7

A client of mine is thinking to hire me full-time for a 1-year project and told me to let him know about the costs.

Now, we all know that I cannot calculate my price as "my freelancer hourly price" * 8 * "work days in a year", because freelancer hourly price includes risk period costs.

Also, although he accepts my hourly price for the regular tasks, I don't think that he will accept it if I multiply it with 8 and numWorkDaysInYear. So I have to think of a discount to my hourly rate for the first phase of 6 months.

However, it's been yeeeears since I worked on 1-year projects and I don't have my rate for such projects. And trying to remember what my rate was at that time will not work as well, as obviously I became a better expert since then. Thus I would like to see what you do in situations like this so maybe I can guess the right figure ;).

Has anyone been in the situation like this? If your price is $X/hour, what is the discount you give for 1-year contract?

  • 2
    Why a discount to begin? I've never added a risk period cost to my hourly rate. Is that something to consider? – Maarten Jun 24 '16 at 14:42
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    Does it have to be 8 hour days/40 hour weeks? You may want to schedule this guy for 30 hour weeks to leave some time available for things like warranty/emergency work for your current clients. – corsiKa Jun 24 '16 at 22:40
  • Why dont you just offer him your normal price and see if he accepts it? – user5193682 Jun 26 '16 at 9:22
  • @Maarten Well you should if you think to persist in the business. Unless you are the rare one and actually work full month, each month. For example, if your hourly rate is $50, then you expect to earn 50x160=2400 each month. So this is your salary. Obviously you can rarely work full month each month. so you have to calculate risk. let's say for the start, you predict you will work only half month - it means that you have to charge clients $100/h. This cannot always work as simple as this, but you must know the minimum you have to each each month to survive – Peter MV Jun 27 '16 at 12:09
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    @Maarten If you are interested more about your question, why don't you post a question. I am sure you will get great answers ;) – Peter MV Jun 27 '16 at 12:19
16

Realize that if you are tied up, full time, for a year, you'll most likely lose all your other clients. So, if that's okay you need to make it worth your while.

If you are financially in good shape as things are with several clients, then putting all your eggs in one basket, as it were, can be very risky.

Due to the damage, yes damage, such a position will do to your freelancing I would not be inclined to offer any discount.

The only possible reason I may consider some sort of discount is if the client was going to take on additional items. Such as paying for equipment/maintenance, paying for electricity, paying for healthcare (if necessary), paying for all your business overhead essentially. Because unless the client is covering some of that as well, there's really little benefit to you killing off your freelance business for this one client. Face it, your expenses are not going to change just because you have a lengthy contract. Your overhead will stay the same unless you are working on-site for them. And if you are indeed working on-site, then why not a traditional full-time employment position with all the benefits that are associated with that? (I know why... because it's cheaper for the client if you aren't actually an employee.)

I've had many a client that dangled the "we'll be looking for full time help soon" carrot in front of me. As if it were an incentive to work more or cheaper for them. The truth is, if your freelance business is doing well and you aren't struggling there's really little reason to drown it intentionally by focusing on one client full time.

All that being posted, I might offer something like a 20% discount based on a lengthy contract with steady payments. I'd offer the same discount I do to any client that has a great deal of work for me. I reward clients for repeatedly returning to me. But... I wouldn't build this into pricing. I'd reward it along the way... every 90 days I'd just give a discount without warning as a "reward" for steady, on-time, payments. This figure would not be mentioned to the client during fee negotiation and it would not be built into my calculations for the figures I need to negotiate. It's a "gift", a "reward" not a "discount".

If I were forced... I'd average my yearly income over my freelancing career (or the past 3-5 years) and then use that number as the figure to negotiate to. So if I've averaged $130k (random figure) over the past three years, the client would need to pay me $130k minimum. Truth is I'd probably add another 20-40% to that in order to cover the loss of existing clientele and the risk associated with that.

So, rather than trying to calculate hourly, I'd work backwards from annual income. The reason being that although we set hourly rates, most freelancers aren't working full 40 hour work weeks. We work more or less most weeks. So by using the annual income average you base figures on what you've pocketed, not just what you are asking for currently. Imagine a full 40 hour week for me at my current rate may amount to $4,000/week. But really I only worked 27 hours this week ($2700), 32 last week ($3200), 65 the week before ($6500), etc. So my hourly rate is not an entirely accurate indicator of my actual income. Averaging annual income over a few years is an accurate indicator of my current income.

  • (average annual income + 30%) / yearly work hours = hourly rate

or

  • (130,000 + 39,000) / 1,800 = $94/hour (rounding up to nearest dollar.)

Whether or not that matches or comes close to your existing hourly rate is a different matter :)

If the client balks at that figure, you can easily explain or back it up with the fact that you are already averaging that amount annually and that there's little or no upside for you if you aren't at least making the same average income you already pocket.

  • Thanks for another great reply. Your formula should be put into Help section of this group so new freelancers can figure out what should be their rate. – Peter MV Jun 27 '16 at 12:16
  • +1 for mentioning the implied risk of focusing on just one client – John Jun 27 '16 at 18:54
11

In my opinion a client should be paying you more if they want you full time.

If you are working for someone full time, it means there is no competition on your time for anyone else.

As a freelancer, your time is bought by the highest bidder. If they buy out your time, they're buying you off the market. They should be paying you more than your normal rate, not less.

Last time a client did this, I asked them for 20% more hourly than my usual rate because that's how much I was expecting my rate to go up in the next year, had they been in competition with other clients. The client agreed to the deal.

2

Like most others I try to avoid discounts - but if giving a discount seems unavoidable, I would need some guarantees added to the contract.

Many things can happen in 12 months. Companies may be bought or collapse, people may move on or priorities may change.

Can they fire you at all during the 12 months? If so, what if you're fired after 3 months? As a bare minimum, I would insist the contract state that the client must re-pay the given discount.

However, even with such a rather unusual clause, actually getting the 'severance payment' may prove tricky as you have no leverage apart from taking them to court.

1

The only time I've ever offered a discount for a long term (12+ months guaranteed) contract is if bonuses are worked into the rate.

My rate is $30/hour not because that's the number I chose out of a hat, but because that's what I'm worth. If I lower my rate I'm lowering what I'm saying I'm worth. With that said:

I do have a contract in which I make $24/hour but I get a bonus every 6 months based on the results I've gotten. This equates to an average of $28/hour. So, yes there is a discount from charging $30 to $28/hour but this is mostly because it's an international client and conversion rates are worked into things.

If I were to give any discount, I wouldn't give more than a 10%.

1

While @Scott is right that you can't expect to maintain business relationships with the numerous small clients you (presumably) are currently working for if you do a full time contract for a year with a single customer; it is possible to make a living contracting larger jobs serially. It will however be a rather different way of living that the former. (And not just that you're probably going to end up spending a lot of time in places where you're expected to wear a tie instead of a tshirt.)

A former acquaintance of mine's done it for a number of years; generally working for larger businesses that will hire a team of contractors to either build an application from the ground up or when an in house team is in trouble and needs bailed out. I've lost touch with him (or I'd ask him to answer here directly); but he did explain how he priced various length contracts and I can pass that on.

The key item is that - because you will generally be out of work for a period of time between contracts - you need to price that time into the hourly rate you charge. As a simplified example:

If you need $50/hour to cover your business and living expenses, and need an average of three months to find a new large contract after your previous one completes, for a 3 month contract you'd want a rate of $100/hour. If it was a 12 month job you could lower your rate to $62.50. Going the other way, you can see why enterprise consultants on very short term contracts charge what seem like eye wateringly high rates to the salaried people at the sites where they're working for a few days or weeks.

  • Does this happen before or after the client already knows your rate? If you charge $50/hour to an existing client and they want to hire you full time and you charge then $60-75 an hour - in my experience - most clients aren't too keen on increasing rates too much when they'll already be paying you more due to more hours. – Memj Jun 25 '16 at 23:45

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