Advice when pitching a day rate to maximize billable time

Question

I originally asked this over on workplace.stackexchange.com: https://workplace.stackexchange.com/q/131342/40440

---

I read an article for contractors/freelancers about how to calculate a day rate, vs hourly rate. The advice was focused on how to make sure the freelancer is charging enough. (I typically do staff augmentation work on multiple projects, for a single client.)

The calculation was to charge an extra 40% premium, then multiply by 8. This is your day rate. The article then advised to charge 75% of the day rate if you charge a half-day rate; then to charge 30% of the half-day as the hourly rate.

Here's an example: Let's say the salary is $50,000. The day rate is calculated as ($50,000/2040) + 40% premium or $34.3/hour. A full day is $274.40. Half a day is $205.80. The hourly rate is $61.74/hour. Probably round up to whole numbers like, $274/day; 205/.5 day; $62/hour.

Ultimately, what would be presented to clients would be something like:

I'm looking for a day rate of $274 for an 8-10 hours day. Otherwise it's $62/hour. We can discuss other terms, if you'd like.

Something like this. How it's calculated is not really their business.

The benefit of this type of calculation is if the client doesn't have you working a full day, you don't lose out on hours that you could have potentially charged to another client.

---

In my case, I usually end up working a full 40-hour week, but I'm trying to be a bit more structured in my freelance work. Having said that, I don't have experience with day rates and project rates. A lot of advice for freelancers is to charge by the day or project. I also think charging in this way helps companies to remember that you are a contractor, not full-time, as some companies (but not all) seem to go the freelancer route in order to avoid paying US payroll taxes.

There are 2 areas of focus for this questions:

1. I'm curious if anyone has any advice for how to approach negotiations or pitch this to a potential client. Basically, when someone asks for the hourly rate, I want to steer the conversation into asking for a day rate. I suppose this means a contract on my part will be required, to detail this out?
2. In terms of a strategy to maximize billable hours with a client, how well do you think this might work? Do you have other strategies?

Answer 1

My day rate is considerably more than merely 8 x hourly rate.

Day rate means I can't take calls, answer emails, etc. and am exclusive to that client for that day.

Being entirely exclusive to one client means they need to pay more for my time, not merely for 8 hours of my time. If I am to provide a day rate, it's much closer to 16 x hourly. And my day rate is for times where I'm asked to be on-site or to be on-call throughout the entire day. I don't do day rates if I'm sitting at my desk and the client's project happens to take 8 hours of my time.

I, personally, charge by the project. To me, value-based pricing is really the only way to ever stay profitable as one gains experience, proficiency, and possibly notoriety. Hourly rates merely ensure as one works faster, less money is made. With hourly rates one has to constantly work more to make the same amount. The better you are at your job, the more projects it takes to earn the same amount.

In my opinion, hourly rates shouldn't ever be based upon day rates. In fact, just the opposite. Day rates should use a (profit) multiplier based upon 8x of hourly rate. I use (8 x hourly) x 1.75 = Day rate. So, if hourly is something like $50, 8hrs is $400, Day rate is $700 (400x1.75). Half day is $350 (700/2).

If a client wants a day rate, I'll provide it. But I don't start the conversation from the standpoint of wanting a day rate. In my experience that simply scares off clients. Clients will easily pay $700 for a project, but they will shy away from paying $700 for a day rate. While it's the same number, the connotation "rate" brings is that it's open-ended and will most likely increase. Clients won't know how much you can get done in a "day". So, they never know if they'll need 1, 2, 5, 8, 15 days, etc.. And you can't reassure them of the time you'll take, regardless of what you say, until after you've worked with them a while.

I bid per-project using value-based pricing. If there's a possibility that a per-project price may not provide adequate payment due to possible future changes, then I bid per-milestone with an explanation that additional work will entail additional milestones for additional costs.

---

Sidebar: If I were a client and saw $274/Day, $205/Half day. $62/hourly.... I'd ask why the half day is markedly higher. If a day costs me $274, then half a day should cost $137 (half the day rate). And I'd always, I mean always pay your day rate. I get 8hrs for $274 rather than $496 (8 x $62).

Don't think clients are stupid. They aren't. If you provide a day rate and an hourly rate, they'll do the math.

This is another reason I use value-based pricing. So that the math isn't immediately discernible. If I bid a project at $5k and the client is happy with that. It makes no difference (to the client) if it takes me 1 hour or 30 hours - they'll still paid the price they agreed to.

Answer 2

This really depends on your market, your business-model and how you want to steer your clients.

I, for example want to encourage the clients to book larger chunks of my time. It is way less overhead for me and it allows me to plan better. So I give a discount on daily, weekly or long term contracts.

So how do You arrive at your rate?

1. You should have a clear idea what you have to have as a minimum monthly income, to be better off than in a permanent position. Don´t forget to factor in perks such as paid time off, health insurance, contributions to retirement. Also add all the costs resulting from your freelance-activity, like liability insurance, training, equipment etc.

2. Try to get a good idea of the non-billable hours you have to invest, to run the business like: invoicing, bookkeeping, taxes, client communication and marketing.

3. Subtract (2) from then normal working hours you would have in a permanent position and then divide (1) through the remaining hours. This is your minimum rate. You should never offer any work below this price! If you don´t get contracts at this rate, find a permanent position! Usually, you should get a bit more than that, for taking the risk and offering the flexibility. For me, at least 20-40% sound reasonable.

Now, research the market rates. They should be above your minimum so you have some headroom. This is where pricing politics kick in. I have gone towards the top end, because I consider myself at the top of my field, but still a bit cheaper than others who may have unique selling points. I have a small discount on my daily rate, because I like to work and concentrate on one thing for a whole day. Also it requires less effort of keeping a time-sheet. Also, a full day can end up on being more than 8 hours - so that may be something to keep in mind. I also wanted to discourage clients to interrupt my work with too much small requests, so I have a minimum billing interval of 1/2 hour. I also offer further discounts on bigger projects or long therm support contracts - if I want them. At last, I have a small fee for traveling on location, big enough to discourage unnecessary on-site visits, but small enough to don´t prevent them where they bring a real benefit.