How to determine your consulting rates?

For some good links on how to determine your rates check out these links.
A Guide To Information Technology Consulting Rates
Independent Consulting and Back Office Services
Consulting Rate Worksheet

Here is how I came up with my rate

Step 1
Choose a target billable rate – for this demo we will say it is $65 an hour (going rate in the Chicago land area).

Step 2
Determine your current hourly rate.  This is your salary divided by 2080, total number of ‘work’ hours in a year.  Now you have a baseline for what you make now, including benefits.

Step 3
Now that we have our rate, we need to determine how much all our expenses are going to cost and subtract them out.

  1. 401k matching – lets say your company will match up to 3k a year (and you get the full matching).  At 3k a year, this is worth $1.44 an hour off your billable rate.
  2. Health insurance (cost if you had to buy it own your own) – lets say you need to cover you and your family, this could cost you about 5-6k a year.  At 6k a year, this is $2.88 an hour off your billable rate.
  3. FICA (Social security and Medical tax) – As a employee, your company will pay 7.65% for you, while you pay the other 7.65%.  So, at 7.65%, this is $4.97 an hour off your billable rate.
  4. Vacation/Sick/Holiday time – I assume that I am going to take 3 weeks vacation, 2 weeks holiday time, and 1 week sick time.

Step 4
Time to figure out your ‘actual’ rate after expenses
65 – 1.44 (401k matching) – 2.88 (Insurance Cost) – 4.97 (FICA) = $55.71

So, that $65 number is really more like $55.  So, if your salary rate is not at least $10 an hour less then the ‘actual’ consulting rate, I would say that it is not worth the effort.  For me, I don’t have to worry about insurance (on wife’s plan) and my company does not have any matching, so the only subtraction I have is the FICA expense.

So my actual rate calculation is really
65 – 4.97 = 60.03

Via Derik Whittaker


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