10

I've spent my career in full-time employment in the UK, on an annual salary.

I'm interested to know how contracting rates compare to salaries, specificially how to compare the two.

Basically if someone would make a certain salary, what would they equivalently charge as a day rate?

day rate * X = annual salary

What is the X factor?

Edit: Some people have suggested that the X is 365, or something like (365*5/7 - holiday), but that doesn't seem to tally with the rates charged 'in the wild'.

13

Typically one can estimate 2000 billable hours in a year. There are actually 2080 (52 weeks x 40 hrs/wk), but you'll at least be taking a couple weeks worth of holidays and vacation, and likely more. That works out to roughly 250 billable days per year.

I've always done an hourly rate, not a daily rate, so I'll couch my answer in those terms to begin with. Each $10/hr is equivalent to $20k annual revenue. So $50/hr = $100k/yr. Keep in mind that, right or wrong, a company will always value a contractor more highly than an employee. I don't know why that is, but I've seen it everywhere I've ever been. Companies are usually willing to pay a contractor a minimum of 1.5x what they'd pay an employee, and usually it's between 2x and 3x. Occasionally it can be as high as 4x and depends on the situation.

What makes the most difference is how many links are in the chain between the company (who's paying) and you (the resource). In most contracting situations I've seen, there's a middle-man staffing firm who has the prime contract and all the resources sub through them. The main reason is liability protection for the company. If you can ever get a direct contracting gig with a company, that's actually better for both of you. The company will be able to pay less for you while allowing you to see more money.

Here's an example. Say a company ("Acme") is looking for a strong mid-level programmer in the NYC market for whom they could hire for $75k plus benefits. So call it $110k all-in counting benefits. Acme reaches out to a staffing firm to source the position. The staffing firm will propose a rate of $120/hr (which is equivalent to $240k/yr). The staffing firm advertises the position on monster.com at a rate range of $60-$80/hr. They get a bunch of resumes and the staffing firm interviews the top 5 candidates and orders them by fit and desired rate. The staffing firm's objective is to find the cheapest possible resource that'll fit the requirements because that will maximize the staffing firm's margin. They send over a couple of folks to Acme to interview, one of whom is a good fit so Acme pulls the trigger on "John".

So John the contractor negotiates a $75/hr rate with the staffing firm and he gets placed on the gig. He's making the equivalent of $150k/yr, the company is paying the equivalent of $240/yr and the staffing firm is making $90k/yr margin (37.5%).

If John were able to get the contracting gig directly with Acme, he could've negotiated maybe $95-100/hr which represents an extra $40-50k/yr in his pocket with a similar decrease in Acme's expenses.

Now let's talk hourly vs. daily rate. There are a number of different ways a company can spin it. They can call it a "professional day" rate. They can also call it a cap on billing. "I don't care how many hours you put in, I want to see 8 hours a day across the board." What are the pros and cons? Typically the company does a day rate to limit the overtime they would normally have to pay if they're driving hard on a project. It's free labor to them. The only upside to the resource is that a partial day worked (like if the company lets everyone out at 2pm the day before Christmas) equals a full day billed. Same situation if the weekend on-call beeper goes off. A daily billing usually simplifies the time reporting requirement.

So, now let's answer your question. Shoot for 2-3x the salary of a full-time employee. Given the specific situation, you may need to settle for less or you may be able to get more. Protect yourself in terms of giving away unbilled labor. If you put in 50 hrs/wk and only bill for 40, for the year you're giving away 500 hours for free which lowers your effective hourly rate by a substantial percentage. Of course certain markets are hotter than others and you may have to adjust based on supply and demand. A small town in the midwest likely doesn't have as much demand for technology resources as perhaps a large metro area or specific hotbed (silicon valley, research triangle, etc.).

7

The full benefit of regular employment is sometimes double the actual salary. You get health benefits and pensions and insurance etc. You need to work that out...many companies actually know the true cost of an employee. Then factor in that you may have dry spells when no income will be available...this will have to be guessed at. So the estimate of X=2 by Barry may be a little low. I would lean more towards X= 3 or 4.

The other factor to consider is that with your move you will want a higher salary than your current job.

4

I am currently paid by a body shop, and I asked myself this question recently here's what I came up with:

  • W = Work. actual number of work days, not counting week-ends, holidays and vacations etc. For me, it's 218.
  • Y = Yearly bank input, as in "what gets in my bank account".
  • E = Employer's cost factor. What I cost yearly to my employer. Roughly 1.8 * Y, if I recall correctly.
  • M = The employer's margin to what the customer actually pays. I have not come around asking, but I speculate it is between 1.2 * E and 1.5 * E.
  • R = The self-employment risk factor. It must account for slow periods, and various issues that can be caused by not having a constant income. Arbitrarily set to 2. Should be lower for long or recurrent missions.
  • P = Premium. Some self-employed jobs can be very taxing in requiring very intense work in a short period of time, stress, or other unpleasant things you do not normally have as an employee. Base value 1, increase as needed.

So, the self-employed daily rate should be something like:

daily rate = Y / W * E * M * R * P = between Y/50*P and Y/40*P.

Ballpark calculation. Of course, many factors differ with the country and the personal situation.

3

Daily Rate * 150 = Annual Salary (for UK market)

Ok, here is your calculation:

  • There are roughly 52.14 weeks in a year.

  • And 8 working days (or 1.6 weeks) are bank holiday, leaving you with 50.54 weeks to work.

  • Living in UK and working in IT you're probably used to at least 25 additional days of annual leave (i.e. 5 working weeks), leaving 45.54 working weeks in a year.

  • Count in a week of training, leaving 44.54 working weeks.

  • Add sickness and family emergencies, at least a week (a friend of mine, a seemingly healthy 34 year old single male working as a freelance data analyst had a stroke and had to spend 4 month recovering), leaving 43.54.

  • You need to factor in training. Again a week (even if you plan to work and learn at the same time you might need to take some time off for an exam or to go to a professional conference). That leaves you with 42.54 working weeks.

Hence even if you assume continuous employment and no working time spent chasing up contracts you've left with roughly 42 working weeks or 210 working days.

Divide your present annual salary by 210 billable days and you will get the appropriate daily rate or will you? No you won't.

Depending on the way you formalise your employment as a freelancer (sole trader, limited company, umbrella company, agency employee) you will pay different amount of tax. In basic case you'd need to count in about 10% for Employer's National Insurance Contributions that are normally hidden from you, but are the part of what you cost your present employer:

210 billable days - 210 billable days * 10% = 210 - 21 = 189 days.

Fine, is that it? No. You also need to pay for your training (cash in addition to loosing billable hours, factor another 5 days), bookkeeping and professional indemnity insurance (probably worth another 3 days of work per year), pension (that would have been otherwise contributed by your employer 10 days worth), expenses on commute and (or) temporary accommodation (as a freelancer it won?t make sense to re-locate each time you get another 6 months gig, another 10% of billable or 21 days).

And you end up with 189-5-3-10-21 = 150 days. I.e. the X factor you?re looking for is about 150, given that you manage to do 210 billable days a year which may be pretty difficult.

Hence divide your current annual UK salary by 150 and you will get the minimum daily rate excluding VAT you need to be aiming at. You will also need to work much harder for this money, because you?ll have a bunch of additional responsibilities permanent employees do not have.

2

Very approximately, equivalent full-time job daily rate is 2~4x. That would make your X about 125~500.

There's more tax, and if you work for a body shop, then they'll be taking a cut. You need to factor in the fact that you may be out of work for some time between contracts, you won't have any benefits, you have no job security, etc.

2 accepted

During my brief stint switching from full-time to consultant (and then back to full-time)

A = last full-time annual rate;

B) 1st contract hourly rate = (A * 1.2) / 2000 (or A*1.2 /250 for day rate) (6 months)

C) 2nd contract monthly rate = (A * 1.5) / 12 (or A*1.5 /250 for day rate) (11 months)

D) Current full-time annual rate = A * 1.2

Both B & C were the price offered; they didn't ask me for a rate. C was a well-funded (but questionably managed) start-up, so they were throwing money around.

A & D had full benefits. B had modest benefits. C had no benefits.

For B, I worked for a consulting company, who offered the benefits. I don't know what they charged the company I did the work for.

For C, I was paid directly by the company I did the work for.

1

This is one approach to working out day rates.

d

1

The website http://www.ir35calc.co.uk/ has numerous calculators for comparing rates income targets, equivalent PAYE salaries, etcetera.

0

You should only calculate with the numbers of days you are actually working (you are not planning on working every single day in the year, do you?) In Germany, the average working days per year is estimated at 220 (that accounts for weekends, holidays and sickness leave). So your X would be 220, given that you are able to find that much work.

But I agree with the other posts, that you should not calculate with your current annual salary. You need to find out how much annual revenue you would need, in order to keep your current income. That figure may differ very much from your annual salary, depending on insurances, benefits, taxes, etc, etc.

As a (very) rough approximation, you can calculate whith your annual employment costs to your current company. It they do not print those numbers on your salary report, you can always ask the accounting department for it.

And last, google a little bit for the going rates for freelancers, and compare them to your calculation ;-)

0

"Basically if someone would make a certain salary, what would they equivalently charge as a day rate?"

Charge as much as you can. Talk to several recruiters about open positions, and ask what the maximum of the rate range is. You might try asking for a little more than this.

But for the record, my "X" has been anywhere from 0% (same as f/t) to 400% (high rate and no taxes withheld). It can really vary based on time, place, need, etc.

0

Couple of things:

i certainly don't intend on working every available day each year so my hourly rate would be way out!

and

here's a question for all my fellow contractors - i'm paid quite handsomely for my normal contracted hours (any overtime is billed at the same rate) but do you think it fair to bill for travel time to the other end of the country (regional office) when this takes place outside of the normal working day (or overlapping into the eveining) as well as actual time holed up in a hotel room when you get there, ready for a normal working day the next day, along with the return journey? Petrol is claimed normally (nominal rate) and hotel is covered by the company i contract for.

-3

X = 365


At the danger of stating the obvious.

day rate * X = annual salary

What is the X factor?