How do I set my fees? And how do I make sure I get paid?

How do I set my fees? And how do I make sure I get paid?

Naming Your Price

Pricing their services is an issue many independent contractors view with a measure of dread. Some even fall back on the deadly practice of asking a customer, “How much do you think it’s worth?” or “How much do you normally pay for this service?” Don’t do this. It signals to the customer that you are an amateur. If you are going to prosper as an independent contractor, you need to know how to properly set–and defend–a price on the services that you perform for an organization. The good news is that the “right price” is probably higher than you might expect!

One common pricing technique used by many independent contractors is to use “cost plus a fixed fee.” This means that you take your costs for completing an assignment and add in a fixed percentage of total costs, such as 30%, to arrive at your price. However, I don’t recommend this approach. The fact is that clients normally buy services based upon value, not price, and this technique ignores the value that a client places upon your services.

Another technique is to find out what your competition is charging, and charge a similar price. I don’t recommend this either. Remember, what you have to offer is unique, something that only you can provide. One thing we have found to be true is that you can actually lose some assignments if your proposed fee is too low. You’ll find that many organizations place a greater value on you and your services when you charge higher fees. It’s a “get what you pay for” mentality that you can take advantage of!

Determining Your Hourly Rate

Some independent contractors bill clients by the hour, while some charge a flat “per-assignment” fee. Others use a combination of these two methods, such as a flat fee plus an hourly charge for any changes to the project requested by the client. Regardless of how you charge your clients, you need to determine what your hourly rate is. Even if you charge a flat fee, knowing your hourly rate will let you know how much you must charge for your time by multiplying your hourly rate by the number of hours you think it will take to complete the assignment. Your hourly rate is the minimum you must charge a client above your expenses in order to stay in business; since you price your services according to the value they provide clients, you will often be able to charge more than your hourly rate. But your hourly rate is your “floor price” for your services. If a prospect is unable or unwilling to pay your hourly rate, you don’t want to work for them.

The process of determining your hourly rate is simple if you keep a few facts in mind. You should assume that you will be working a typical workweek of 40 hours and that you will be taking two weeks of vacation per year. Multiplying this out will give you a total of 2000 working hours per year. (Of course, you can work more hours per year if you desire, but the safe, conservative approach is not to count on any “overtime” when determining your hourly rate.) However, you won’t be able to bill all2000 working hours as an independent contractor to clients. You’ll spend time looking for new clients, meeting with prospects, preparing proposals, maintaining and upgrading your skills, meeting with accountants and attorneys, buying supplies, and many other essential tasks not related to anything you do for a client. The actual number of hours you will spend working for clients and charging them will be substantially less, perhaps about 1300 to 1500 hours per year. Those 1300 to 1500 hours are the ones you’ll base your hourly rate on. If you can charge for more hours in a year, great–just don’t assume you’ll be able to do so.

The first step in determining your hourly rate is to figure out what your overhead will be in a year. Overhead includes such things as supplies, telephone and postage expenses, insurance, travel, equipment, professional association memberships, extra equipment or software, office space, etc., that you’ll need to function as an independent contractor. For now, let’s assume that your overhead will be $1000 per month, or $12,000 per year. (If you’re starting your contracting career, play it safe and overestimate your overhead expenses; anything you can save will be pure profit for you.)

You next have to decide how large a salary you want to earn. Suppose that your salary at your last” permanent” job doing similar work was $40,000 per year. Let’s say your desired salary as an independent contractor is $50,000. That’s only fair since you have to provide for your own retirement, insurance, etc.

Thus, your goal is to make at least $62,000 (your $50,000 salary plus $12,000 annual overhead) per year after any assignment-related expenses billed to the client. Your hourly rate is $62,000 divided by your total working hours. If you decide that you’ll be able to work 1400 billable hours in a year, then your hourly rate will be $62,000/1400 = $44.28, which you round up to $45 or $50 per hour. If you think an assignment will take 100 hours of your time to complete, you would quote a fee of $4500 to $5000 in your proposal plus any necessary expenses.

Getting Paid

You will need to submit invoices to your client for services performed–an invoice is simply a written request for payment. Many computerized accounting packages have invoicing forms built in and automated. If you’re not using a computerized accounting system for your business, then you can make up your own. Include your name and address, as well as that of the client, and the date you are submitting the invoice. You should include a “customer reference” on the invoice, referring to the document under which you are claiming payment.

Invoicing is one of the most important elements of working on your own. If you don’t send out invoices, you won’t get paid! I’ve been surprised at how late many of our suppliers are with their invoices. Remember, when you’re late sending out an invoice, you are granting your client an interest-free loan! Send them out as soon as the work is billable–don’t let them pile up!

In my experience, if you stay on top of your invoicing and bill collecting–and choose your clients wisely–you’ll have very few problems with uncollected bills. Unfortunately you may sometimes run into a client who pays slowly or not at all. This can have several causes, but whatever the cause, you must take quick, firm action whenever an invoice is overdue.

If a payment is more than 5 days late, then phone either your contact at the company or their accounting department and ask about the invoice. Refer to it by date and number. If they confirm that they have received it, then ask, politely but firmly, when payment will be made. If you can’t get a firm commitment from the accounting department, then call your contact person, explain the situation, and ask them to help.

If the accounting department says that they don’t have a copy of the invoice, then someone dropped the ball. Your invoice is probably sitting in someone’ in-box. The most likely culprits are either your contact person or his/her boss. Regardless of what explanation you get, say that you want to receive payment within 10 days. Be friendly but firm on this point.

Follow up your phone conversation with a letter to your contact person. Express thanks for their assistance in handling the payment problem, but point out that your agreement calls for payment within 30 days, or whatever your payment terms are. If a check is only a few days late, the odds are good that the problem is minor and correctable.

If your payment doesn’t arrive by the deadline you’ve set, the time has come for stronger measures. These an consist of:

  • Telling your contact person that they have breached your agreement with them and that you will do no further work with them until the check is received. Be firm and decisive.
  • Put in writing a demand for your payment within five days; send it to both the contact person and the accounting department.
  • Make follow-up calls and send letters every five days until your invoice is paid.

If your invoice is still unpaid past 60 days, it’s time to take off the gloves. Call both the contact person and the accounting department on a daily basis. In our experience, and that of other independent contractors we know, it is the most aggressive creditors that get paid by cash-strapped companies. Make it clear that you are willing to take legal action if necessary; by doing this, you give the company an incentive to pay you even if it means postponing payments to other, more “understanding” creditors.

If a payment is more than 90 days overdue, your local small claims court can be a good way to press any legal action, with a minimum of expense on your part.

The best way to avoid such difficulties is to be selective about who you take on as a client. New and smaller firms are the biggest credit risk, and you should ask for a portion of your fee-say a third-in advance before starting work on a project with any client that you have doubts about.

Adapted from “On Your Own: How to Escape the Corporation and Make More Money as an Independent Contractor,” by Carol Lewis and Harry Helms.

Learn more about Independent Contracting – Common Questions

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