This question just keeps coming up. In fact, just today I had a “ discussion” about it with a pimp who had no concept, he was just trying to get someone to take a technical writing contract at way below market rate. What shocks and appauls me is the number of supposed consultants who do not understand this concept.
Effective Rate has nothing to do with “cost of living.” When you used the formula I presented in an earlier blog, you took into account the cost of living. Most of you probably thump in a “gas only” or “train ticket” only value for the transportation portion of that equation, which is fine, as long as you are willing to donate your travel time. Most people do not realize just how poor travel time makes them. Travel time and non-billed hours are what determine your Effective Rate.
Many consultants will work the occasional hour unpaid just to help someone on the project shoot a bug or help the team finish a design. It happens. There is little we can do about it and remain successful. When you have a client that tries to Walmart you on a regular basis (force you to work for free) that’s when you end up in poverty, which is why Walmart is constantly creating slaves in America, because it turns a profit, if you are completely void of ethics and morals…in short…if you are an MBA. I have regularly encountered managers who viewed consultants just like salaried employees. They thought they should carry the support beeper and not be paid for after hours work. There’s a lot of little Walmart’s out there.
Assuming you aren’t dumb enough to work for Walmart, or a Walmart like company, your next killer is transportation time. So many people forget to calculate this, it is unbelievable. Just today, the pimp wanting me to work for $60/hr on-site agreed that you couldn’t possibly live in the city on that income, but said he had people farther out who could take the train….blah..blah…blah. I’ve done the train thing into Chicago before from Naperville and Aurora. Other friends have tried to do it from farther in. In theory you can read on the train, as long as you don’t go to sleep and miss your stop, but, for the most part, the time is wasted. Today’s laptops take too (*^)(&ing long to boot and there is always someone either wanting to talk or crowding you.
What most people forget, is the fact there are only a handful of express trains in the morning and in the evening. They are 45 minutes each way. Add to that the time it takes you to drive to the train station and park (assuming you were willed a parking pass by a now deceased relative) and you are looking at two hours unpaid. If you have to take a bus to the train because you never got a parking pass, add another half hour each way. God forbid you work late and have to take a milk-run train home because that is well over an hour just getting you back to the train station.
60*8 = 480 / 10 = 48
60*8 = 480 / 11 = 43.63
If you take the train, your effective rate is $48/hr. On the day you put in the extra hour gratis, you make just over $43/hr. This is why successful consultants take corporate housing and never quite making it consultants commute. Nearly everybody is willing to eat 15 minutes each way. You need that time to wake up or wind down. The real problem here is that the billing rate is below market on so many levels. You aren’t going to find corporate housing in downtown Chicago for $60/week. You aren’t even going to find it for $60/night, not in the city.
What if the billing rate was the actual prevailing wage?
$80*8 = 640 / 10 = 64
$80*8 = 640 / 11 = 58.18
Now you are okay. If the contract doesn’t have a no overtime clause, you can do the corporate housing thing and work one extra hour per day to cover it. If you shop really hard you can find $90/night corporate housing. Even if you have to tough it out commuting, you aren’t at the poverty line.
Your effective rate is your total bill for the day divided by all of the hours you are away from home. A salaried employee working for $60K/yr in the city is simply getting raped.
60000 / 2000 = 30
30 * 8 = 240 / 10 = 24
30 * 8 = 240 / 11 = 21.81
I’m not talking about your effective income level here, just your effective billing rate. Effective income level is a completely different calculation.
