From: mats@netcom.com (Mats Wichmann)
Newsgroups: misc.jobs.contract
Subject: Re: Becoming a software contractor
Date: 9 Apr 92 16:41:14 GMT
Article-I.D.: netcom.s!sj11h.mats
Distribution: usa
Organization: Netcom - Online Communication Services  (408 241-9760 guest)

Edward Reid provides good advice in the area of fee setting.
I want to toss in my few bits as well...

>> >  - How do you determine how much to charge?
>> 
>> 	I always ask my friends how much they are getting.

>Depending on the nature of your contracts, you will need anywhere from 50% to
>200% more per hour than you made at regular employment, for the same usable
>pay.  Self-employment tax, health and life insurance, vacation, sick leave,
>disability coverage, pension -- you are taking over those responsibilities at a
>minimum.  Depending on the situation, you may also have marketing, office space
>and equipment, telephone, education time and expense, periodical subscriptions,
>professional organization membership.  It's easy to underestimate your
>expenses, especially since the rate you quote is going to sound so exorbitant
>compared to your previous salary.  Companies that deal with contractors,
>though, understand the difference.  If they don't understand, they will be very
>difficult to deal with in other ways also.  The low end of the range I gave is
>for long-term contracts with reliable clients who provide all office space and
>equipment and who expect you to keep up with the field on their time.

I use the following process to work out the fees:

(1) Determine the value of your labor - this could well be the salary
    you were getting at your last permanent job, but you might need to
    give yourself an increase if you felt you were underpaid.

(2) Detemine your fixed overhead costs.  These will vary somewhat
    depending on whether you plan to work as a contractor (which
    I define as a taking long-term jobs performed on the client's site)
    or as a consultant.  Remember everything Edward listed above.
    Don't underestimate education: as a contractor or consultant,
    you're being paid to do a specific job, not to spend the time
    improving yourself as an employee, so much of the ongoing education
    has to be on your time.  Don't leave out equipment costs: as
    you continue to work as an independent, you'll end up with more
    and more things you need to hang on to from job to job, and you'll
    need a good machine; probably also fax, printer, modem, etc.

(3) Compute your overhead as a percentage of your labor value -
    if you ended up with less than 25% you probably underestimated
    (that's my opinion only).  A full-blown consultant will probably
    have from 45% on up.

(4) You should consider making a profit to compensate yourself for
    being in business (your clients will understand this - they're
    hopefully also in business to make a profit).  A number between
    10% and 20% is probably good.

(5) Use these values to determine what you need to gross in a year.
    Example: (labor value) $60,000 X (overhead) 25% X (profit) 10% =
    $82,500.

(6) Work out how many days you expect to bill - subtract weekends,
    holidays, vacation, sick time, marketing time, education time,
    and just plain slack time when you can't find work.  My guess
    is that folks who bill 200 days a year are doing well.

Now you can work out your daily/hourly/weekly/monthly rate, knowing
how many days you expect to bill for an how much you have to gross.


>Realize that your pay is going to be delayed relative to what you are
>accustomed to.  Instead of getting paid for January on 31 Jan, you will submit
>an invoice in February for January work, as soon as you get around to it.  If
>you are lucky, they will pay in under 30 days without hassle.  Make sure to
>include late fees in your terms.  If you afford the float, 1.5% per month is
>great interest.  If you can't afford the float, quote a stiff penalty, since it
>will cost you more than 1.5% if you must suddenly find ways to cover your
>expenses.  These terms are only examples, of course; you can set the terms as
>you both wish.  Government agencies will probably insist on 90-120 days to pay.
> In a large company, the person you are dealing with may be very understanding
>about the terms yet have no knowledge of how the accounts payable department in
>his own company actually operates.

My experience is that it's worthwhile suggesting that you bill every two
weeks; most companies will go for this, and it cuts your float a little bit.
I've never gotten anyone to go for the late fees, much as I have tried.
Doesn't mean you shouldn't try.

Good luck.

Oh, one more thing:  I find it's very hard to deal with jobs shops.
Their cut is like adding extra overhead on top of your overhead, so
it's very hard to get the price you need if you're using a placement
agency.  If you really want to follow this route, you can recompute
your overhead such that you allocate marketing expense to the job shop,
and lower your fee a bit.  If they take you on as an employee with
benefits, etc., then you can recompute on that basis.
-- 
Mats Wichmann
Systems Software Consultant
alruna!mats@ossi.com (or mats@netcom.com)
Newsgroups: misc.jobs.contract