Home > Consulting, Resume > What are you worth? How to figure it out.

What are you worth? How to figure it out.

This is a question I’ve heard quite a bit lately.  Either from potential employers, new contracts, friends or colleagues looking for answers, or management looking to determine a billable rate.  I don’t know that I’m the best person to answer these questions, but I know I can at least offer some assistance.  So with that in mind, let’s take a look at how you can figure out the answer.

First, let’s make some assumptions and explore some facts.  Let’s assume a round number of a $100,000 year salary.  That might be high, it might be low, but it’s a decent place to start.  You need to figure out what sort of hourly rate to charge for a contracted position to do similar work. 

When I first started consulting way back when, I had heard a few different numbers:

* There’s 52 weeks in a year, take 2 off for holidays, that’s 50 weeks * 40 hours, 2000 hours a year.  Figure out your hourly rate based on 2000 hours.

* You need to factor for overheads and slack time, so assume you only get to bill 1000 hours a year. 

Neither is 100% true, but you might be surprised to find out the latter is closer to the truth than you think.  Let’s look at some of the facts.  This isn’t quite one of those witty calculations that prove that you only work one day a year, but because it’s Labour Day, no one works. 

First, you have likely been doing this for a while, so you might be getting 3 or 4 weeks holidays.  So that’s 20 days

Next, most companies might give you some amount of sick days.  Averages I’ve seen are about 5 days a year.

You may or may not also get “Personal Days”.  Maybe it’s not called that.  It might be every second Friday afternoon off.  Maybe it’s one Monday a month.  Maybe it’s just days you ask for and get to drop the car off, etc.  Let’s call that 12 days a year.

Next, there’s normal statutory holidays – that’s about 11 days a year.

We’ll assume you also typically attend a conference or some training – you do need to maintain your skills, especially in the fast changing world of IT.  5 days a year.

Let’s take a look at what we’re up to – 20+5+12+11+5 = 53 days a year, or 424 hours.  52 weeks @ 40 hours is 2080 hours.  So we’re at roughly 1656 hours left, which is about 79%.  Let’s make an assumption that running a small business might take some additional effort, and just call it 75%. 

This means that you should only plan to have 75% of your time actually be billable.  This surprises some people.  It’s not just those looking to do consulting that it shocks, but some managers.  I’m sure you’ve had a manager who’s suggested you spend “90% of your time on THE project”.  The problem of course is that daily tasks, meetings, overhead, client management, paperwork, that all takes time – just like the days that are out of office. 

So the next part to figure out is what the overhead is.  Everyone knows it’s there, but it’s never quite clear what that includes.  This is everything from:

  • employment insurance
  • workers’ compensation
  • taxes
  • health insurance
  • equipment
  • accounting and legal
  • expenses
  • etc.

What that number might be will vary based on where you are and what you do.  A low number might be… 30%.  Some might suggest that number is 50%, some even higher.  The difference is largely in scale.  One guy, out of a room in your house, with a laptop?  Probably 30%.  5 guys, renting an office, with desks, and a meeting room, and someone manning a phone even if it doesn’t ring, and servers and infrastructure and such?  Going to be 50% or more.  It usually peaks in the beginning, then as one goes on, comes down on a per person basis.

So what we know then is:

  • Salary Rate (SR) = $100,000 yearly salary is paid for 52 weeks @ 40 hours for the year, $48.08 hourly rate
  • Billable Hours (BH) = 2080 * 75% = 1560
  • Overhead Rate (OR) = 30%
  • Contract Rate (CR) = ???

So we can use:

(SR) * (OR) / (BP) = (CR)

or

$100,000 * 1.30 / 1560 = $83.33 / hr

$70,000 * 1.50 / 1560 = $67.31 / hr

$100/hr * 1560 / 1.3 = $120,000 / yr

Now, you’ll have to figure out what numbers go into the formula to make you happy or that work for where ever you may be.  This is definitely a YMMV situation.

Even if you’re not looking to get into any sort of contracting, this general formula can still help you out in other situations.  Some examples:

Internal Billable Rate – sometimes you’ll be asked what rate to give to another internal department.  Numbers may not exist, and you may have to come up with something.  Hopefully someone in accounting or HR knows the above better than I’ve demonstrated.  But if you have to come up with some numbers to determine what a project might cost, you at least have a way to do so.

Contractor Rates – you can use the same formula in reverse to try to get a rough understanding what your VAR, contractors, etc, are either earning or paying.  That’s of course perfectly fair – they’re in business as well.  They’re looking to make profits, have to pay staff even if there is no active work, pay for training, equipment, etc. 

You’re looking to join a consultancy – They have billable percentage target as well.  It’s important that you ask what those are.  You’ve already done the math above to figure out what’s reasonable.  If you’re told they expect 90%+, but you get 4 weeks holidays and 3 weeks training and a conference, and and and – and you know it’s more likely to be 70-75% – you may want to ask some questions.  But do remember that they’re also paying you even if THEY haven’t kept your work queue full.  When you’re working for a consultancy, they may be paying you, but you should be considering it that you’re billing out your time, and they’re simply a management fee to keep you full and busy at all times.  If they are, that’s fair – they’re doing the business development and letting you focus on what you’re good at.  If they’re not, or if things get quiet and they have to let you loose – what were you paying them for? 

So for those of you who have an accounting background, or have done consulting or management for a while, the above might not seem so enlightening.  But I do know for at least a handful of folks I’ve spoken to lately, they’ve indicated it’s helped them work out whatever their ultimate numbers are.  It seemed like it would be easier to just write it down somewhere Winking smile

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