5 things to consider when building your billable rate

There are so many formulas’ employed by experts at revealing the optimum billable rate. While the answers to this question seem infinite, the key variables necessary in deriving the vast majority of optimum billable rates stay consistent. This list is simply an expression of a few of the key variables that I have consistently seen used to discern optimum billing rate for the development freelancer or team. If production is your goal, using the below key variables will help aid you in fine tuning a billing rate stable for your business and personal life.

1) Start with your personal needs first

Building a list of personal expense items is simple. Do not make it unnecessarily complex. How much do you pay in a month for Electric, Rent, Credit Card, Entertainment, Groceries, etc.  This list should be broken down by month with a consistent expectation for spending. Listing all personal expenses in broad categories on a single month basis helps eliminate confusion around timing that may arise. For example, the fact that electric is due on the 12th and rent is due by the 4th doesn’t impact your monthly estimate. Streamline the entire month in one list and make it easy on yourself.

2) Then add your project costs of production

 There are many different methods businesses use to determine a production cost. Whether it be per hour, per service package or per product created, all you really need is a standard single deliverable variable to express costs of production into a term easily bridged with the services you provide. Here are some examples of deliverable variables for you to derive a cost per term.

Helen is a web developer focusing on user experience development for a number of company clients. She produces work in a number of different ways and usually incorporates fees associated with a part-time contract technical developer into her packages. These packages really vary depending on size and scope; it is difficult to derive a cost per hour due to the fact that she relies on outsourced contractor costs on a project by project basis. What she does have is the ability to derive a cost per her three packaged service tiers. One package she can estimate will have a cost component of $500 of additional contract labor and another package is around $1,000. Helen is able to discern costs based upon some sort of deliverable term (specific service package), this assists her in budgeting.

There are so many different ways to arrive at a standard deliverable costing term for your business. While dollars per hour of labor works really well for an established development shop with set labor demands, costing per project works great for the developer dependent on part-time contractors. The key variable here is really up to you, mold it to your business, don’t ever mold your business to an accounting variable.

3) Predict hours needed for specific projects

So moving forward with our logic from the prior point, we need to establish an expectation for your different production offerings. Hour derived expectations are a great way to establish a set standard for your different project offerings. Also hours are great units used for billing models and clients will appreciate detailed invoicing if hours are listed in a genuine fashion.  If you have a number of service offerings, use hours to explain what derives the end result. Let’s use Helen in another example.

Helen knows that she will work between 60-80 hours in order to complete a tier 1 service project. She understands that it is consistent for her to spend around 10 hours in the initial strategy and conception phases while later build out stages require 40-50 hours of work and testing. She understands the make-up of how much time it takes to go from start to finish of a typical project.

Having an hour’s expectation is crucial to the billing rate configuration. Obviously if your charging a client by hour, it is mandatory for you to understand the number of hours necessary to complete a project. It is also necessary for the health of your business to understand hour requirements even if you bill a fixed rate for a specific project. This understanding will not only allow you to optimize billing for fixed rate projects but will also assist you in discerning the worth of your current billing model.

4) Build hour expectations for personal and proprietary work

Each week we all are given only a certain number of hours to produce. This is set and there is no changing this law. We eat, sleep, shower, drive, relax and run errands. Each week we are lucky if life has presented us with a window of 40-50 hours to do focused heavy work. Even during the workday, time is allotted for lunch, checking emails, organizing notes and simple chatter with peers. The more you as a producer are able to acquire an expectation for your hourly spend per week, the closer you will become to having confidence in your billing rates.

 Use a template for expectation also. We all attempt to work a minimum of 40 hours in a given week to produce our craft. Ensure that you are estimating your weekly schedule by taking into account your 40 hour per week goal. Use broad terms in building this expectation to allow for an easier method for benchmarking weekly actuals. For instance, use “admin” as a category to bucket hours spent emailing and organizing your non-billable time. You aren’t building a clock in clock out system for yourself; you are simply building an estimate of your weekly productivity.

This step combined with our next step will ensure that you are functioning at optimum billing structure while also squeezing the most production potential from each week of work.

5) Track time actuals

This is the easiest to understand in terms of importance and yet the hardest to accomplish consistently. After spending almost my entire career working towards establishing better time tracking strategies for creative professionals I have come to realize that this is the single most despised task. Tracking time each day feels like a prison sentence to many creative and technical professionals and there are few occurrences in which I would ever disagree with this innate feeling of contempt towards tracking time. The task feels like a choir, provides no immediate value, and can bring immediate interruption to periods of true creative productivity.

My ultimate solution to this is 2 fold:

1) Use the simplest, most broadly focused, easy to access time tracking system available to your trade. I use Excel because it’s all of these plus it is fully customizable depending on my goals for the week. Use a software system that you feel meets these qualities and also could provide you with additional services such as CRM or project management tools.

2) Track time on a weekly basis. This is counter to the “Daily Time Tracking” norm. Weekly time tracking works more effectively for many freelancers due to the nature of their project work. I know that many of my peers can sit and work on a single project for an entire day without noticing the time. One strategy you can use when working on large projects is to track time on a notepad when variations exist. For example, perhaps you worked 7 hours on project A and then spent an hour emailing other clients. Write these numbers down on a page of an organizer or notepad on your computer. After a week worth of work, type the time spent into your official time tracking system. Don’t be so hard on yourself to track time to the minute each day either. It is better to book 54 minutes as just an hour rather than not track time at all.

My motto has been consistent. I would rather have a client or peer track time completely and consistently every week rather than track time by the minute three out of five days per week. Having time actual's gives you a window into your habits as a developer of a product or service. Do not miss an opportunity to derive useful data out of the world’s most precious commodity, time.

Conclusion

 Help your clients, help your business, and help your potential to earn that dollar. Creating optimum billing rates for your production services is a great way to cover a lot of ground on the field of entrepreneurial value. Only by understanding the above variables can you start to create for your business a better method of supporting client ventures while also putting food on the table for your family at home.