Are you selling yourself short in your contracting rate? Have you factored in the risk of contracting verses the relative safety of being a staff member? Then read on!
There are many ways to derive your consulting rate. Usually during times of high demand it’s a gut decision based on the number of offers you receive and who wants you more. However this article is less about using bravado and ego to set your rate and more about using logical market-driven concepts to derive a minimum rate that ensures you keep ahead of where you would be if you were ‘staff’ and are sufficiently rewarded for taking the plunge.
Project contractors will proudly extol the many and varied reasons for why contractors rates are different to staff salaries but the discussion usually boils down to one simple concept – risk & reward. The more risk you take, the more you should earn to offset the downside not to mention a little reward for all this hard work!
Where to start?
The opportunity cost of contracting is the baseline for this calculation – What can you earn as a staff member in the same position? Staff members generally enjoy a significantly less stressful work life. Aside from the occasional paper-cut, job longevity is generally measured in years rather than months and priority is usual given to staff when new opportunities come around. So the staff salary level is usually a sound baseline from which to derive your rate. After all why would you work as a full time contractor earning less than as full time staff member?
So let’s begin by assuming you’re a senior project manager earning 100,000 (currency units) ‘in the hand’ (that’s cash after tax). Obviously the figures below will change with the country, industry and organisation but its a good rough guide for our purposes:
- Add 25% marginal tax (25,000)
- Add 9% pension contribution (9,000)
- Add 4 weeks leave (7,700)
- Add 7 days sick leave (2,000)
- Add provision for long service leave (1,666)
- Add health insurance (1,500)
The cost to the business for that staff member, not including operations costs such as floor space etc is approximately 147,000. This figure also doesn’t include any access to company bonus schemes or other entitlements such as maternity/paternity leave and training allowance.
Now factor in the cost of contracting risk
Contractors, by their very nature, may only work 50% of the time. If they are busy then this may rise from 70%-80% of the time, the rest of the time is spent “on the beach” unemployed or looking for new work.
At a micro level, contracts are generally measured in months with very short termination clauses (ranging from 1 day to 1 month) so depending on market conditions it would be safe to say that a consultant isn’t going to be working the full year. However the risk premium doesn’t stop there.
At a macro-level, over a period of 5-10 years, it would be safe to also factor in a major down turn in the employment market (we’re going through one now) which usually hit the contractors first. The reality of this could mean being out of work for 6 to 12 months while the market recovers. So let’s assume a 10 year cycle, working 60% per year and spending 1 year out of work. All these costs need to be factored into the rate to ensure you aren’t penalised for changing from a staff position to a contractor/consultant.
- $147,000 * 40% (annual unemployment premium) = 205,612
- $205,612 * 10% (10 year cycle unemployment premium) = 226,173
Here is your baseline income required for a consultant to be on par with a staff member earning $100,000 in the hand per annum after working for a 10 year period (not including inflation of course). At this level you’re consulting rate would be $135/hr (or $942 per day) based on a 7 hour day of productive work (you don’t get paid for lunch) over a 48 week year (you don’t get paid for holidays).
Obviously at this rate there is no real financial benefit to being a contractor as your salary, benefits and risks balance out. While there are still many other benefits to being a contractor, if you’re just after a paying job, you might as well be a staff member and not have to worry about your next gig.
So the next step is to calculate the “get-of-out-bed” factor, you’ve managed to calculate your equivalent rate, now ask yourself, how much more do you need to be paid to make this all worth while?
To answer this question let’s now look at the HR or management consulting markets who typically use profit margins of 10% to 150% ranging from HR body hire to expert consulting. This obviously depends on your industry, demand and skill level but you get the picture.
So the big question is.. are you selling yourself short?