Pricing Freelance Work: Why Hourly Rates Undercharge You

Most people who go freelance set their rate by taking their old salary, dividing by the hours in a working year, and adding a bit. That method reliably produces a number too low to survive on, for reasons that are easy to see once listed.

The hours you cannot bill

An employee is paid for roughly forty hours a week. A freelancer is paid only for the hours a client agrees to pay for, and a large share of the working week is not that: finding work, quoting, invoicing, chasing payment, admin, tax, training, and the gaps between contracts.

Realistically, somewhere around half to two thirds of your available hours are billable in a good year, and less than that when you are starting. A rate calculated as though every hour is billable is therefore roughly half of what it needs to be.

Working out the floor

1. Start with the annual income you need, after tax, to cover your actual life.
2. Add tax and any mandatory contributions you now pay yourself rather than having deducted.
3. Add the benefits you no longer get: pension contributions, paid holiday, sick pay, and the equipment and software an employer used to buy.
4. Add a buffer for unpaid time off, because you will be ill and you will take holiday, and neither pays.
5. Divide by realistically billable hours, not by the hours in a year.

Why hourly billing punishes competence

Under an hourly rate, becoming faster reduces your income. A task that took eight hours in your first year takes three in your fifth, and your reward for five years of expertise is to be paid less for the same result.

Clients also dislike it, for a different reason: an open-ended hourly quote transfers all the uncertainty to them. They do not know what the project will cost until it is over.

Pricing the job instead

• Quote a fixed price for a clearly defined scope. The definition is what makes this safe; a fixed price on a vague brief is how freelancers lose money.
• Write down what is included and what is not, including how many rounds of revision. Additional work is charged, and saying so in advance is far easier than saying so later.
• Price against the value of the outcome where you can see it. Work that saves a client substantial money or time is not worth less because you happen to be quick at it.
• Keep an hourly rate for open-ended work, and set it above your project-equivalent rate to reflect the flexibility the client is buying.

The test that matters

If nobody ever objects to your price, it is too low. A small share of prospects declining on cost is the sign of a rate at the edge of what the market will bear, which is where it should be. Winning every quote feels like success and usually means you are subsidising your clients out of your own retirement savings.