Outsourcing

Hourly income gets stuffed on the holidays

Thinking of taking time off this holiday season, but you're worried about the financial impact? Chip Camden says you may want to consider increasing your rates to attract business.

Editor's note: This article was originally published on Nov. 19, 2007. 

The nights are getting longer up here in the Great Northwest, signaling the arrival of the dark days of consulting: the holidays. Besides making it much more difficult to coordinate efforts with others, there are simply fewer hours available to work. That might be OK for salaried employees or those on a monthly fixed contract, but for those of us who bill by the hour that means a temporary cut in pay -- right at the wrong time of the year. I don't know about you, but we have family coming to visit on Wednesday so I'll be expected to keep my greasy little paws off the keyboard from then until Monday morning. Oh, the withdrawals! The lost receivables! The unread blog posts! I might even fall from the TR Top 100!

But at least it's only for a few days. The last time I took a two-week vacation, nearly a year passed before I fully recovered. That was about 10 years ago. Lately, we limit vacations to a couple of days intersecting a weekend.

One way to find some relief, at least on the income front, is to raise your rates. "But wait," I hear you cry, "won't that also reduce the available work?" Well, you'd think so, but let me tell you a little story about that.

Back when I first started consulting independently, I had no idea what rate to charge. One of my early clients proposed the same rate that they charged their clients for consulting services. It sounded like a lot of money to me at the time (though I failed to take into account all of the costs of being independent) so I said, "Sure." I stayed with that rate as I added other clients, and pretty soon I had so much work that my evenings and weekends were completely billable. Soon after that I began dating my future wife, and I wanted to cut back on work. I raised my rate by almost 40%, hoping to chase off some business -- but it had the opposite effect! I was in more demand than ever. Apparently, my higher rate made me appear more credible -- if I charged that much, I certainly must know what I was doing, right?

Now, I don't pretend to fully understand the psychology of the matter, nor can I preclude other factors -- so as always, your mileage may vary. But you might just want to consider increasing your rates as a way to attract business and stuff your pockets. Then you might not even feel so bad about taking some time off for the holidays.

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About

Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant b...

24 comments
tappy0814
tappy0814

This is what I do: say, the Salary of a comparable full time employee = 100,000 (this is important to find out or gauge - use resources on the web to get this info, or ask friends, etc) Overheads: Soc sec, medical, 401, training = 20% Vacation: 4 weeks =12% approximately Total 132,000 Assume 1920 hrs if it is a long contract 132000/1920 = 68.75/Hr If short contract, less than 6 months, then I assume around 1600 hrs considering the time it may take me to find another contract. Rate: 132000/1600 = 82.5/Hr This turns out to be reasonable since I gathered that companies spend about 30% or more on overheads for full time employees.

Sterling chip Camden
Sterling chip Camden

That you may not be able to bill out a full 40 hours per week -- or is that included in your 20% overhead?

JohnMcGrew
JohnMcGrew

As an independent consultant, you are in fact a business. And I know very few businesses that have income that is consistent across all 12 months of the year. If you live a lifestyle based upon your busiest months; living paycheck-to-paycheck and not banking a substantial portion of your income, you're not going to make it. Part of the problem is that most people who only know of getting a paycheck don't have a clue as to what their "compensation" is actually worth; Their paid vacations are actually just pay they did not receive during the rest of the year, Social Security "contribution", heath and other insurance, etc. They may think they are making so many dollars per/hour, but in reality most are making 30% or more than that. When I started out as an "independent" in the mid-eighties, I was charging $30-$40 an hour. Most of my wage-earning peers thought I was rich beyond belief. But they also didn't realize that being a high-paid independent consultant also means that my rate had to cover my insurance, overhead, continuing education, and especially my time off. Unless you truly understand this, you will not know if you are making a decent living or not. It's much more than the rate you charge.

gherardini
gherardini

service contracts... the key is to get them quarterly billed and that they become due 1 december, payable maybe 14 days later. it takes a little planning and foresight, but it allows plenty of disposable income at the holiday time. another thing to realize though is that computers and networks don't take a holiday. they care not what day it is when they break. while december was not a top month for me, it was not near the bottom, either.

upuaut
upuaut

Usually for me the overtime over the length of a contract more than pays for the lower hours over the holidays. And quite often, I'm assigned more work over the holidays as other full-time employees working on the same project take vacations. I don't mind that if I have no planned vacations.

drowningnotwaving
drowningnotwaving

but that also means you have to be budgeting the cash like a demon, which in my experience is practically impossible. It does emphasise the need to understand your own personal cash requirements and make sure, for heavens sakes, you're saving something in the bank or under your bed or wherever. A week or two (or 18!) with little or no cash coming in can be somewhat of a challenge if you live life by the cash-in-cash-out rule. (I am on contract payments - in daily units plus commission for sales. In Australia it is very typical of companies to effectively close down for Xmas through NY, and then (in my case) the first two weeks of January. That's three weeks non-billable for me, with no real option of alternate employment unless I retake my role as a lap dancer). As to the pricing rule? It's what the dreaded marketeers call Inverse Price Demand. It works on many levels. It makes a Rolex more precious or exclusive and hence plays to the ego of the buyer. Or, exactly as you described, it gives people a greater perception of trust in what they are buying. Your challenge is to push it without breaking the back of your clients!! Try adding a retainer on top of your hourly rate. That is, "if you wish to remain a client of mine, you need to pay me $1,000 per month". See what happens. Get ten of those clients who are also paying you an hourly rate and you don't have to worry too much about the holiday period ever again.

MikeGall
MikeGall

Yep that is me :) I invest half my salary. So by the time I'm 50 I'll have 20 years salary saved up. I figure I'm making about double the average salary, and I'd be comfortable with an average salary if I didn't work so I'll try to get to the point where I don't have to work as quickly as possible :)

Sterling chip Camden
Sterling chip Camden

... I could afford to invest even a tenth of my salary.

Sterling chip Camden
Sterling chip Camden

... even if you can justify all of those expenditures. But if you can't touch it, you can't spend it -- end of story. When I have been able to save it was by sending it to my IRA -- no pulling that out without a penalty. Of course, nowadays the IRA's managed fund is starting to make me question the wisdom of doing that, too.

ssharkins
ssharkins

First, as a 1099, there's the double/triple tax that kills you right off the bat. Your financial picture doesn't matter a wit -- you pay it right off the top. Ouch! Second, if you have a family, it can be difficult to save. Now, if you're living in a 12 room mansion and driving expensive cars, but not saving, I have no advice for you, but I have a word for you -- stupid. ;) Third, almost everyone can save -- I don't necessarily agree that it is an attitude, but I would say it's a habit. Take the same structure you employ to pay your estimated tax each quarter and stuff in a little more. At first, it won't seem like much, but eventually you'll start putting away more. It really does work that way. Don't tell anyone because they'll be the first to squeal, "We can pay for it out of the tax fund -- you always have extra there!" Fourth, the key to sound saving for most of us is to always pay yourself first. You must find a lifestyle that allows you to put away a small percentage each month, first -- it comes out automatically and it's like you never earned it in the first place. Difficult? Yelp. Hardest thing I do and I'm not terribly successful at it myself. My husband's recovering from a long illness --six months worth and still not back to work. Without savings, we'd be living in my son's basement.

JohnMcGrew
JohnMcGrew

...than an appreciation and understanding of the economic realities; mainly that you've got to own complete responsibility for your destiny. Most people who work a normal "job" don't understand because employers and the tax code insulate them from most of the gritty details. The details I speak of are: A) Knowing how to price yourself in the marketplace. The tendency is often to make yourself to cheap. Big mistake. Don't give away the store in the name of future business. It's not worth it. Too many people spend too much time and money basically buying what ends up being a minimum wage job. (Minimum wage jobs are supposed to be free!) B) Dump pain in the ass clients unless you are charging them far above your normal rate. If they are going to be trouble, at least make it worth your while. Life is too short, and there are others out there that will actually appreciate what you do. C) Use some kind of system for tracking your time and billing. I used to have weeks where I knew I worked 40+ hours, and yet I only ended up billing out a couple. It's amazing what slips through your fingers if you aren't watching. D) Track and know the real costs of your overhead and what you used to know as "benefits". (insurance, continuing education, etc) If after subtracting out these costs you're making minimum wage, you know you need to either make more money or get another job. E) Have money in the bank. The guy who started this whole thread was in trouble because he didn't make as much in December as he did the rest of the year, and was coming up short. December is on the calendar ever year, so its arrival should not surprise anyone. You should be able to survive for at least a few months on no income. There are usually going to be good months, and always going to be bad months. Hope for the best, but plan for the worst. F) Consider some form of disability insurance. It is not terribly expensive. It will keep the mortgage paid and the lights on until you are better, and you won't be left with a pile of debt afterwards. G) No matter what you think, you won't be able to do this forever. At minimum, max out your tax-advantaged savings options, like IRAs, SEPs, HSAs, etc. If you aren't making enough to do this and see little opportunity to do so in the near future, then you need to change your career track. (For those of us under 55, I seriously doubt Social Security is going to be around for us in any meaningful form when it's supposedly our turn to retire, and even if it is, it's not going to pay for much beyond your ISP bill) For people just starting out, this list is quite a bit to fully grasp and deal with. The reality is that many people simply cannot. But the rewards for those who can are extreme. In one word, it's "freedom". I am not a slave to an employer, like so many people feel they are. I love the fact that I can get up in the morning, and choose what I am going to do on any particular day. At this point in my life, I seriously doubt I could ever go back to a "normal" job. And if you're having a hard time right now, don't feel too bad about it; It took me over 10 years to really figure it out. And I should have known better all along since I my educational background was in economics. Good luck!

MikeGall
MikeGall

I've seen a lot around my work (health industry). Most of my coworkers are making six figures but still complain about their bills. They constantly have that problem because as soon as they get a raise, they buy a more expensive car, or take an unpaid week off in Cuba or something. I good example that I've been reading a lot lately is Warren Buffet. He started with $100, and is currently at about 45B. Admittedly he negotiated a sweet compansation deal early on (he had about 1M in investors money, he got paid 25% of any profits over 6% (typical bond rate). Anyways, he pretty much gave away all his money recently (at least 37B), but says he'll continue working for free because he loves what he does. He's over 70 now and still working. Anyways, I'll probably end up in the same boat, even if I'm wealthy enough to not need to work, I hope to have a career that will make me want to. Of course with enough money, you buy a company that you'd like to work for, no more resumes required ;)

Sterling chip Camden
Sterling chip Camden

... towards reaching your goal of financial independence. Having the right attitude towards money is the first step. I guess I have an attitude problem...

MikeGall
MikeGall

Being a consultant could make it difficult. I'm not sure how elastic the pricing is, I work for corporations though. I swapped jobs and my salary tripled (I went from an out of field job to in field, first non academic coding job). Anyways, I was used to living on a mediocre salary, I gave myself 50% of the increase and banked the rest. Anyways, something that works for me (though I've always been a good saver) is if my salary increases bank it. I end up enjoying my new work anyways because I'm learning new stuff, and just because of the variety. If you put it in a retirement plan it spins of tax rightoffs so your tax bracket doesn't increase. If you and to that some of your current salary you can end up with $1 in the account and 25-50% back in your pocket. I like to work, and probably will continue to work even if I end up rich, but who knows? 20 years from now I might feel different, I want to be in a situation where I choose to work, not that I'm forced to work.

Sterling chip Camden
Sterling chip Camden

I've often considered adding on a retainer, but that always seemed like a bit of a cheat to me. How do you justify it to your client?

ssharkins
ssharkins

It simply means that you guarantee your availability and that they're willing to pay for it. If you work with one, you need to be prepared for that, but they're a good deal if you ask me -- unless you are so insanely busy that you can't fit them in when they call! Now, I don't have anyone paying me a monthly retainer -- nice work if you can get it I guess. But, I do work on a retainer-type plan -- so much upfront to get me started. It's good protection for me and nobody seems to mind. It tends to weed out the less serious potential clients -- the "let's try you out and if I don't like you, I'll ignore your bill" bunch.

Sterling chip Camden
Sterling chip Camden

I only have one client from whom I require payment up front, and that's only because they've had a history of "ignoring my bill". It is nice to get that money up front.

drowningnotwaving
drowningnotwaving

One justifies it along the lines of: * I limit my clientele to 6 customers. This gives a reasonable assurance of access to me and my services in short notice. This money also enables me to take days off in order to complete training and certification which, by contract, I ensure my clients I will keep up to date. I know their systems, I keep up to date with their technology, and the value that they get from these things far outwieghs the reasonably small cost per month. In addition to that, I do not count off-the-cuff calls from their people for quick assistance. That comes with the pre-payment, as such. And my other friend: * Just because!! But I do take ad-hoc calls without charge (althought since I know their systems I can quickly determine whether a call is a quick-fix or a get-in-the-car type of issue, so it isn't really a burden to do this). Does this help ??? :)

Sterling chip Camden
Sterling chip Camden

..I'll still have to consider it further in my situation. It would be nice to just toss in the off-the-cuff calls, but then again they might start doing it more frequently!

Sterling chip Camden
Sterling chip Camden

Do you a service like realrates.com? Do you ask your colleagues what they charge? etc?

burntfinger1
burntfinger1

I use a three tier fee schedule. One price (the lowest) for stuff I know well, middle price for things I'm not sure about and the highest price for anything I haven't a clue about. I'm upfront with my clients and explain what I charge and why. Some of my most interesting work comes from clients who are impressed with my fee structure.

ssharkins
ssharkins

Seems like it should be just the opposite! ;) I'm impressed that it works!

techrepublic
techrepublic

When a salaried employee takes a paid holiday they are really just receiving part of their earlier pay, but paid in arrears. I receive 24 days paid holiday per year, or roughly 5 working weeks. My employer will only pay for those days if I work the remaining 47 weeks. If you were to convert my salary into an hourly rate, during my first hour I am in effect paid only 47/52 of my true rate. The remaining 5/52 of my rate is paid pro rata during my holiday. If you were to set aside 5/52 (just under 10%) of your hourly pay while you were working you would be no worse off than a salaried employee - provided you haven't underpriced yourself. In practice you would be better off because you could invest that money until your holiday and you would have a reserve to borrow against in an emergency.

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