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My colleague and I were hired as freelancers by a small company to build their company website. The website included Home, About, Products, Services, and Contact pages.

When our client asked us about the overall cost, we said that our cost would include

  • Cost of Personnel (man-hours spent, hourly rate), and
  • Cost of Materials (Photoshop, personal laptop usage, web development research/training)

They found the personnel cost acceptable, but they balked at our inclusion of the material cost. Their argument was that the cost of materials shouldn't be included in the overall cost because we are freelancers.

Is our client correct in that the cost of materials should not be included in the cost? We are new to freelancing, so any help is appreciated.

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    I only include software costs if I have to buy a special rool or licence for this specific job. In other cases, I don't mention this. – Peter MV Jan 14 '15 at 12:30
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I do not know what's standard for your particular business niché.

However, your "cost of materials" seems exceptionally out of line to me.

Charging for software, hardware, and training which you will use for every client you ever have seems ludicrous to me. Detailing that in a quote/bid for me, would instantly mean I wanted to anger my clients. Operating expenses are not part of a bid/quote. Operating expenses are built into hourly rates as your overhead and customarily not treated as items every client is directly invoiced for.

Think of it this way, if your car breaks down and you take it to a mechanic, does the mechanic charge you for his wrench? The lift? the air tools? The garage? That's essentially what you are telling your clients. Even though you would use these tools for every conceivable client you ever have you want this client to pay directly for them.

To me, you are simply calculating costs incorrectly.

Hourly rate = ((yearly overhead / billable hours per year) + profit margin

Overhead =
yearly electricity cost +
yearly water cost +
yearly heat cost +
yearly rent/mortgage fees +
yearly travel expenses +
yearly phone cost +
yearly training expenses +
yearly software cost +
yearly hardware maintenance expenses +
etc.


So for example, I calculate that I will work 5 days a week for 40 weeks of the year at 6 hrs per day (6 hrs x 5 days x 40 weeks = 1,200 billable hours per year). And I know it costs me $25,200 a year for Overhead. Divide that by the 1200 billable hours and I know it costs me $20.83/hr to operate. So a minimum hourly rate is $21 (I'd round up.) Then add your profit margin to calculate hourly rate. Commonly 20% is used for profit. So, let's say 20% ($4.20) for profit. Rounding up, the hourly rate would be $26/hr. You don't have to use 20% this is just an example. In some markets, you could easily use 50%, 100%, or even 200% and still gain work. The point is you should know your minimum hourly rate needed for overhead.

This builds your operating costs (overhead) into your hourly rate. If you aren't doing this.. where are you getting your hourly rate from???? Are you just guessing at it??

Even if you want to use a much larger profit margin you should still calculate your overhead. Without knowing your overhead how do you know what is too low of a bid? How do you know when you are losing money on a project? What if you bid a project for $20/hr and your overhead is actually $25/hr? You'd be losing money with every hour you worked.

Material costs should be reserved for materials directly needed for ONLY this project. So, if this particular project requires a license for a third party software package, or this client is requesting the use of a particular typeface which carries a cost with it, then those would be added as materials costs. Material costs should never include anything you require to run operations every day you're in business that is overhead, not materials.


Unfortunately, for this client, you may have shot yourself in the face. If your proposed hourly rate was lower than your operating expenses (overhead) it is not going to look favorably if you you return with lower "material" costs and a higher hourly rate. The client will most likely figure out you are adding to the hourly rate to increase return on the project and, even if it is to legitimately cover expenses, it will still look simply like number shuffling. If you keep your proposed hourly rate the same and remove the "material" costs, the client may feel you were trying to take advantage of them with the first quote/bid. I'm just speculating based on my own experience, but this particular client may be a loss due to the misstep when bidding.

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3

Neither of you are correct really. There's no standard way of doing it and each client is different. Some are happy for you to bill them for cost of materials, others (like yours) not so much.

I used to charge cost of materials separately (hardware, software licences, etc.) but have hidden them since a similar discussion. Unless they're specific to the project then it's hard to argue. They think that because the tools you use are standard for your business, it shouldn't impact the client... which I guess is true. Because you've already discussed this with your current client, you might just have to take one for the team and only charge the cost of personnel this time round.

In future, try removing the cost of materials but increase your day rate or cost of personnel. This will cover the cost of materials then and not cause any grief from your clients.

Hope this helps!

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    You are right. Hourly rate is not only your work rate. It includes your service, your bills, your office costs, etc. – Peter MV Jan 14 '15 at 12:30
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There is no "Standard Company Website".

Time & Materials (and overhead) is just one way to price a project. It also happens to be one of the worst, because it traps you in a weird cycle. As you get better, you get faster, which means fewer billable hours and...less money. Hooray, progress! Then you have to up your hourly rate and prospective clients start freaking out about your massively inflated hourly rate.

The better path is to price based on the value the client will get from your work. If I'm a business owner, I don't care how much time something takes you or what tools it takes to make something happen. All I care about is what's important to me (usually more sales or leads).

Lets say I'm a mental health counselor. My average client pays $80 per week to meet with me, and they typically see me for 2 years. That client is worth roughly $8000 to me.

If you pitch me a total website solution that will bring me just ONE extra client per month, that equals an extra $96,000 per year in revenue for my company. You could easily charge tens of thousands of dollars for that website because the client will continue to use it for years to come, and what happens if you start getting them 5 or 10 extra clients per month? There's a huge upside and very little risk assuming you have the track record to prove your success & skills.

And maybe that site only took you 40 hours to build using free tools like GIMP, Notepad, and WordPress, so your effective hourly rate is much higher than you'd ever be able to justify otherwise.

Note: these ideas aren't mine. I learned everything from Brennan Dunn's book, Double Your Freelancing Rate. It should be required reading for all freelancers.

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  • I absolutely agree that value-based pricing is a much better pricing model to use. But you should still know your hourly overhead expenses. – Scott Jan 14 '15 at 15:59
  • Paragraph 4 with your example: $80/wk * 52 wks = $4,160. Seems to be worth a lot more than $2,000 – Canadian Luke Jan 14 '15 at 18:25
  • Haha, you're right. Math is hard :) – Chris Fletcher Jan 14 '15 at 19:08
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This is how I've priced jobs:

There is your overall bid price for the project. It is a fixed number. That number is based on the detailed Scope of Work (in this case, the kind of site, how many pages, etc) and an estimate of the amount of time it will take to complete it. So, for example $5,000 and two weeks turnaround.

Your "material costs" should be folded into what you have in your head for an hourly rate. The hourly rate should take into consideration what your costs are (equipment, software, office space, internet access, utilities, etc) and what you want your annual income to be divided by the number of billable hours you can put in over the course of a year. Factor in vacation time, holidays, sick days, time spent getting work: writing proposals, negotiating, meeting with potential clients. I've seen estimates of 800 to 1360 billable hours per year; not the 2000 hours a fulltime employee can possibly work.

That is your hourly rate.

http://www.consultingsuccess.com/consulting-fees-calculator

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