Evaluating Hourly Rate

[j_sims]

Hello to all....first timer

I have a question about calculating my hourly wage.

As I said in another post, in the past I used a 20% across the board mark up on total job cost.
My business is doing not so great that is why I decided to find out why. After now doing what I should have been doing in the past an Overhead Recovery Analysis
I know why....I was pretty much working for slave wages. ........unbeknownst to me.
I use Quicken Home & Office for basing my P&L from. I know it is elementary but for
as my needs it serves it's purpose.

Doing my restructuring of my hourly rate, I categorized Indirect and Direct expenses

My questions are: (finally)

I will preface this with saying...I know I am the business and the business is me as far as the IRS is concerned, so these question are about what the customer (my hourly rate) should be billed for and what is fair.

1). Are Self Employee tax and Income Tax considered to be Indirect cost or are they considered Direct cost because they are directly tied to wages?

2). Do I include 100% of both of taxes in my overhead....IE; should the customer be footing the bill on 100% of these taxes
OR...Do I do like an employee and absorb 1/2 the SE Tax in my personal finances.

3). Do I include ANY part of my estimated Income Tax in figuring my hourly rate

4.) Same thing about including a retirement in my hourly rate....If I have a set % that suits me...do I split that between the business overhead and a "personal contribution"?


AGAIN....these questions are geared to what is standard and what is fair to the customer. I know I/Business are paying 100% of these taxes.
In my mind I am thinking, that to be fair to the customer, like employee/ corporation situation and what they would be passing on to their clients.

I do hope these questions make sense....The more I get into the financial part of my business the more I know I don't know. I don't even think I am at Biz 101 yet...more like Biz 98-1/2.

[Freelancier]

You are so overthinking this.

The rate you charge is based on what the market will bear for your services. When you undercharge, you send a marketing message to your client that either you are desperate for work or "there's something wrong"; some clients will ignore these messages anyway. When you overcharge, you are limiting your client base to those who agree that your rates are fair anyway. Neither has anything to do with "what's fair to the customer". What's "fair" is that the customer agreed to the price, whatever it is, and you complete the agreed-upon work for that price.

When someone starts out as a freelancer, I usually tell them: take your last yearly salary divide by 1000 and then round up to the nearest $5 to get your hourly rate. That rate will keep you about even with where you were as a salaried employee provided you don't have high start-up costs for what you're doing. By doubling your salary's rate, provided you work at least half the year, you should be able to cover taxes, insurance, etc.

However, most new freelancers screw up the estimation part when they quote a fixed-bid job. They're usually way too low on the hours, but sometimes they're too high. The only way you'll know how you're screwing up is to carefully track every hour you spend on a job and -- at the end of the job -- compare it to what you bid and figure out where you went wrong.

When I first started out, I quickly figured out that all my quotes were 25% too low for the hours I was spending on it, so I added a "fudge factor" of 25% into every bid. I still won the bids and my quotes were more in-line with my actual time spent.

So you can get stuck in the trees about whether taxes get billed to a customer or you start looking at the forest and figure out whether your rates are too low for your market or your estimated time is too low for the jobs you're winning.

[j_sims]

First ....Thanks for the reply
AND your first comment is EXACTLY what I told myself. Jeez quit over thinking this thing !

That is 99.9% of my projects are fixed bid estimates and or proposals. I don't think that I have done a T&M job in 4 years.
I do use unit pricing half the time....but again....unit pricing has to take in account for a labor rate.

My first guess at what is wrong, unfortunately.... has been my past pricing "method". Bidding by what the norm is for my local area and local area rate, i.e. "Joe Blow is doing it for $ x.xx , that is what I will charge." Never taking in consideration that Joe Blow may only have gas,and insurance for his only Operating Cost. (exaggerated) . Second guess is lack of marketing...It use to be word of mouth kept me busy. Now with all the help we are getting from our neighbors to the south, working at way below "standard" labor rates has been an issue. Third is just the total neglect of the business side of my business....just letting my CPA do the numbers and then write a check.

I am in the process of "figuring out what & where I am going wrong"..... (better late than too late). I just wanted to get a little more precise of the how I am setting my hourly rate at the $$ amount I will charge the customer.
I know to stay competitive I need to be as close as I can to what the market will bear BUT... if my rate can't be set to meet biz and personal expenditures AND still be competitive....then it's time for Plan B (whatever that is)

As far as using historical data, I am using only operating expenses in restructuring my hourly rate. I really didn't want to use any past references for income to set any kind of hourly rate because historically that has proven to be a broken wheel, that now I am trying to fix.
I think I was a little overly pronounced about "fair to the customer in my initial comment" even though I do want to treat them fairly I am in business to make money......I think.

I am pretty exacting on the mechanics part of my trade. and the more I get into the financial side of it....I can tell I will be just as exacting. I need to know what % is going where and why and exactly how it will evolve into an hourly rate...(maybe it's an OCD thing.)

As far as your fudge factor, I do the same only mine is categorized as the "OSIF Charge" (OH S*** I Forgot). Mine normally runs about 10-15% of job cost. (Now thinking after reading your reply and historical data maybe 25%-30% is more of a realistic number)

I will heed to the advice "over thinking it" .....that pretty much confirms my initial thought.

Thanks again

[Freelancier]

I've been running my own businesses for over 20 years and one of the most important things I've learned is this: Never EVER compete on price. Compete on value, customer service, expertise, but never ever ever compete on price. Someone will always come along and underbid something and take the client if the only thing you're competing on is price.

But that's back to paying attention to marketing. Everything you say and do is a marketing message to the client. Your price is one of those marketing messages as is your expertise, how you dress, how you speak, whether you have an accent (good and bad, depending on the listener!), what you say when you answer the phone, whether you mention you have a dog! It's all related to how the customer perceives who you are and what you're worth. I just won a project where the customer never checked my references... instead he listened to the questions I asked and judged me based on whether my questions were the ones he would ask (it's a really technical project, so I seem to have asked the right tech questions during the sales meeting). That's marketing! Advertising is just getting some of your messages out to a wider audience, but the reality of marketing is that every time you have a contact point with a potential or actual client, you are doing marketing.

Figure out how to make your marketing work for you so that you can bid the prices you want and not worry about what other people are charging.