time, so we’ll need to subtract those hours. Ideally, you’ve kept time sheets. A review of a few weeks can give you a pretty good idea how much non-billable time you average. If you haven’t kept time sheets, you’ll have to give it your best guess and make some adjustments later on when you have some documentation.
A typical target is 25 percent. For those new to web design or development freelance work, it may be as much as 50 percent. Hopefully it’s not more than that.
I’ll use 25 percent for this example. That brings our billable hours into the more realistic area of 1,428 per year. All you need to do is simply divide your billable hours into the cost of salaries and voila! You have a rate of $36.41 ($52,000/1,428). Let’s round that down to $36. This is the amount to must charge to recover your salary and its associated costs.
Get a Handle on Your Overhead
To do the job, though, we’ll need some stuff. Most web designers and developers – like all freelancers – need office rent or home office costs, utilities, phones, tablets, computers, software, paper, ink, marketing materials and so on. The accountants like to call this overhead. I guess that’s because if you buy too much stuff, you’ll find yourself in way over your head.
Allow me to pull a number out of the air. Say, for our example, your overhead costs $35,000 per year. We need to find the percentage of salaries this overhead represents. Simple. Divide the overhead ($35,000) by the salary ($52,000) and you come up with a little better than 67 percent. Add this to the base rate we calculated earlier:
$36 X 67 percent = $24.12
$36 plus $24.12 for overhead comes to $60.12.
Again, we’ll round that out to a clean $60.
And there you have it. Now you know you’ll need to charge at least $60 per hour if you want to eat on occasion, pay the rent and buy various supplies. We also know that we need to contract at least 1,428 hours per year, or 119 hours each month, to make this mark. We not only solved our rate problem, we also set a sales goal. That’s a pretty handy piece of information to have as a byproduct of your mathematical efforts.
Whew! You’re Almost Done
There’s one more thing. We covered the target salary and overhead, but we also need to make a profit.
How much profit do we need? I’d say not to go below 10 percent. Twenty percent is better and that’s what we’ll use for our target. Time to pull out the calculator again. We’ve established our base rate at $60. Twenty percent of $60 is $12, so we need to tack $12 on top. Our final rate, to recover salaries, overhead and a healthy profit, is $72. If you’re like me, you’ll round this amount up to a tidy $75. It just sounds better and adds a slight fudge factor.
This final rate is the number you’ll use to do your estimating, whether you charge by the hour or by the job. It’s the number you can’t afford to go below. No more wondering if you can afford to take on this job or decline that one. You have facts to back up your decisions.
With your real hourly rate and some previous time sheets in hand, you’re all set to start estimating like a pro who can back up project estimates with confidence.
Neil Tortorella is a graphic designer, writer and marketing consultant. He’s the author of “Starting Your Career as a Freelance Web Designer” and runs Tortorella Design from his home in Fort Lauderdale, Fla.
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Excellent thanks. It’s funny but I set my hourly rate simply by intuition and now when I have done all the calculations it is exactly as I set it 🙂
Thanks for pointing out how much you need to charge for an hour of work.
Fantastic article! After 6 years with essentially the same rate model, I realized it was time to restructure my rates. I used this exact method (could have written this word for word); it really is the most logical method, and it’s nice to see it laid out in a well-written article. Only wish I would have found it sooner.
I discovered this (after the fact) while trying to find what a reasonable going rate was for freelancers, and you just solidified my belief that my pricing was fair. Sometimes I hate being the good guy, always wanting to give clients the best deal, at my expense. Articles like this help me justify the rates I know I’m worth and know I need to be making.
Thanks!
Your method is good. Best is to compare the outcome with the other methods as described in the Freelance Rate Guide. This guide includes five methods you can use to determine your hourly rate. In addition, the guide contains hourly rates of more than one hundred and fifty professions.
What can you ask for your services? How do you get what you want?
The answers depend on a large number of factors. What is more valuable for the lost hiker who has been wandering for days in the desert, a bottle of water or a backpack filled with forty kilos of gold? What do you buy for your loved one, a gallon of perfume/cologne for five dollars or a small bottle of perfume/cologne for 30 dollars?
A higher (hourly) rate results in higher self-esteem; a good rate is important for your wallet, but even more important for your happiness. Studies show that fair compensation for your work increases your self-esteem and happiness. Thus, lowering your prices will lower your self-image. (And for scientific reasons we are still looking for people who think they are overpaid and are not happy about that. Please leave us a message and provide tips for how to deal with that.)
It appears that the price is determined not only by the quality or quantity of the item, but also and perhaps largely on the expectations of the buyer. Although, the price is obviously important and a price reduction can increase sales, there are also examples where a price decrease leads to a decrease in sales.
That post totally rocked. I am actually in the process of launching an entrepreneur blog network and I absolutely knew that paying for a professional design would be needed! No if ands and buts. In the long-run, if you are serious about gaining readership, making money, and really getting your content out there in the best possible fashion, then it’ll always be worth it to pony up the extra cash for a sick design. Think about it, if you’re going to drop $100 bucks a month on a dedicated server (like I do) to host all of your blogs blogs, then its worth dropping $1 – 2.5k on a great design that will really last and really help gain that critical mass of readership — makes perfect economic sense and that’s the most cost effective thing to do..but yeah…many people don’t apply logic to matters such as that and would rather download a played-out theme that million other bloggers are already using… or just sit back and get pissed off by how much it would take to get a “real” design… To each their own, right?
Great Article! I was pretty close to my goal without all the calculations, but I definitely bumped it up a bit after doing it.
Thanks for the InstaCalc Thing too, I used it after I did most of the calculations, but it made it much easier.
Hi Eric! That’s great to hear. Thanks for reading! 🙂
Great article!!! I just signed up for a 6 week Web developer course. Super inspired and ready to change my career!!!
That’s awesome to hear! Welcome to the community Jon. 🙂
That’s awesome to hear! Keep up the great work Jon. 🙂
Thank you for sharing. Great Article!
Hi Neil, great article.
I have 2 questions/remarks:
– you count 30% of the net salary for taxes&co but shouldn’t it be in the other way round? Usually taxes and social security are calculated on the gross salary? Or am i wrong? I sometimes read to count 45% of the gross salary, is that right?
– you count 35k$ of overhead = around 2900$ per month. what kind of expenses do you have with this?
Thanks a lot for your article, it helps a lot.
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Hey Neil great written article I run a small air conditioning company and do all my own web site work and have now started building websites for other small business. I have even had one of my customers ask for web site. The link for this article was posted on divi facebook group and has come at the right time as I need to sit down and do a price list. Thanks for sharing your thoughts
Excellent read, Neil! I smiled when you said this line…
“If I do great work, the world will beat a path to my door and the money stuff will take care of itself.”
I started out in 98′ and this was my exact thought process! I lived by this way of thinking for a long time. I did some great work and managed to please all of my clients…but did I ever come out on top? Nope. Putting a value on your work is one of the hardest things to do when your a “behind the scenes” guy, and not a salesman.
“Will companies really pay me $200/hr or will they laugh in my face?”, is how I saw it…
Then I realized one important aspect: YOU HAVE to be a salesman, if you’re going to make it as a freelancer (Or anything for that matter). If you’ve got the skills and confidence, you can do it. So… I started on the route as a “contractor”.. $45 – $50/hr range with 40 hours/ week steady isn’t so bad.
That was last year… and wouldn’t you know it, I’ve found myself right back in the freelance pot! Which is why I’m here reading this brilliant article.
With the knowledge you’ve given, I’ve still got some questions. Maybe you can point me and/or others in the right direction:
1.) Accounting/ Billing/ Invoicing software… What’s your favorite for keeping up with everything?
2.) What’s the best way to receive payments of large sums of money?
3.) What’s the best method for creating contracts?
4.) Is it a good idea to ask for 50% payment up front and 50% upon delivering?
5.) For large projects exceeding $10,000+ , do you spread the payments out on a monthly basis?
6.) Do you use any particular software to keep up w/ your workflow process (Trello I’ve found to be excellent)
7.) What’s the best way to handle taxes, expenses, contractors you hire, and other business related expenses at the end of the year? Should finding a good accountant and a good cloud-based billing software all we should be worried about?
8.) How do you handle a client that doesn’t pay you?
9.) Is it better to form a sole Proprietorship, LLC, or Incorporate?
Loaded Questions! I know. These are all stress-fully haunting… And I’m sure that there are about 1,000 more that I didn’t even think to mention.
How do we as mere’ freelancers, where so many hats…
,
Justin
Thank you for the information on calculating the rate card. it was useful for me.
regards
Nagaraj
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Hi Scott,
Welcome to the world of freelance Web design! Now, hold on to your hat and enjoy the ride.
£38 is roughly $60 US and that amount sounds pretty reasonable to me for a freelance Web designer who’s just starting out. If you’re like most “newbies,” you don’t have very much overhead. A 10% profit target might seem a bit low, but again, not that low for one starting out.
Plus, many startup freelance Web designers must deal with the notorious portfolio Catch-22 balancing act. That’s where the new freelancer has school projects to show, but little, if any, “real” client work in their portfolio. Yet, prospects want to see work done for authentic clients, not just school assignments. Prospects tend to think, “Yeah … their portfolio is nice, but can the designer handle my project with its real world requirements?”
That’s a topic for another article, but suffice to say a new freelancer needs to find ways to win clients while being fair to their own wallet. So, setting a bit of a lower profit margin can be a method to keep everybody happy. Just try not to live there for the duration of your career.
P.S. I dislike using the words, “real client work.” Nothing else popped into my brain. A lot of students I’ve met along the way put more time and effort into school assignments than many pros put into paying gigs. It’s said, “time is money,” and the saying is very true. One can always make more money. However, time is a non-renewable resource. When one spends a minute or an hour, it’s gone forever and can never be replaced.
Hi, ive read your article and it seems very useful. I wondered if you could give me some advise. Ive just qualified as a Web design professional (web design specialist/ecommerce specialist) I am looking to do some freelance work as ive had no look getting jobs due to lack of experience but I am getting people asking will I build them a Website for
for their local business. Using the calculations including overheads and 10% profit £38 per hour. Does this seem reasonable for a new designer? Or do I start lower??any advise would be great. I am really passionate about webdesign would love to be my own boss and earn a living from it.
Thanks scott
Wow fantastic read. I need to fix my life and stop charging $25 per hour. No wonder I made more stress than money! Of course the business needs to make profit, of course I have costs to think about, and I really should be giving myself a salary that’s different to total money earned.
Hi Dominic,
Many freelancers do, in fact, make more stress than money because they don’t address the business side of their work. That can certainly be the case for folks who are new to the Web design/development landscape. The thinking is along the lines of, “If I do great work, the world will beat a path to my door and the money stuff will take care of itself.” It’s a nice idea that rarely works out in reality.
In the article, I refer to setting a “target” salary/draw. That target is a goal. Without some sort of income goal a designer puts themselves in the precarious position of letting their clients establish their income by default. That’s not the best idea. A business-savvy Web designer will know how much they need to generate each month to reach their salary goal, while covering their overhead. If there’s a low revenue month (or week), they know they’ll need to step up their marketing and sales efforts to get back on track. Without knowing their numbers, a Web designer can’t really know if they’re doing well or falling behind.
Hi Hook,
Thanks for reading my ramblings. Much appreciated. I’m doing the happy to learn you find them useful.
Time to ‘fess up. I got into writing about this [mostly] business stuff because it was nowhere to be found when I was starting out. Granted, that was roughly two days before dirt was invented, circa late 70s [insert horrific gasp here] and there wasn’t any Internet. Well, there was, but not like today’s Web. So, I had to rely on reading books and magazines for information, as well as picking the brains of a couple veteran designers and ad agency folks. Suffice to say, I bought a lot of vets lunch in exchange for design biz info. Plus, there was the trial and error, try this, try that method of gaining knowledge … and losing your shirt a few times in pursuit of business acumen.
This stuff shouldn’t be some type of hidden knowledge only gained during some ritualistic gathering of seasoned designers or developers. It should be taught in the schools as a standard part of a design education. The reality is that most folks will freelance at some point, even if they have a day job. It’s the way of things in the creative industry. Not teaching it or not teaching it properly, I believe, does a disservice to students seeking a well-rounded design education, whether Web or print.
And now I shall step down from my soapbox, before I fall off.
I’ve read your posts before, excellent stuff from you, dude! Fantastic sharing. You manage to keep it smart and interesting. Will bookmark this blog and visit regularly to get more.
Hi Neil,
A pretty good and reliable way to calculate the rates, I must say! When it comes to charging and deciding rates, personally, I’ve had much trouble figuring out what should I call for, from the clients.
This has sometimes resulted in me being under-paid. In some cases, I made a call that the clients felt was not just justifiable. This made me lose work also!
This article should have came to me pretty early. This method, I can see, is pretty much reliable. It makes sense. Further, looking from a client’s point of view also, this method can be relied upon!
Nice work and thanks for sharing it! 🙂
I found the link to this post on Kingged.
Arun
Hi Arun,
Thanks for reading, Arun and sharing your thoughts.
As I mentioned in my reply to Christopher, rates are a tough issue to tackle for many Web designers and developers. To take that reply a step further, it not just tough for freelancers but also design firms and agencies. They fall prey to pulling a number out of the air, too. I worked at an ad agency a while back. When I came on board, one of my first tasks was to look at the rates they used to estimate. These folks still were operating in the 1960s, using an hourly rate that didn’t come close to covering their overhead and staff salaries, let alone a profit.
When a freelancer (or firm, for that matter) takes a few minutes to run their numbers, they end up with their true rate, but also a rate they can justify. One can’t easily argue with math. There’s a higher level of confidence that’s often the byproduct of doing some simple arithmetic. So, if a client’s budget isn’t going to work, the designer or developer knows … and knows why. That bit of knowledge can help a lot with fee negotiations.
However I do think that being able to calculate your rate separates a good freelancer from a great one. This is definitely a branch of our skill-set that we need to learn to master.
Hi Christopher,
I’m happy to learn you found the article useful. And yes, rates and money stuff in general are always tough, and not just for those new to business. Veterans often have trouble, too. Sure, experience helps … a lot, but with service-based businesses, it seems some client eventually throws you a curveball.
As I mentioned in the article, we all have different set ups and financial needs. Loose numbers, such as a “going rate,” doesn’t always cut it. Here’s an example for you. Once of my consulting clients was charging $75/hr here, $35/hr there and often in between. He pretty much based things on what he thought the client would pay … and how much he needed to pay his bills that month. But, when I ran his numbers, we found he needed to charge a minimum of $95/hr to make it. He was shocked. Now he’s charging around $125/hr and his clients are happy to pay it.
Keeping track of one’s time is really important in order to draft future estimates. That means some sort of timesheet – be it paper or digital. Many … no, wait … all of my creative cohorts hate keeping timesheets, whether they have a conventional day job or freelance. But, keeping them gives one real data to review when estimating. That’s a whole lot better than pulling numbers out of the air.
Thanks for sharing your thoughts, Christopher.
Great article. This is always something I think about. Not just when taking on a new client but in general. For developers and designers (or even anyone in a technical field) calculating the required time and pay is one of the most difficult things.
Howdy Josh,
That’s great! I had created an Excel spreadsheet for my business quite a while back. I had so many requests for it I ended up selling it for a couple of bucks just to cover the bandwidth. Your InstaCalc version is a lot cleaner and streamlined. I’m sure readers will get a lot of use out of it.
Nice job.
Great piece Neil! I needed to wrap my mind around all your math so I built a customizable calculator with it all here: http://instacalc.com/22297
All the math is worked out for you, just tweak the numbers based on your situation and voila!
You are my favorite person right now.