How Do You Determine Your Hourly Rate?

Question

In pricing a service or product it is general practice to not merely charge for the effort spent and the costs involved + margin but from the value delivered down. As an independent consultant, how do you set the price of your work?

What is the process of determining your hourly rate as an independent software developer? If you have one, what is your hourly rate and how did you arrive at that figure?

What factors would you take into account. Is the process of setting a hourly rate only based on balancing demand with supply so that supply (you and your time) doesn't get overwhelmed?

When are the good times to raise your rates?

Are there projects in which you have had to charge higher than other projects? If so, please cite examples.

Do you change your hourly rate based on what kind of development you are doing? (for example, .net programming more, and lesser for php programming)

Do you set hourly rates based on what type of business the client is? If so how?

If you know of any relevant articles or material on the topic of charging for programming services, please post the same.

Answer 1

In pricing a service or product it is general practice to not merely charge for the effort spent and the costs involved + margin but from the value delivered down. As an independent consultant, how do you set the price of your work?

A combination of the above + what the market will take. Some further answers below.

What is the process of determining your hourly rate as an independent software developer? If you have one, what is your hourly rate and how did you arrive at that figure?

I actually have a daily rate. I start at the market rate for a senior Java developer and then added 'chunks' to that rate based on my unique selling points for a particular client if they are relevant. So for one client my experience in open source community management is a bonus, another client values my contacts in the Java community as a whole (I co-lead the JUG in London) etc. I also factor who the client is and what sector they are in (financials will pay more if you have relevant business experience for example).

Supply and demand also come into it, as does the length of contract.

What factors would you take into account. Is the process of setting a hourly rate only based on balancing demand with supply so that supply (you and your time) doesn't get overwhelmed?

No it's not just based on that one factor, it's one of many factors.

When is it a good time to raise your rates?

When you have demonstrated over a length of time that you are worth more than your original rate and the market/client can afford it. Remember as a contractor/consultant they expect to see real value for money, it helps to be able to track your work to a tangible saving/revenue/profit.

Do you change your hourly rate based on what kind of development you are doing? (for example, .net programming more, and lesser for php programming)

Yes, the market will pay differently for different skill sets.

Do you set hourly rates based on what type of business the client is? If so how?

Yes, as above, investment banks and the like do pay more - but they expect more as well, if you don't deliver you're soon out the door :)

HTH!

Answer 2

It's not me making my hourly rates, it's the market. In bad times (e.g. around 2005), I have to step down. In 1995-2000, the .com boom, Y2K and the euro conversions caused hourly rates to skyrocket. In 2005, I had to do a Job at 65% of what I had earned in 1998 (and that job was not in any way less sophisticated). Today, I earn a lot better, fortunately.

To make this a useful advice: Ask friends, relatives etc. who work in the same industry and area how much is currently the usual rate. That's the price you should ask for, most clients will accept it and only a few clients would pay more.

Answer 3

Primarily the market for the work in question dictates the rates you can charge.

The work in question will be defined by the skills you're using (technical), the industry the client is in and the value the work will deliver to them, any specific knowledge which may be needed to carry out the work and any reputation (good or bad) you may have. Essentially the fewer people who can compete with you for the work, the more you're going to get away with charging.

So understand the market is the main thing.

As the market rises you can raise your rates. If it falls then I wouldn't necessarily volunteer to drop them but be aware so if a client starts negotiating you know whether he really has other options - obviously if you're trying to charge $1000 a day and there are good programmers who can and will do the work for $500 you've got a tough sell on your hands. Similarly if everyone else is charging $1000 a day you'd be missing a trick charging much less.

The key thing in doing this is to understand who your competitors and therefore the people you can compare yourself to are.

Answer 4

This is what I do; it is by no means the only way or even the best way!

• set your normal rate based on your income needs, relative value, market rates, a rational (40-hour) work week, and allow for taxes; if you're self-employed in the USA, figure taxes will take almost half of your income
• if the project adds tremendous value, charge a percentage of the ROI, say 2%, as long as this is more than your normal long-term hourly rate
• if the project is short-term and rush, charge 50%-100% more than your normal rate for schedule disruption and overtime
• if the project is short-term, charge 25% more than your normal rate
• alternately, you can bid on projects for a fixed fee (half up front!) as long as the scope is set and the schedule is reasonable. Beware the unknowns, mitigate risks, plan for interruptions and "gotcha!" bugs

Answer 5

Ask around your area and see what others are charging or just guess. If you are getting more work than you can handle, you're not charging enough.