How should I decide rates and negotiate as a contractor?

Question

I am planning on starting out doing consulting in the bay area. I would like to know how do you guys decide on consulting rates for a project and how do you go about negotiating them with a client?

Answer 1

You could check this question for some information: http://stackoverflow.com/questions/197139/fair-contract-salary-compared-to-permanent-salary

Answer 2

In my experience in London, I don't negotiate directly with clients. Here it is much more common to go through a recruitment agency. Generally the client has a budget (which may be flexiple) and the recruiter has a pool of contracters with varying rates. The recruiter than presents the best candidates they can find within the clients budget.

That means it I (as the contractor) set my rate based on my perceived value. I generally judge the accuracy of my rate based on the number of leads my rate brings. If my phone is ringing off the hook then I'm too low (since I am the ideal candidate for so many budgets). Once the work becomes regular and the rate is satisfactory I cap it.

Everyonce in a while I drastically raise my rate to see if the jobs keep coming. I have an idea the maximum for my type of work so I aim for that or just above. If I actually get it then I'll stay there for a while or I'll allow them to negotiate me 10-20 per day lower. I would say it is rare for me to move on my rate unless I quoted high to begin with.

I suggest talking to many recruiters in your area to find the range of rates for your type of work. The more recruiters the better since they are motivated by their own personal financial situation and not by some altruistic need to help you. Then guage your skills unemotionally and choose a rate within the range you feel is fair to you and representative of your experience. If you are worried about your estimation skills then don't sign up for long term contracts so you will have the opportunity to adjust your rate over time (nothing worse than getting locked in for less than you are worth).

Answer 3

An easy formula, let

S be the Annual salary I wish for myself (within the market, of course)

B be the Annual cost of the indirect costs I have to pay for myself (insurance, taxes, office rent and so forth)

C be the Extra cost for the project (travel, sleeping, etc.)

M be the profits margin (20%)

D be the duration of the project, in years or fractions thereof

Then

Price = ((S+B)*D + C)*M

Of course you don't show this formula to the client, you embed M in S and B, and embed both adjusted S and B into an hourly rate.

Then you know what's the margin you can play with to negotiate, trying first to negotiate on extra costs or benefits the client might be able to give you.

You might want to adjust to market (if the formula gives you a price too high or too low with respect to competitors, you want to win too much or too little)