How to set your billing rate: estimating utilization

Written by Chintan Rajyaguru

Tuesday, 03 October 2006 07:55

Disclaimer: I am not an attorney, tax advisor or small/large business expert. Everything I write here is my personal opinion so take it with a grain of salt. I am not affiliated with any vendor so any product I mention is just for example purposes, I don't recommend any products or services.

I want to go independent but how much should I charge? Every consultant thought about this or similar question sometime in his or her life - most likely while considering consulting as a career. Some consultants recommend doubling or even tripling your current rate as an employee while others determine billing rate by dividing desired income by number of hours you expect to work. In any case, you have to know the number of hours you expect to work (called utilization) and amount of money you want to (or have to) make.

How to determine number of billable hours per year? You have to use your judgment to answer this question but use the following data points:

If you put your resume on monster.com or similar and get a lot of phone calls and emails, it means your skills are in demand and the market is good; you shouldn't have any problems finding projects throughout the year. When I started, I used to get at least 3-5 emails a day and a phone call a day so I knew that there were a lot of jobs out there for me. Be careful though. A lot of 'opportunities' will simply not match your skill set and interest
Look at your vacation plans. If you have to take vacation during certain time of the year, you have less flexibility. You will not be working while on vacation and on top of that you may loose time between the projects. Try to use time between the projects as vacation
Consider your location. If you are located in a big city, chances are there is a lot of work for you
The length of your contract will also impact the number of hours you will work in a year. My first contract was 8 months long so I knew that during the year, I would be between projects only once and I could estimate higher utilization
Finally, consider public holidays and emergency situations. Companies have 8-11 holidays in a given year, which means a loss of 64 - 88 hours per year for you. Add to that the hours you would loose due to unforeseen circumstances. Remember, you can't call in sick without loosing money!

When I was considering going independent, I estimated that I would work between 1600 and 1800 hours per year. I adjusted that number to 1800 hours/year when I got my first 8 months long contract and I didn't have any major vacation planned.

Tomorrow, I will talk about estimating the income...

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