How do I calculate the cost (to me) of one hour of work?

Question

I often stand in the situation where I can choose between doing something myself or outsourcing it to someone else. Or I have a chance to so some extra work in a situation where they are not able to pay my full rate. As an aid in both these situations, I would like to be able to calculate the cost (to me) for working one extra hour. This is very simple if I am 100% utilized, because then I can easily calculate the opportunity cost (cost = to what I am missing out on). But as most freelancers I am just roughly 50% utilized. How do I calculate what the cost of an hour of work is to me? Or in other words, coming back to my outsourcing decision, how much would I be willing to pay to get someone to save me one hour of work?

I know that the cost is just one part of the picture, as sometimes extra work can give me extra opportunities etc. etc. but it nevertheless helps to know the cost of my hours of work.

The perfect answer would probably involve some rough formula or rule of thumb.

Answer 1

Now that's an interesting subject. Actually, two subjects:

1. How to determine the price for one extra hour of my work
2. How to determine the total cost of outsourced hour of work

Ad 1) For me, that depends on if I am currently happy with the amount of work I have, and what kind of client wants it.

• If I want to have more paid work, then I charge my hourly rate (which is calculated in such a way that it includes my working time, time needed for "switching the context" to that project, other costs, reserves, etc.).
• If I do not need the work, but I want the client to be happy, I will do it for my standard rate as well.
• Otherwise, I multiply the rate so that the resulting number is enough for me to cover the loss of free time (I really do base this on how I feel); this is usually between 20-100% extra (unexpected weekend work is always 100% more for me – I consider weekend time essential to regeneration of body and mind and I am not willing to part with it).

Ad 2) I approach this more strictly (although I make sure I wont get paralyzed by analysis):

(Hourly rate of outsourced workforce * number of hours needed)
+ (time needed for testing the result myself * my hourly rate)
+ reserve for additional last minute work and snags.

I approximate the testing time as 20-50% of the amount of time needed for development I would go for 50% if it is one hour of work. Of course if you can trust your contractors, you can lower this estimate, but you need to test; you don't want to hand over product with low quality to your customers, right?. Even in consulting, you "test" by proofreading whatever goes to your contractor, checking for mistakes, weak parts, redundancies, accomplishment of the goals, etc., and ensuring that you are handing over a high quality product to your customer.

I add 20% of the original amount as the reserve; it is usually about right.

And that's it – if the number is lower than doing everything by myself (with the price calculated per no. 1) – I would consider outsourcing the work.

As you can see, outsourcing the work would usually end up being more expensive than doing the work myself if it was only for a one hour job...

Answer 2

I would challenge that you are looking at it wrong. The relevant question is not "what is the cost of one hour of your work" so much as "what is one hour of your time worth?"

In the case of outsourcing it is tricky as what your time is worth is complex. You could be doing sales which might or might not produce money, you could be doing other work that pays more or less directly or you could be spending time with your friends/family/relaxing which the value is solely up to you. It's tricky to measure since the value of sales depends on how good you are at it and how much time you are doing direct work. It really comes down to how much you think your time is worth and how productive you are in general.

Once you know this, the other questions become simpler. For outsourcing, you know if it is worth your time to do particular direct work or if you might be better off working on other things and taking a smaller cut. If you think your time is worth $80 an hour and the job only pays $60, then outsource it for under $60 if you can.

Similarly, if someone wants you to do extra work, you should first consider what it is worth to them for the work to be done. Don't charge less than it should be worth to them. If the amount it is worth to them is legitimately less than what your time is worth to you, then don't take it unless it's going to cost you other work that makes it overall worth the time. (Or outsource it if you can.)