Billable rate vs. Salary

When a company goes through the kind of turmoil I've seen recently, there are frequently opportunities to pick up some consulting hours to help with the transition. I got a shot over the bow last week: "Hypothetically, what would your rate be to do 'XYZ'?" I hadn't given it an awful lot of thought, but suddenly found it was time to do some "back of the envelope" calculations. I found a link that was helpful for me, and I dropped some of my calculations into an Excel spreadsheet that's available for you to download.
First, it may be helpful to consider whether you have any preconceived ideas about what you think your rate might be. They might turn out to be way off, but it'll be useful later to see whether the rate you compute is anywhere near the rate you thought you'd end up with.

Next, grab a copy of the spreadsheet and open it. This spreadsheet is based on a thread about the same subject on the Joel on Software site.

There are just a few numbers in here for you to adjust. I'll comment on them briefly here.

  • Salary. This is your W2-equivalent salary, or what you'd expect to make if you worked for someone else.
  • Hardware-software budget. After all, nobody's going to buy you that new laptop but you.
  • Insurance. Health, liability, and other insurance normally provided by your employer
  • Billable hours per week. This is the first of three factors designed to account for the fact that as a contractor, not all of your hours will be billable This is an area you'll want to give some careful thought to, as I'll discuss below.
  • Working weeks. You want vacation? Sick time? Holidays?
  • Utilization rate. Another billable hours factor. See below

The most important part of the spreadsheet to fiddle with will be the factors in the Revenue area. Generally, you're trying to account for risk here. There's nobody paying you if you find yourself without a client, so you need to plan for downtime to line up that next deal, as well as all the incidental time-wasters that come up during the week.

You can play with both the hours / week factor and the utilization rate factor to see what effect they have on your rate, but remember to leave a few hours per week for administrative tasks like accounting and IT support. You may also want to adjust the utilization rate to account for the length of your contract. If you've got a year-long contract, for instance, you can get a whole lot higher utilization than if you have a series of one-week contracts.

Even with a long-term contract, though, don't go to 100% utilization, since there will still be time spent at some point lining up the next gig, not to mention education, training, and decompression time. In general, the more confident you are that you'll always have another gig spun up and ready to go when another one finishes, the closer you can approach 100% utilization, but remember that 80% is considered a very healthy utilization for consultants that have a supporting crew selling deals for them.

There's clearly a lot more sophistication that could be built into this model, but this should serve to help structure your "back of the envelope" scribblings a bit. Good luck!

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