Amanda Lincoln: What to charge

Hi Guys

I've been doing quite a lot of reading up lately as I have had a few clients take advantage of me and don't want that to happen to me again. I came across this helpful post from Neil Tortorella about charging what you are worth, I found it very helpful, I hope that it is helpful to you too.

“If there’s one question I’m asked by designers more than any other, it’s how to figure out what to charge for a project. We have several ways. We can look it up in the Graphic Artist Guild’s Handbook of Pricing and Ethical Guidelines (PEG). We can charge the ‘going rate’. Or we can make a good guess at what the client is willing to pay and charge that. There are others, but these are the typical methods.

The Guild’s PEG is a good source and every designer should have a copy. You might find it a bit too general, though, in some areas. The ‘going rate’ is called that because if you’re not careful with it, you’re going out of business. Unless you happen to be clairvoyant, guessing what you think the client will pay is just plain bad business. The idea isn’t to figure out what the client will spend. It’s figuring out whether you can make any moolah on the project.

A better way to approach the problem is figuring out your bottomline: where you need to be to really make money. Go below this point and you’re paying your client for the honor of working for them. The more work you take on at the wrong rate, the deeper the hole you’ll dig for yourself. You can actually ’sell’ yourself right out of business with a rate that’s too low. Go too high and you’ll price yourself out of the market. Once you know your true costs of doing business, you can make sensible decisions.

You’re unique. Yup, just like every other designer out there. We all have different set ups and our costs vary. So we need to tap into some of that high school math you complained you’d never use. Actually, this is pretty elementary, so don’t sweat it.

The place to start is you. What’s your target salary? And let’s be realistic here. If you have employees, you’ll need to add up all the salaries. On top of that, you’ll need to figure in other associated costs like taxes, FICA, insurance, etc. A safe figure is 25-30%. I lean toward 30%. The math looks like this:

* Salary: $40,000
* Associated costs at 30% of salaries: $12,000
* Total: $52,000

Well, that’s a start. So how many hours are there in a year? Hmmm; let’s see. Eight hours each day. Five days in a work week. Fifty-two weeks in a year that’s . . . er . . . Hang on. I’ll save you the trouble of digging out that calculator. It’s 2,080 hours. Again, if you have employees, you’ll need to multiply that by the number of employees.

Now, if you’re like most people, you probably would like to spend a few holidays with the family and you may get a bad cold now and then and need to take a day off. Let’s factor those things into our equation (based on an solo practice):

* 7 legal holidays (US): 56 hours (8 x 7)
* 2 weeks vacation (you need some time off): 80 hours (8 x 10)
* 5 sick days (did you get a flu shot?): 40 hours (8 x 5)
* Total: 176 hours

Take that off the top of our total hours and we’re left with 1,904 billable hours. But, you probably do other things around the office like invoicing, sales calls, surfing the net and reading articles like this one. Well, you can’t bill for that time so we’ll need to ax those hours too. If you’ve been a good designer, you’ve kept time sheets. A review of a few weeks can give you a pretty good idea how much ‘down time’ you have. If you’ve been bad and haven’t kept time sheets, you’ll have to give it your best guess and make some adjustments later on . . . when you do keep time sheets. A typical target is 25%. If you’re new, it may be as much as 50%. Hopefully it’s not more than that. Let’s use the 25% for this example.

That brings our billable hours into the more realistic area of 1,428 per year. Now we’re getting somewhere! Now simply divide your billable hours into the cost of salaries and voila! You have a rate of $36.41 ($52,000/1428). Let’s round that down to 36 smackers. This is the amount to must charge to get your salary and its associated costs.

You’ve got stuff. Stuff is good. We all need stuff. Designer stuff includes things like office rent, utilities, phones, computers, software, paper, ink, marketing materials, yada, yada, yada. You get the idea. Now it’s time to start adding up all your stuff. The accountants like to call this overhead. I guess that’s because if you buy too much stuff, you’ll find yourself in way over your head. Let me pull a number out of the air. Say for our example your overhead costs $35,000 per year. We need find the percentage of salaries this overhead represents. Simple. Divide the overhead ($35,000) by the salary ($52,000) and you come up with a little better than 67%. Add this to the base rate we calculated earlier:

$36 X 67%= $24.12

36 bucks plus the $24.12 for overhead is a whopping $60.12. Again, we’ll round that out to a clean $60.

And there you have it. Now you know you need to charge at least $60 per hour if you want to eat and pay your rent. We also know that we need to contract at least 1428 hours per year, or 119 hours each month, to make this mark. Pretty neat, eh? Now we’re starting to act like a real live business! We not only solved our rate problem, we also set a sales goal.

Well, I guess that’s about it. What’s that the Accountant is saying? There’s one more thing? Hmmm . . . we took care of our salaries. Our overhead is nailed. What else could there be? Oh! A profit! We need to make a profit. Profit is that funny money that allows our business to grow and expand. It’s the leftover nest egg that gives us the ability keep employees on when things get slow. It’s what allows us to replace the old G-3 with a nifty new G-4 and a Titanium Powerbook to go. Yup, we need to make a profit.

How much profit do we need? I’d say not to go below 10%. 20% is better and that’s what we’ll use for our target. Time to pull out the calculator again. We’ve established our base rate at $60. 20% of 60 is 12, so we need to tack $12 on top. Our final rate, to recover salaries, overhead and a healthy profit, is $72.00. If you’re like me, you’ll round this amount up to a tidy $75. It just sounds better and adds a slight fudge factor.

Now that wasn’t too bad, was it? The final rate is the number you’ll use to do your estimating, whether you charge by the hour or by the job. It’s the number you can’t afford to go below. No more wondering if you can afford to take on this job or decline that one. You have facts to back up your decisions.

If you can’t find your calculator, you’re in luck. Being the nice guy that I am, I’ve posted a spreadsheet on my site that will do all this for you. You can find it in either Mac or Windows flavors at http://www.tortorelladesign.com/calc. Happy calculating!

About Neil Tortorella
Neil Tortorella has been calculating his hourly rate for over 25 years. He’s pretty sure he’s got it right this time. ”