Demistifying conntractor day rates

I have alway done self employed work on the side and in the early 2000’s after the dotcom boom there was money to be made doing work for small to medum businesses getting them online. The value of this was high as it took them from a single premise retailer to regional, national or even global.

It’s funny, but back then I was young with a bit of technical knowedge and able to command £500 / day as a side hustle. Yet today I increasingly find myself in debates about day rates and the person on the other side of the conversion has little insight in to what they really mean.

In this blog I try to outline how day rates are arrived at in the self employed world and why what might be perceived as a high rate, isn’t actuall that high.

Employees

Let’s first start out with an employee.

We’ll use £100,000 salary as a baseline because its a nice round number, an indicator of the minimum I expect to earn in full time employement.

– i need a table here that includes employee pension at 9%, laptop, phone, software, other costs.

There may be other benefits too like life and health insurance, bonuses,.

Paid holidays and sick leave are as standard.

GEnerally you get paid month to month regardless of ups and downs in the business. The business absorbs these.

Billable days

What I often find is that people will do something like multipley the day rate bu the number of working days in a year, not accounting for anything.

Oh you charge £750 wow that £750 × 260 = £195,000 !

But this assumes the person is able to bill for every day. At a minimum we need to take in to account holidays, sick.

In relaity a contractor might lose days to:

• gaps between contracts
• interviews and proposals
• contract negotiation/procurement
• training
• administration
• part-time contracts creating unusable fragments of time
• clients changing requirements
• simply not having enough work

Timing clients

If a business wants you full time for a period of time that is great, but often case it will be days a month / or week.

So perhaps they want 2 days a week for 6 months and another wants the same. Now you are billing 4 out of 5 and filling that extra day of the week with incidental work can be tricky.

There is also the issue that some companies will want 2 or 3 days a week. So I might now agree to a minumim but if both want 3 days a week in a busy seasonabl period I now have a time issue, so over selling can be risky too.

It’s a delicate balance.

Business developement

Finding new business can be tricky too. In the type of work I do it is project / product based and usually I have to work in with when the client wants me not when I’m available.

This can lead to gaps in my schedule.

Another real risk is that contractors are the first to be cut when times are tough and being unexpectedly cut and then having to piuck up more work can leave weeks if not months of down time.

this is why it is useful to have multiple clients, but time is still lost that needs to be factorerd in to the rates.

negotiating / Reduced rates (need a better title)

When clients can book a block of time perhaps 2 days a week for 6 months with a 2 months notice period, I can potentially discount my rate. This isn’t saying that anything si worth less or a gift, it is predictability and loweing risk.

high risk contracts / jobs require higher rate than those that are predicatble.

I know what I will get for a given period with a notice period, which allows me to better plan and fill gaps and then I can manage my income, business developmet

Pro-bono

Often as part of the business development process, IO’ll find myself doing a bit of pro-bono work. This can be mutually benefitial as you find out about each otehr and if you work together. I try to lmite this to a day or two of wok, but this is still time invested in getting to know the business.

This is where work above and beyond what you paid for needs to be negotiated. Usually this will be some sort of bonus agreement, revenue share deal, share options, or similar.

Shares and options

Shares an options can be a nice addition, especially getting on on the ground floow with a start-up, but its all “jam tomorrow” and they could be wroth millions in the future or nothing, but all that is irrelevant when theere are bills to pay today!

Another issue is that shares can be diluted, and so over time the value of what you were offered goes down and they can often come with terms attached and may not vest for 2 or 3 years.

Frankly, if shares are not gifted fully dliuted and with a sehelf of day 1 year, then they may as well be worth nothing when I’m working contract. Unless I’m tied to that company with a very robust contract for 2 or 3 years anything after 12 months is far too risky.

And the bottom line is, a day rate is still required, just to pay the bills.

A note on IR35

need a note on working in and outside IR35.

Account and beuracracy

dealing with accounts increasingly complicated. making tax digital means no longer a single return but quarterly.

this means more software possibly an accountant, etc. to deal with . this all costs time and money.

Worked example

I need a best case scneario where I get 2 clients on 2 days a week for 6 months followed by the same again for another 6 months. with some holidays etc.

then I want a good case where for half the year I get this, then I lose a month between and have one other client on 3 days of work and some incidental.

then a worse case might be 3 clients the whole year with big gaps.

Useful links and references