As an independent contractor or small business owner, how do you decide what your time is worth?

Most of us will sit down with an accountant, business advisor or, at the very least, a calculator and work out our desired total salary, divide that by how many hours we want to work in a year, and adjust to account for taxes, expenses, superannuation, time off, a percentage of downtime, and so on.

The thing about calculating your rate using this formula is that the figures you come up with will be based on a desired salary that you’ve chosen, likely arbitrarily, plus estimates as to the time you’ll spend on work that isn’t billable (downtime).

Not to mention, this blanket formula sets the precedent that you’ll charge all of your clients at the same hourly rate, no matter the job. It doesn’t take into account the flexible nature of contracting; for example, when you might adjust rates to be more competitive, or to offer discounts for long-term agreements.

Here are a few other things to consider when setting hourly rates as a contractor, freelancer, or small consulting team.

Consider the differences between an employee and a contractor

First, it pays to consider why contractors and employees are paid at vastly different rates in the first place.

An employee goes to work for about eight hours a day from Monday through to Friday. They get paid no matter what they do; when they’re chatting at the water cooler, getting a coffee, and spending hours on a project only to discover they’d misread the brief, they’re paid for it.

Errors, sick days, morning tea breaks and the like are incorporated into an employee’s salary. So, their salary reflects a relatively low hourly rate because they are not always productive, they make mistakes, and they require training and supervision.

Expert contractors, on the other hand, are paid a relatively high hourly rate. They are only paid for the work they produce; they are not paid for breaks, training, errors, or to be supervised, and their work is expected to be of an exceptionally high quality. Unlike employees, they must manage their own taxes and superannuation, and need to account for these charges in their hourly rates.

When setting your hourly rate, it helps to consider whether the nature of your role and work reflects that of an employee or an expert contractor. It helps to consider a spectrum; we like to call this the Employee-Expert spectrum.

Always remember, though, as an independent contractor, you should never accept the equivalent of an employee rate. You don’t receive the same benefits as an employee, after all.

Consider your clients’ expectations

If your client expects work that is highly polished and error-free, you may sit higher on the Employee-Expert spectrum, and charge more for your services. If your client wants you to produce large volumes of work that they will fine-tune themselves, you may sit lower on the spectrum.

The most important thing is that when you quote for your work, you are clear with your client about the nature and the expectations of that work; the last thing you want is to be working at a lower rate for a client who demands top quality.

Often, your role will be unique to different clients, but a good time tracking tool will make billing at multiple hourly rates simple.

Consider all of your time – yes, all!

As an independent contractor, you may be familiar with time tracking software that can help you bill accurately, minimizing the risk that your clients will dispute their invoices. But did you know that you should be tracking your non-billable time as well?

Everything you do in your business on a day-to-day basis affects your earning capacity. The time you spend calling, emailing, quoting and estimating, invoicing, marketing and so on may not seem like much at the time, but these activities all add up to many hours you’re not necessarily charging for.

When you track every minute you spend in your business to a task level, whether they’re ultimately billable or non-billable tasks, you end up with a precise understanding of what percentage of your day is spent on these activities, and perhaps a more realistic (holistic) view of your actual vs estimated billable hours and project requirements.

All of these aspects will help you to hone in on a billing (or project) rate that adequately reflects your time and effort, and meets your client’s expectations.

A screenshot of in-house, non-billable or administration task and time report in time tracking software.

Regularly assess your rates

Your hourly rates should at least increase in line with the Consumer Price Index (CPI); however, you will gradually want to increase your rates to align with your expanding skills and experience as well–especially if you’re consistently delivering high-quality results.

The bottom line is that you and your client both need to be reaping the benefits of you contracting your services. You should be retaining business, attracting new business, and making a profit.

Determining rates for employees and subcontractors

If you manage a team, then you will also be responsible for setting billing rates and salaries for your subcontractors and staff. Applying the considerations above, especially that of your employee’s expected billable and non billable time (in essence, their productivity), will help you determine a suitable rate.

At first, your measure of an employee’s productivity will be an estimate; however, over time, you can refine this with a good team time tracking tool.

That’s because time tracking reveals the exact billable hours logged per day by a staff member or subcontractor over any period. You can use these figures to more accurately gauge a team member’s productivity, and combine this knowledge with their skill and experience when you review the initial rate or salary that you agreed upon.

As you will likely set different rates for different staff, you will need a good tool to help you track these agreed rates and ensure accurate billing.

Better still is if that tool can also help you analyse your staff behaviour and productivity, and project profitability. This way, you can accurately identify staff whose productivity is increasing or declining, and act quickly to reward or intervene.

A screenshot of one of many customizable reports in, demonstrating how an administrator user can see the hours, both billable and non billable, logged by any team member for any specific time period.

See for yourself the difference that time tracking software can make to your business.

Get started with a free, 14-day trial of today simply by clicking the button below. Here are some tips to help you on your way.

Share This