andreas.com FAQ: How to Set Your Contractor Billing Rate
by Allen Schaaf, Business Process Analyst
Basically, your hourly rate as a 1099 or corp-to-corp contractor is the W2 salary divided by 1,000. For example, if the company has a $100K/year full-time employee (FTE) in a similar job title, the contractor’s rate should be $100/hour (0.1% of $100,000).
Why is this? The cost of a $100K FTE is about $135K when you add payroll costs and benefits. As a contractor, you add your tools of the trade: computer, software, cell phone, etc., as well as supplies like paper, printer toner, etc. When you add all of this, the real cost of a FTE is around $150K/year.
Let’s look at a contractor’s billing opportunities. You will be very lucky to bill 75% of your available hours. A year of 40-hour weeks X 50 weeks = 2,000 hours. So 75% is 1,500 hours, or $150K/year at $100/hr. The reality is that consultants rarely bill more than 60% or 1,200 hours ($120k/year). This is slightly low but is made up somewhat by tax deductions for transportation, equipment, supplies, as well as not paying unemployment taxes.
You will spend many more hours in non-billable activity, such as marketing yourself. A realistic number of billable hours is around 50%. To compare, IBM considers it good performance if their staff consultants work 1,000 or so billable hours in a year.
However, many people don’t calculate the real costs of being a consultant, so they price themselves too low. This is why consultants for the most part don’t continue as consultants unless they are under an umbrella like IBM which charges around $175/hour at the low end and typically $225-$275/hr and up to $350/hour in some specialized niches.
Here is a useful Contractor’s Rate Calculator.
Notes: Their default payroll and benefits is 18%, which I am sure is low. They say the realistic number of productive hours is 1,424 for a software developer. That figure is somewhat high in my experience because there are often many meetings. Personally I think 1,250 to 1,350 hours is closer to the mark.
They also state that office space should be 100 square feet per worker. That’s too low. One hundred square feet is ten by ten and since most cubes are 64 to 80 square feet, they are not considering meeting rooms, server rooms, filing cabinet space, toilets, reception space, etc. The standard is 200-250 square feet per employee. Nevertheless the calculator is very useful
You may not get as much as you deserve because of job market conditions in your city. Furthermore, some people are willing to contract at a lower rate (because they simply don’t know any better). Less may be fine as a bridge from one staff position to another. It’s up to you and your best judgment, so good luck.