How to calculate what your time is worth: Part 2
Freelancing is an increasingly popular career path, especially among millennials. Within the 35% of the workforce comprised of freelancers, there exists a spectrum. On one end, you have freelancers who are scraping by. On the other, you have people that are thriving financially. Where you fall on that spectrum is determined by how you calculate what your time is worth— and how you communicate that value to clients.
In How to Calculate What Your Time is Worth: Part 1, we covered how to determine your hourly rate. In Part 2, we’ll discuss how to use your hourly rate to calculate project fees, and whether you should charge by the hour or by the project.
How to use your hourly rate to calculate project fees
In order to translate your hourly rate into a project fee, you’ll use a formula based on the projected number of hours that it takes you to complete any given project. This can be challenging, especially for new freelancers who aren’t sure how long an assignment will take. Use your best judgment to estimate.
In Part 1 of this series, we determined an example hourly rate of $94.
Say your client wants a 750-word blog post:
- First, you’ll estimate how long it will take you to write the blog post. If you think it will take 1 hour, estimate for 2 (we’re always less productive than we think we are).
- Based on this, you’d multiply your hourly rate of $94 by 2, giving you a project fee of $188.
You can use this formula for any type of project: (hourly rate) x (estimated hours) = project fee.
Now that you know how to turn your hourly rate into a project fee, let’s explore which pricing method you should use.
Should you charge by the hour or by the project?
Ah, the great freelance debate. Hourly or project fees: which is better and why? There’s no right or wrong answer, but it’s important to weigh the pros and cons of each before you decide.
You get paid for the actual time you spend on a project, instead of on an estimated number of hours — This can be helpful if you overestimate your productivity, like many freelancers do.
Helps prevent scope creep — Because you charge for all hours spent on a project, your client may be less likely to ask for excess revisions.
It can help you establish a project fee — If you’re a new freelancer, charging an hourly fee can help you establish an accurate estimation of how much time each type of project takes.
You have to track your hours — This means you have to spend more time on administrative tasks, which detracts from your billable hours. It can also be a real hassle if you’re working on multiple projects at once.
The perception of value decreases — A client may happily pay $190 for a blog post that they think will take 3 hours to complete. However, if you say that it will take 2 hours to complete and quote an hourly rate of $95, the client may balk.
It limits your earning potential — You only have so many hours in a day, so charging hourly creates an income ceiling. And if you produce quality work efficiently, you end up getting paid less than what your time is worth.
You can get nickeled and dimed — If your client has a strict budget (let’s be real, all clients have strict budgets), they may end up micromanaging the time you spend, in order to make their money go further.
You can’t bill upfront — It’s always a good idea to ask for a project retainer of 30 to 50% of the total cost. If you bill hourly, this becomes a lot more challenging because you can’t bill until you know how many hours you spent on the project.
The perception of value increases — Without having to justify an hourly rate, your client may be more convinced of the value of your work.
Allows you to bill for a retainer — Because you’ve agreed on a project rate, you can accurately calculate an up-front retainer fee.
You can adjust your rates easily — Extra research, last minute projects, and difficult clients all warrant a markup in your rate. If you’re charging by the project, you can add in these fees without having to adjust your hourly rate (or justify it).
Increased earning potential — If you complete a project in 1 hour, you still get paid the same as if it took you 2. This gives you the opportunity to scale according to your skills, your experience, and the market rate for your work.
You must have a clearly defined scope of work — When charged hourly, clients are less likely to ask for you to do extra work, since they know they’ll be billed for it. When charged by the project, they may not be as hesitant.
You need to have an accurate time estimation — If you underestimate how long the project will take, you may end up working for 4 hours and getting paid for 2.
Calculating what your time is worth — and deciding how to communicate that to your clients — is no easy task. There is a strong case for both methods of billing and what you decide will depend on your unique situation and your personal preferences. Either way, make sure you’re getting paid according to your worth so you end up on the side of the spectrum where you thrive as a freelancer.