Your old salary is not your rate
The most common way to set a rate is to take what you earned as an employee, divide by 1,800 hours or so, and add a bit because freelancing feels like it should pay more. This produces a number that is roughly half of what you need.
It is wrong twice. It assumes you will bill every working hour, which nobody does, and it ignores everything the salary quietly came with: paid holiday, sick days, pension contributions, insurance, equipment, training, and the several weeks a year somebody else spent finding you work.
The way to get to a defensible number is to go backwards. Decide what you need, add what it costs to be you, then find out how many days you actually have to earn it in.
Step 1: how many days can you actually bill?
Start with the calendar and subtract honestly.
A year has about 261 working days once weekends are gone. Take off holiday, and take a real amount rather than an aspirational one, say 30 days. Take off public holidays, roughly 10. Take off sick days, and take some even if you never get ill, say 8. You are at about 213.
Now the part people skip. Not one of those 213 days is fully billable. You will spend days on proposals that go nowhere, on invoicing and admin, on your own website, on learning something because the market moved. A realistic figure is 65 to 75 percent, and if you are also doing your own selling it will be at the lower end.
213 days at 70 percent is about 149. Round it to 140 and you have a number you can plan with rather than one you have to hope for.
- 365 days, minus 104 weekend days, is 261.
- Minus 30 holiday, 10 public holidays, 8 sick days: 213.
- At 70 percent billable: about 149, call it 140.
- If you are new, or your work comes in short pieces, use 120.
Step 2: the costs an employer used to absorb
These are not overheads in an accounting sense, they are the difference between your invoice total and the money that reaches you. Add them up once a year and the number is usually a surprise.
- Health cover and pension provision, which you now pay in full rather than in half.
- Insurance: professional liability at minimum, and whatever your kind of work needs.
- Equipment, replaced on a real cycle rather than when it dies.
- Software, which quietly compounds into a serious monthly figure.
- An accountant, and any legal advice a contract makes necessary.
- Workspace, whether that is a desk somewhere or a share of your rent.
- Training and conferences, which are how you stay worth the rate.
- The unpaid weeks: the selling, the admin, the invoice that gets paid 60 days late.
Step 3: the arithmetic, worked through
Take a worked example. The numbers are illustrative, and the point is the shape, not the figures.
Say you want €70,000 a year to live on, before tax. Say your business costs come to €12,000: insurance, pension, software, accountant, equipment, a coworking desk. You need to invoice €82,000.
Divide by 140 billable days and you get €586 a day. At eight hours that is €73 an hour. Round up, because round numbers negotiate better and because you were conservative nowhere else: €600 a day, €75 an hour.
Now notice what happened. If you had divided by 220 days instead of 140, you would have arrived at €373 a day, and you would have been wrong by 60 percent, in the direction that ends with you working weekends to make the year add up.
- Target income: €70,000
- Business costs: €12,000
- Revenue needed: €82,000
- Billable days: 140
- Day rate: €586, rounded to €600. Hourly: €75.
Sanity-checking against the market
The arithmetic tells you what you need. It does not tell you what anybody will pay, and those are different questions.
Check your number against what people in your field and your region actually charge. Ask peers directly, because most will tell you, and look at what agencies quote for your skill, remembering that they add 30 to 50 percent on top of what they pay you.
If the market rate is well below your number, you have a real problem with three honest answers: lower your costs, raise your billable days, or change what you sell. Working more hours at the wrong rate is not one of them.
If the market rate is well above your number, raise it. You calculated a floor, not a price.
Why the rate you set is not the rate you get
The rate on the contract is the best case. What you actually earned per day is that rate minus scope you did not charge for, minus the calls that were not in the estimate, minus the revision round somebody described as small.
This is the number that decides whether the year works, and almost nobody measures it, because measuring it means knowing how many hours a project really took. That is the practical reason to track time even on fixed-price work.
Steerd will not calculate a rate for you. What it does is hold the rate on the project and the hours against the same record, so at the end you can see what the project actually returned rather than what you quoted. Whether a project held its margin is the question this whole exercise was for.