As an Indian Freelancer, what is the right way to calculate the hourly rate for client services for a sustainable workload
How to calculate the hourly rate and what you should charge for your freelancing service is the biggest dilemma among Indian freelancers. If you charge too much, you will have too little work, and if you charge too low, you can have sustainability issues.
So what should be the process to calculate and set your hourly rates?
Usually, the freelancer looks at the client’s budgets and tries to price the services in line with the budget. The underlying calculation should not be the client’s budget but your expense to get it done. If the client’s budget is not very different from your expense, you can go ahead or else just pass it along.
Start with Expected Monthly Income
I am sure you have a figure in mind that you want to be earning each month. However, if you were doing a job, you have a salary as a figure that you want to make via freelancing. It can be that you want to better the salary by 20 or 30% as a freelancer.
Either way, you come to a monthly earnings figure.
Divide the figure by 22 working days and 8 hours per day. It will give you a rough estimate of an hourly rate. We call this the base hourly rate.
So if you wish to be earning 50,000 Rs per month, your base hourly rate will be 50000/(22*8) = ~300 Rs per hour or ~4.5 USD.
Add Time Overhead
The base hourly rate is what you should be getting per month as an individual if hired for full-time. We will use it to calculate the final hourly rate as a freelancer.
You may not be hired for all the 22 working days for 8 hours. On top of that, you will need time to understand the requirements. Also include other time overheads like emailing your clients, attending phone calls, and Skype meetings that could lead to fewer billable hours.
Add the number of hours you will be doing overhead tasks.
If you aren’t sure what the time overhead will be, just multiply your hourly rate anyway between 1.5 and 2. We assume 50 to 70% of the time will be dedicated to overhead tasks. It can be more if you work on smaller freelancing projects like me. However, it can reduce drastically if you work on long-term projects.
Multiplying 4.5 by 1.75 gives a basic hourly rate of ~8 USD.
Add Fixed Expenses
Individual freelancers working from home don’t consider these fixed expenses. So they calculate the hourly rate wrongly which ultimately results in quoting meager per-hour rates. Though I work from home, I think those as an expense to my business. Rent, electricity bills, phone, and mobile bills, internet broadband charges.
It is straightforward to calculate these expenses.
Just get your previous month’s electricity bill, and you can assume the same amount as an electric expense for your business. Visit a shop nearby and ask for rent, and you will get the idea of how much your monthly amount be.
Ideally, if you want to be earning 50k, on a very conservative basis, your fixed expense will be in the range of 25k to 30k. A factor of 1.5 to 1.6.
Factoring the fixed expenses, the hourly rate will be in the range of 12 to 13.
Add Hidden Expenses
There are many hidden expenses that you should factor in the calculation of hourly rates. I call them a hidden cost because they are more like a one time expense or once every year expense that is overlooked and remains as hidden unless we need to be paying them.
Expense related to
Especially Adobe Photoshop, Microsoft Office, or IDEs like Dreamweaver. Don’t quote hourly rates based on pirated software.
Working from home on a laptop does not mean you don’t have hardware costs. You may need to change your laptop/desktop in a span of 3 to 4 years. Do consider it as an expense.
Domain expenses are very less when compared to your monthly desired income.
However, if you have a sizable number of domains like me, it can create a big hole in savings in the given month. I have almost 80 domains, and at 800 to 900 Rs per domain per year costs 60k per year to me.
If you’re freelancing, it will have a website, and it is quite likely you will have quite a few domain TLDs and so consider those expenses.
The majority of my Hosting expenses are paid monthly. However, if you are on a shared host, it usually is paid yearly. So it can be a sizable amount when paid in a given month.
Each year you have to compute your income tax returns.
So you not only have to allocate time (time overhead) for filing your tax returns but also have to bear the expense of hiring a CA to get it done. Every July, I have to deal with those expenses.
Each quarter I have to pay advance tax. It is one of those expenses that I am always lagging. However, they should be part of the calculation for hourly rates.
My tax consultant always insists on me paying the taxes in advance and avoid the interest. However, I am still behind in paying them but have managed to get things on track for the last few quarters.
Still, not perfectly ideal on how it should be.
If you are paying maintenance charges for your building monthly, it’s okay, but in Surat, these charges are annual.
I am still keeping them as hidden charges because, as soon as I get the bill, I realized it needs to be paid. (BTW it is on this list because it was to be paid in April-May, and I see the notice of it every day outside my building. If I would have written this article in any other month, I may have missed it here as well.)
Tea Bill, Coffee Bills, and office supplies expenses
You need to buy printer cartridges as well as pay those miscellaneous bills that need to be added to your hourly rates.
Add all the expenses that you will incur in a year. Add them as a factor to the hourly rates. Usually, these are not significant changes, but then the hourly rate of 12 would become close to 12.5 or 13, depending on your expenses.
Add Profit Margin
We haven’t added any profit margin, nor have we considered any bad debt or nonpayment from clients.
So if we add a profit margin of 20%, which is quite reasonable in business, it will make a minimum hourly rate of 15 USD. The same profit margin can be used for non paying clients. So if a client does not pay, it will dampen profits.
So if you want to be earning 50k per month, your minimum hourly rate should be $15 per hour.
If you are considering all the factors and if you feel your hourly rate is too high to start with, opt for removing some of the overhead, especially rent. However, as soon as you start grabbing more work, make sure you add them else they will always remain pending in your billable hours forever.