“How do I calculate my minimum hourly billing rate?” I get asked this question a lot, and not just by green/new consultants. Whether you are billing locally or for work on-site around the country, the formula doesn’t change, it simply has additional values.
Billrate = (onemonthhousing + onemonthtrans + $700)/40
Even a contract “down the street” is going to put you on the bench for a month if it doesn’t work out in the first week and will generally leave you on the bench a lot longer because they will keep hem-hawing about extending you right up until your last day, stopping you from effectively marketing yourself. The $700 is a meals fudge factor you need to toss in and it is absolutely mandatory when considering working out of town. You should never leave it out of the equation anyway. Let us work with some numbers:
|
Local Onemonthhousing category |
Amount |
|---|---|
|
Rent or mortgage |
$1,400.00 |
|
Real estate tax |
$80.00 |
|
Utilities |
$110.00 |
|
Insurance |
$70.00 |
|
Association Fees |
$150.00 |
|
$1,810.00 |
It is quite possible that your real estate taxes will be rolled into your mortgage because the lender will want to be certain they are paid. Some condo associations have the real estate tax as part of their fee as well.
|
Onemonthtrans |
Amount |
|---|---|
|
Car payment |
$250.00 |
|
Car insurance |
$70.00 |
|
Gas |
$100.00 |
|
Maintenance |
$40.00 |
|
$460.00 |
I just pulled these numbers out of the air, but they will work for now and seem pretty typical. Most consultants calculating a “local” billing rate give themselves away because they never include their housing. They tend to do stupid things like say to themselves “Well I made $70K as an employee and survived on that so $40/hr ought to be an improvement.” No, it’s not. As a self employed consultant you have to pay your own health insurance, business insurance, and the employer half of social security. Even if you are a fraud, working W-2 hourly and calling yourself a consultant, you are paying for your own insurance ala-carte from the offerings provided by your employer. Unless your employer has matching 401K contributions, you are an idiot to pass up a Keogh (which lets you put up to 25% or $250,000, smaller of the two, away tax free for retirement) in favor of their 401K with contribution limits ranging from $11K – $18K. Many consultants I know multiply the amount in parentheses by 1.25 before dividing by 40 so they can be assured of having the 25% of income retirement contribution. It is not a bad practice, but, as you will see, does lead to a lot of time on the bench with the H-1B1 billing rates being offered instead of U.S. citizen wages.
(1810 + 460 + 700)/40 = 74.25
If a person exists with these expenses, they need to have a minimum billing rate of $74.25/hr just to survive. Never fall into that fools trap of lowering the billing rate by spreading these expenses over all four weeks in a month! You will be bankrupt faster than you can shake a stick. A lot of sly recruiters will try and talk you into such things, so will the account reps for most pimps. Remember those things like business insurance, business license fees, and both halves of Social Security? Where do you see them in this formula? They aren’t there. They come out of the wages for the other weeks of the month. Unless you are in the hottest tech market ever, you are eventually going to be “on the bench” for one to N months because you didn’t market yourself until your contract ended. When you are “on the bench” there is no income, you are paying these things with the slush fund you accumulated during those remaining three weeks each month.
A consultant working out of state has to include ALL of their local housing expenses and add in the cost of corporate housing near the client. Unless you are in downtown NY or LA, most parts of the country will allow you to obtain corporate housing somewhere between $2400-$4400 per month. There will be additional fees for parking and housekeeping in most cases. Please do not forget that you will be paying income tax in two states as well. Length of project is amazingly important when considering an out of state contract. If you don’t think you can be away from home for six plus months at a time, don’t even consider it. You don’t start making money until you’ve been on-site for a couple of months.
Corporate housing is a real dice toss. The bulk of those low cost extended stay hotels where you can sometimes find housing for $45/night have the bedroom in the kitchen. They are smaller than a regular hotel room. The really cheap ones, like Homestead Suites, tend to be bulk rented by off-shore consulting companies stacking way more people in them per room than the fire code allows. This means they are beat to shit even when they are brand new. As a general rule, Extended Stay Deluxe is fine, and Candlewood Suites are really nice. Extended Stay claims the lowest price will only be available from their web site, and I’ve found that to be true most of the time, though Hotwire does have a lot of their rooms. I don’t have experience with most of the other chains, however, my experience at a Homestead booked by PriceLine mentally scarred me for life and cost PriceLine a customer forever.
