Becoming Your Own Boss (BYOB, 5.0)

In the first series, Becoming Your Own Boss (BYOB, 1.x) "Introduction, Today's Employment Picture", you learned some of the facts related to the current employment picture and examined some of the choices that were available to you. In the second series, Becoming Your Own Boss (BYOB, 2.x) "Examining Your Situation", you answered some key questions to figure out if starting as an independent contractor was a good idea for you. In the third series, Becoming Your Own Boss (BYOB, 3.x) "Preparing for Business", you examined the numerous topics (from taxes and insurance to your need for equipment and an office) that need to be considered before you take the step to establishing an independent contracting business. In the fourth series, Becoming Your Own Boss (BYOB, 4.x) "Establishing Your Business" you learned the many requirements involved in operating a business from the business name and structure to the business forms you will need once you establish your business.

Effectively marketing yourself and your services is essential to your success in getting your business started. A continuing process of effective marketing is essential to your continued success. To state it simply, you will not succeed if you do not create a good marketing program for both the short term and the long term, and then implement that program without fail. Marketing is one facet of your business activities that you can never afford to stop. Even if you are at some time simply swamped with contracts, you must still engage in effective marketing activities because the marketing that you do today will affect your prosperity not only today, but months or even years in the future.

Establishing Your Billing Rates

Establishing your hourly billing rates at the start of business is an exceedingly difficult task. The worst part is battling your fears. You will be afraid of turning away prospective clients if you set your rates too high; and you will be afraid that setting your rates too low will turn clients away because they might wonder if you are competent.

Unfortunately, there is no magic formula that we can quote to help you to set your rates. A very general rule of thumb in industry states that your hourly rate should be approximately one thousandth (1,000th) of the yearly salary for a competent regular employee in the subject field; that is, if you can command an annual salary of $50,000, then $50 per hour is a reasonable basis for your billing rates. You might use that figure as a starting point in your calculations. But, remember that it is only a starting point. Just as salaries do, hourly rates vary with contractor competence, specific experience, demand, area of the country, task difficulty, task duration, and other such factors. You'll just have to give it your best shot and hope that you have selected the proper range. As a new and unproven contractor, it is unlikely that a client will contract with you for a very longterm project, so, even if your initial rate is slightly low, loss of a few dollars per hour on a short contract or two will not be catastrophic. There will be ample opportunity to adjust your rates for later contracts.

The most useful information on rates can be obtained by shopping the competition. If your present employer uses contractors, perhaps there is someone in the organization who will give you information on billing rates for the area. If you know people who are contractors, either in your career field or in career fields in which the pay for regular employees is somewhat similar to yours, ask them. Some will discuss rates with you; some won't. Even if they decline to give you exact figures, perhaps they will give you some clues.

Investigate professional organizations. If there is an active local chapter of one of the better organizations, attend a few meetings. Dependent upon the services offered by the organization and the cost of membership, it might be a good idea to join. Try to meet contractors who work in your geographic area and who are experienced either in your career field or one with a pay scale for regular employees that is similar to yours. Obviously, some of those people will not like the idea that another contractor is going to be available as competition, but the ones who are truly competent will not mind. It is possible that an experienced contractor might take you under his or her wing, so to speak, and teach you the ropes. Remember, many people appreciate being asked for advice, and will often help even someone who will eventually be a competitor. But remember too, that advice is often worth just what it cost. Seek advice only from competent and successful people.

It is also possible that one of the more successful contractors might have more work than he or she can accomplish comfortably and is looking for help. Under such conditions, it might be appropriate to work as a subcontractor for a somewhat lower hourly rate than you otherwise would charge, just for the experience of working with, and learning from, a successful contractor. A few months of such work would teach you much about the business of contracting. It would also be a relatively risk free and painless way to break into the business.

After you have learned as much as possible about the competition, do not set one firm hourly rate for your services. Rather, establish a rate range, with the actual rate dependent upon the effort required, the conditions under which the work will be done, and the duration of the contract. After you have some experience, add two more factors: your preference for working with some clients, and the fact that a client who supplies a significant percentage of your income and pays promptly deserves some small extra consideration. Also, after you have some experience, you will no doubt add one more factor - a client characteristic that we call "the jackass quotient". (It is entirely possible that you will devise a more colorful name for this characteristic. Obviously, a higher jackass quotient calls for a higher hourly rate.) The upper rate should be approximately 50 percent higher than the lower rate. For example, if the lower rate is $50 per hour, the upper rate should be approximately $75 per hour.

In practice, it works this way: If there is one part of your skill set that is significantly more difficult than other parts, and the contract will require a predominance of that part, charge more. If there is one part of your skill set that is significantly less difficult than other parts, and the contract will require a predominance of that part, charge less. If you will be expected to work extremely hard or the conditions will be severe, charge more. If the contract is to be of short duration, charge more. (For short duration contracts, you spend proportionately more time in marketing, which is, of course, nonbillable.)

Be competitive, but don't settle for a low rate in a misguided effort to get that first contract or as a favor for someone. Low rates can haunt you for years. And never, NEVER, reduce your rate after hearing a prospective client's hardluck story. Instead, be extraordinarily careful in dealings with such clients. If the client is in poor financial condition, you stand a higher chance of not collecting for your work.

Do not, under any circumstances, allow the client to set your rates. There will be prospective clients who have definite ideas about how much they are willing to pay for services. It is okay to work for such a client, as long as it is understood that you have negotiated the rate to one that is satisfactory to you. It is important that you, the contractor, be perceived as being in the driver's seat when it comes to setting your rate for a task. After all, it is your livelihood that is being negotiated.

The tack to take is to be competitive, and to be prepared to defend your numbers. If the prospective client balks at your rates, point out, diplomatically, that hourly rate is not nearly as important as the cost of the completed task. For example, if you are a writer, you might quote the number of hours per page for a recent similar project. Or, if you are a software engineer, you might quote the number of hours for a recent project of similar size and complexity. Point out that others might charge less, but they might take longer to complete the task. Your unspoken implication should be that some contractors charge less because they know what their service is worth. Obviously, prospective clients should feel that they get what they pay for, and therefore, a lower priced contractor will supply lower value results.

NOTE: Regarding the prior paragraph, as a new independent contractor, you will probably not yet have completed very many contract tasks; perhaps you will have completed none. Do not attempt to conceal the fact of your status as a new contractor. Always present yourself as what you are. If you are asked for an example from experience, simply quote the number of hours required for a similar project that you completed as a regular employee. If the client insists on a dollar figure, and you know the number of hours required to complete it, simply multiply by the rate that you intend to charge for a task of the same complexity. (Remember though, to adjust the amount if there was significant time lost to nonproductive activities such as extraneous meetings and other time wasters.) If you do not know how many hours were required, but you do know the cost in dollars, with some careful calculations, you should be able to extrapolate from regular employee costs to arrive at a figure that would represent contractor costs for that similar project. If you do this however, make certain that you know the burden multiplier (overhead, general, and administrative rates) that was applied to arrive at the cost.

Often, after you secure a contract, you will wonder if you could have negotiated a higher rate. Do not allow yourself to fall into this trap. It can lower your productivity, or your work quality, or both. At that point in the contract, you have either signed the contract or, if it is to be done on an informal basis (not a good idea), otherwise agreed to do the job.

Once an agreement is made; it is done. Concentrate on doing the job as well as you can. REMEMBER, your reputation is at stake.

If, at the end, it turns out that your rate was somewhat low, you will know better for the next contract.

Letting The World Know That You're Open For Business

One of your first acts in business should be to contact friends and acquaintances. These people constitute what is often referred to as your "network". Let them know something of the services that you can provide and ask if they know of anyone who might need such services. As appropriate, give each one a business card or several business cards. If they refer you to other people, add these new people to your expanding number of network contacts. You can never know who will provide that next business contact.

Assuming that you did significant research in "Examining Your Situation" (BYOB, 2.x), use the information from that research to prepare an initial prospect list to compliment your "network" list. Build on the prospect list by further research, then approach each prospective client.

The next article in this series (BYOB, 5.1) addresses the important topic of approaching new or existing clients.

To read the rest of the series click here