Working out an hourly rate

This is for freelancers and non-fiction writers: fiction writers, you don’t want to do this, or it’ll break your heart and spirit…

Working out your desired hourly rate is vital in setting your freelance rates and in goal-setting for your business plan (which, of course, you have dutifully created and revised at the start of each year). It is a valuable exercise even when your freelancing income is not your primary income. It makes you set goals and gives you a valuable glimpse of the worth of your business. It is also a method you can use to work out how much you need to earn before you quit your day job.

First, calculate how many days a year you work. Take off weekends, public holidays, annual holidays, just as you would for a normal job: do not be tempted to lay claim to the full 365 days or you will burn out in quick order.

So, let’s say 52 weeks, multiplied by 5 days a week = 260 days, minus 6 days of public holidays (or sick days, or unexpected emergency days, whatever), and 40 days annual holiday days. That’s then 214 days available for work in a year.

Next, calculate your productive hours. These are the hours that you spend directly working on a project: writing, researching, editing. You might be tempted to say this is eight hours a day, but there’s all sorts of things that eat into productive time – phone calls, emails, marketing yourself, meetings, travel time, filing, query letters – which are not necessarily directly billable to your client and which must be accounted for if you want to accurately project your income. So let’s say your productive hours are five per day.

OK. Multiple the number of days by the number of productive hours available in the day: 214 x 5 = 1070 hours per year available to earn your income.

Now. Look at your costs, which can be both fixed (present no matter how much business you do eg website hosting fee or tax accountant fee) and variable (go up or down depending on how much business you go eg stationery, printing costs, phone calls; I don’t want to get into too much detail, but in this case you work out a cost per unit and estimate how much units you expect to sell in the year…or just work off an average).

Let’s say total yearly costs are $12,800. Australians: this should be ex-GST if you are registered, as you can claim it back so it’s not really a cost. It should include GST if you are not registered, because you can’t claim it back, so that money is lost to you.

You also have to add in another ‘cost’: the profit you want to make – your yearly salary. This must be determined in light of your lifestyle goals and pressures like raising a family or paying a mortgage. Let’s say you’re pretty laid back and aim for $30,000. Therefore, total costs are really $42,800.

Divide your costs by the number of productive hours available: 42,800 divided by 1070 means that you need to charge a minimum of $40 per hour to meet your costs and profit target, assuming that every productive hour is actually earning. You might want to build a little slack into your calculations to account for the low times eg by working off an assumption of four productive hours a day instead of five.

Also consider value/worth: in a particular market, the value of your services might be worth more (or, unfortunately, less) than a straight calculation of costs gives you. From this perspective, you can start with the desired hourly rate (let’s say $60), multiply it by the number of productive hours per year (1070), take off costs ($12,800) and arrive at your projected profit: $51,400.

Price (hourly rate) and profit are clearly related, but it is not linear, because price also affects demand, and too high a price might mean not all those productive hours are in demand.

All right. So what about when you’re working to a per-word fee structure? It’s still best to bring it back to time. In this case, you might think you have to work out how many words you tend to write in an hour. But it’s not that simple, because a per-word fee has to cover not just the writing time but the interviewing/researching and editing time.

You’re better off calculating how much a 2000-word article will bring in at the per-word rate being offered, and then working out how many hours you should spend on it at that rate. You can then plan the project accordingly – or turn the project down as not worth your while.

So, if you’re offered 20c a word for 2000 words, that’s $400 (.2 x 2000), or 10 hours at $40 an hour. If you can’t produce the work required in 10 hours (and this very much depends on the project), re-consider the project.

When asked to quote a per-word rate, turn the calculation around. How long does it take you to complete a 2000-word article on a particular topic to your satisfaction? (You have to get very good at estimating how many hours it takes to do things, to be able to offer competitive quotes and to make calculations like this one.) Let’s say 20 hours, once researching, writing, and editing is taken into account. At $40 an hour, that’s $800. For 2000 words to earn you $800, your per-word rate then has to be 40c (divide the price wanted by the number of words). For a more complicated article that needs interviews and extra research, the number of hours required would go up, which means the per-word rate would go up too.

As mentioned above, you do have to get good at accurately estimating how long any given project will take, which depends on the complexity of the issue, your experience, and access to resources and expert advice. That takes practice, but recording your hours, even when not working to an hourly rate, can help with this. Note how long it takes you to do various tasks (in a spreadsheet or other record) and the project as a whole. Such deliberate observation will give you a feel for your own working habits. (Also with practice, you will get faster at tasks.)

You also need to have an accurate grip on your costs: calculate everything. Phone calls, hosting fees, line rental, electricity use, stamps, fuel, paper, staples, office equipment, computer servicing fees, everything. Even what seems like a minor omission can throw off your targets over a whole year.

And you need, lastly, to be honest about your profit goal, which means assessing your living costs – costs not directly associated with running the business, but that are still bills that have to be paid: mortgage(s), school fees, groceries, utility bills, fuel and car maintenance, gifts, entertainment etc. If you underestimate your true lifestyle expenditure, you will be facing trouble by the end of the year. On the other hand, if you overestimate, you might be charging too much or you might be working too hard…

Do this when you’re starting out, and re-do it every year (even every six months, if costs or demand are changing rapidly).