Excellent discussion - there are 2 consulting ideas being brought forward and that might be a bit confusing but the overall concepts apply to both. One concept is the freelancer/self-employed/s-corp single consultant and the other concept is operating as the owner of a small consulting firm which Tim alluded to with his employees - the former often leads to the latter. The advice you're getting applies to both so Tim's doing us a favor. I totally agree with the 6 month buffer but that takes many, many years to build. There's no way for someone starting to have the 6 month reserve so it's a catch-22. Ideally, the first client would offer you a 6 month sign-up bonus but that won't happen so you have to do it organically and Tim's right - your rate needs to include that and you have to be careful. From what I've seen, the usual offer for an IT contract comes from a recruiting company for W-2 or Corp-to-Corp for 6 months or longer. If going the W-2 route, you usually don't need to pay double taxes for SS and you don't need insurance and there may some option for benefits but they may be limited. Long-term, I highly recommend going Corp-to-Corp and establishing your own company - you have to account for SS taxes, insurance, benefits and other fees so I would ask for at least 20% over W-2, if not higher. If it's a 6 month project, you should ask for a premium since there's no guarantee, you'll have work for another 6 months possibly. If it's a long-term project, it's hard to price because a long-term project is never a long-term when you start on it. Every contract has the option to terminate at any time and it's hard to negotiate a contract that will guarantee a set time of employment unless it's a fixed cost project which is a totally different beast in IT. So every project has to be treated as a 6 month to 1 year project at best. So let's say your skills would earn $100k as a full time employee - we're using a round figure. What should one ask for a 6-month project? I would say for the 6 month project, you would have to ask for a rate that covers at least a yearly salary $100k + plus benefits + costs especially if you're very qualified. Using the 48 per year rule, you'd have to work for 24 weeks. That's 24*40 = 960 hours. Let's the say the answer to the equation above was $135k - your minimum rate would be approximately $140. Now let's say, it's a 1 year project. Should you cut that in half or charge the $140/hr? I think you know the answer. In the end, you'll find that a plumbing company or electrician charges about $200-$300 per hour and an attorney charges anywhere from $200-$600 per hour (or higher). Over to you! Let's have a discussion. Is there any data for IT consulting rates?
I agree with what you are saying. The only thing I would gently push back on is that the 6-month buffer takes "many, many years to build". I disagree. In fact, I think that right there is why most businesses fail. The 6-month buffer is seen as "nice to have" but not vital. Before I went full-time creating content, I had a 6-month buffer. Before I hired my first employee, I had increased that 6-month buffer to cover that employee's salary. I did that by making more conservative choices. For instance, according to most business "experts", I should leverage my company's profits to take out a loan to cover more rapidly launching forward. I could 10x my income by doing so. However, I also put myself at risk. What if the market turns? What if inflation goes through the roof? What if a war breaks out in Europe? Maybe I don't make that 10x and maybe those loans come due and I struggle to make the payments. That is why I have always grown more slowly than I could have. The result is that my employees feel more comfortable (no surprise layoffs because of a bad quarter), I feel more relaxed (no worries about market fluctuations), and as a result, we also have better output. I know saving up 6-months of income sounds hard, especially when you want to go full-time at your dream job. However, it can be done in most circumstances. If you are trying to be a consultant full-time, do it part-time first. Build up your bank account. I've done that twice in my career. I didn't regret it either time. I can honestly say that being a small business owner with three employees depending on me in an uncertain market is the absolute easiest thing I've ever done. I am relaxed and enjoying what we are doing. A HUGE part of that comes from the fact that I know we have a safety net that is more than big enough to catch us if we stumble.
@@IAmTimCorey If you went into consulting with a 6-month buffer, I believe you were in a rare and privileged position. I think age plays a factor here too. Say, if you enter consulting in your late 20s or early 30s, it's unlikely to have that sort of buffer or be able to negotiate a very high rate to generate it quickly. I personally started at a rate that was maybe 20%-30% higher than my salary as a W-2. When I switched to corp-to-corp, I was definitely underpaid as I didn't factor the additional expenses and added just 10% 🙂 So creating the 6 month buffer is the same as saving 50% of your yearly income on top of 401Ks contributions etc. I think your advice of coming up with the right rate is very important and anyone entering consulting needs to understand what it means. It's not about greed, it's about being properly compensated. Looking back, I should have negotiated higher rates in my early years as a consultant. I also fully agree with your advice that a consultant needs to save money for a rainy day and it takes work, time, and discipline to make that happen.
I completely agree, not over extending yourself financially and properly budgeting is the name of the game. I personally plan for a 46 week year of work and save as much as I can rather than buy the ferrari or tesla. Having saved 5 years of salary that I pay myself from my business I think I must have been one of the few people that enjoyed 2020 even though there wasnt much work in the UK.
Having that safety net allows you to really relax, which actually makes you a better developer. A stressed-out developer does not usually do their best work.
I would recommend you be very careful with SLAs. Unless they benefit both sides equally, they aren't a good idea. For instance, if you say "the app will be up 99.999% of the time" and put it in a SLA, you need to get paid for that guarantee. Otherwise, when it goes down, you are going to be in a world of hurt. Notice even in Azure, if you want better SLAs, you pay a lot more. That's because it takes a lot more work to hit that SLA and it is a risk that Microsoft is incurring.
A conspicuous absence here of two very important things: business overheads, and profit. These must be factored into your prices as well, not just your desired personal income. He's obviously a very experienced consultant, so why has he not mentioned them?
The focus here was on getting started as a consultant or freelancer. Typically, that doesn't include overhead but yes, you are correct that you should plan to pay your expenses as part of your calculation for how much per hour you should charge. I would probably include that in a more detailed "set up your budget/plan for consulting" video.
The rule of thumb to charge is approximately double your hourly salary for a full time job in the US for starters. When I did freelance consulting that’s what my rate was and companies were happy paying it. Depending on the demand for you specific skills to may charge more. Some of them tried to negotiate down based on a dedicated number hours and I made my decisions based on what I felt was fair for the guaranteed work. Also, I made sure customers understood that I would be billing for analysis above the initial free analysis to be able to estimate the work. The best advice is get a great accountant to help with what can be deducted on taxes and what can’t be. Also make sure you have a support plan in place with billable time for supporting the customer. Support is many times neglected by freelance consultants and it can burn your time up quickly. If you’re charging for support, there is an incentive for the customer to not call you for every question. Edit: Also don’t forget to take the customer’s temperature for a flat fee for your work. I didn’t some specialized work for a large company and they were happy to,pay me a flat rate for services rendered. I ended up making $450 per hour and that was back in 2008.
Could be "a" rule of thumb, but most often the Rule of Three (of Rule of Thirds) is used, calling for triple the full-time wage. It's based on 1/3 for salary, 1/3 for expenses, 1/3 for profit or risk of doing business (Uncollectible Accounts, Administrative). One tends to want to lower the rate because we think otherwise we won't get hired. If you really think about it, 15.30% is gone on Soc Sec/FICA tax...say 10-15% on Income tax...paying your own Health Plan... That could be 40% gone right there. We'd have to analyze our expenses carefully if we have an office, rent, utilities, insurance, auto/transportation, training, supplies. Often we don't account for those when we have them. If we work out of home, a laptop and a briefcase that's one thing, but we need to be careful what real expenses are.
First, I set my rates high enough to absorb cost increases like inflation. Your rate should always have a buffer in it. Next, I evaluate where things are going and communicate upcoming rate changes. I would change rates for current customers in January, but let them know in June. For new customers, they paid the new rate right away.
If you are a consultant, don’t ask for a raise. Let them know you are raising your rates. Give them time to plan for it. I would tell them that your rates go up in January. Don’t ask, though. Asking implies they have a choice.
@@IAmTimCorey This is some of the best advice I've heard in a while. It's important to remain flexible especially with long-term clients. Don't just throw a number, be prepared to explain it and even offer a concession for someone whose business you value as much as they value yours.
@@IAmTimCorey I love your content. You've probably heard it a bunch before, but your SOLID playlist completely changed how I write code. And I do mean completely. I feel like things just weren't clicking before that series, and afterwards I'm able to carefully implement maintainable solutions and identify solutions that would be difficult to maintain during code reviews. Now I'm in the unique position where an intern is able to occasionally give useful tips to senior devs!
Thanks Tim for using the "kinda" and "would wanna" words less frequently now! Great content as always!
You are welcome.
Excellent discussion - there are 2 consulting ideas being brought forward and that might be a bit confusing but the overall concepts apply to both. One concept is the freelancer/self-employed/s-corp single consultant and the other concept is operating as the owner of a small consulting firm which Tim alluded to with his employees - the former often leads to the latter. The advice you're getting applies to both so Tim's doing us a favor.
I totally agree with the 6 month buffer but that takes many, many years to build. There's no way for someone starting to have the 6 month reserve so it's a catch-22. Ideally, the first client would offer you a 6 month sign-up bonus but that won't happen so you have to do it organically and Tim's right - your rate needs to include that and you have to be careful.
From what I've seen, the usual offer for an IT contract comes from a recruiting company for W-2 or Corp-to-Corp for 6 months or longer. If going the W-2 route, you usually don't need to pay double taxes for SS and you don't need insurance and there may some option for benefits but they may be limited. Long-term, I highly recommend going Corp-to-Corp and establishing your own company - you have to account for SS taxes, insurance, benefits and other fees so I would ask for at least 20% over W-2, if not higher.
If it's a 6 month project, you should ask for a premium since there's no guarantee, you'll have work for another 6 months possibly. If it's a long-term project, it's hard to price because a long-term project is never a long-term when you start on it. Every contract has the option to terminate at any time and it's hard to negotiate a contract that will guarantee a set time of employment unless it's a fixed cost project which is a totally different beast in IT. So every project has to be treated as a 6 month to 1 year project at best.
So let's say your skills would earn $100k as a full time employee - we're using a round figure. What should one ask for a 6-month project?
I would say for the 6 month project, you would have to ask for a rate that covers at least a yearly salary $100k + plus benefits + costs especially if you're very qualified. Using the 48 per year rule, you'd have to work for 24 weeks. That's 24*40 = 960 hours. Let's the say the answer to the equation above was $135k - your minimum rate would be approximately $140.
Now let's say, it's a 1 year project. Should you cut that in half or charge the $140/hr? I think you know the answer.
In the end, you'll find that a plumbing company or electrician charges about $200-$300 per hour and an attorney charges anywhere from $200-$600 per hour (or higher).
Over to you! Let's have a discussion. Is there any data for IT consulting rates?
I agree with what you are saying. The only thing I would gently push back on is that the 6-month buffer takes "many, many years to build". I disagree. In fact, I think that right there is why most businesses fail. The 6-month buffer is seen as "nice to have" but not vital. Before I went full-time creating content, I had a 6-month buffer. Before I hired my first employee, I had increased that 6-month buffer to cover that employee's salary. I did that by making more conservative choices. For instance, according to most business "experts", I should leverage my company's profits to take out a loan to cover more rapidly launching forward. I could 10x my income by doing so. However, I also put myself at risk. What if the market turns? What if inflation goes through the roof? What if a war breaks out in Europe? Maybe I don't make that 10x and maybe those loans come due and I struggle to make the payments. That is why I have always grown more slowly than I could have. The result is that my employees feel more comfortable (no surprise layoffs because of a bad quarter), I feel more relaxed (no worries about market fluctuations), and as a result, we also have better output.
I know saving up 6-months of income sounds hard, especially when you want to go full-time at your dream job. However, it can be done in most circumstances. If you are trying to be a consultant full-time, do it part-time first. Build up your bank account. I've done that twice in my career. I didn't regret it either time. I can honestly say that being a small business owner with three employees depending on me in an uncertain market is the absolute easiest thing I've ever done. I am relaxed and enjoying what we are doing. A HUGE part of that comes from the fact that I know we have a safety net that is more than big enough to catch us if we stumble.
@@IAmTimCorey If you went into consulting with a 6-month buffer, I believe you were in a rare and privileged position. I think age plays a factor here too. Say, if you enter consulting in your late 20s or early 30s, it's unlikely to have that sort of buffer or be able to negotiate a very high rate to generate it quickly. I personally started at a rate that was maybe 20%-30% higher than my salary as a W-2. When I switched to corp-to-corp, I was definitely underpaid as I didn't factor the additional expenses and added just 10% 🙂 So creating the 6 month buffer is the same as saving 50% of your yearly income on top of 401Ks contributions etc.
I think your advice of coming up with the right rate is very important and anyone entering consulting needs to understand what it means. It's not about greed, it's about being properly compensated. Looking back, I should have negotiated higher rates in my early years as a consultant.
I also fully agree with your advice that a consultant needs to save money for a rainy day and it takes work, time, and discipline to make that happen.
16:26 👍
I completely agree, not over extending yourself financially and properly budgeting is the name of the game. I personally plan for a 46 week year of work and save as much as I can rather than buy the ferrari or tesla. Having saved 5 years of salary that I pay myself from my business I think I must have been one of the few people that enjoyed 2020 even though there wasnt much work in the UK.
Having that safety net allows you to really relax, which actually makes you a better developer. A stressed-out developer does not usually do their best work.
Talk about putting things into perspective. 😆
Yeah?
@@IAmTimCorey Yes! You did. The entire time. The entire talk. Thank you.
Excellent!
Hi Tim thank you for great content. Do you have any sla’s based invoicing? How would you go about a service level agreement?
I would recommend you be very careful with SLAs. Unless they benefit both sides equally, they aren't a good idea. For instance, if you say "the app will be up 99.999% of the time" and put it in a SLA, you need to get paid for that guarantee. Otherwise, when it goes down, you are going to be in a world of hurt. Notice even in Azure, if you want better SLAs, you pay a lot more. That's because it takes a lot more work to hit that SLA and it is a risk that Microsoft is incurring.
A conspicuous absence here of two very important things: business overheads, and profit. These must be factored into your prices as well, not just your desired personal income. He's obviously a very experienced consultant, so why has he not mentioned them?
The focus here was on getting started as a consultant or freelancer. Typically, that doesn't include overhead but yes, you are correct that you should plan to pay your expenses as part of your calculation for how much per hour you should charge. I would probably include that in a more detailed "set up your budget/plan for consulting" video.
The rule of thumb to charge is approximately double your hourly salary for a full time job in the US for starters. When I did freelance consulting that’s what my rate was and companies were happy paying it. Depending on the demand for you specific skills to may charge more. Some of them tried to negotiate down based on a dedicated number hours and I made my decisions based on what I felt was fair for the guaranteed work. Also, I made sure customers understood that I would be billing for analysis above the initial free analysis to be able to estimate the work. The best advice is get a great accountant to help with what can be deducted on taxes and what can’t be. Also make sure you have a support plan in place with billable time for supporting the customer. Support is many times neglected by freelance consultants and it can burn your time up quickly. If you’re charging for support, there is an incentive for the customer to not call you for every question. Edit: Also don’t forget to take the customer’s temperature for a flat fee for your work. I didn’t some specialized work for a large company and they were happy to,pay me a flat rate for services rendered. I ended up making $450 per hour and that was back in 2008.
Could be "a" rule of thumb, but most often the Rule of Three (of Rule of Thirds) is used, calling for triple the full-time wage. It's based on 1/3 for salary, 1/3 for expenses, 1/3 for profit or risk of doing business (Uncollectible Accounts, Administrative).
One tends to want to lower the rate because we think otherwise we won't get hired. If you really think about it, 15.30% is gone on Soc Sec/FICA tax...say 10-15% on Income tax...paying your own Health Plan... That could be 40% gone right there.
We'd have to analyze our expenses carefully if we have an office, rent, utilities, insurance, auto/transportation, training, supplies. Often we don't account for those when we have them. If we work out of home, a laptop and a briefcase that's one thing, but we need to be careful what real expenses are.
i would still remember you if youtube went down, Tim 😔
I hope we don't need to find out if that is true.
I have a question, how would you set your new rates in view of inflation?
First, I set my rates high enough to absorb cost increases like inflation. Your rate should always have a buffer in it. Next, I evaluate where things are going and communicate upcoming rate changes. I would change rates for current customers in January, but let them know in June. For new customers, they paid the new rate right away.
Now I’m stressed… I need to call my client and ask for a raise
If you are a consultant, don’t ask for a raise. Let them know you are raising your rates. Give them time to plan for it. I would tell them that your rates go up in January. Don’t ask, though. Asking implies they have a choice.
@@IAmTimCorey advice taken
I can see you're speaking from experience.. thanks.
@@IAmTimCorey This is some of the best advice I've heard in a while. It's important to remain flexible especially with long-term clients. Don't just throw a number, be prepared to explain it and even offer a concession for someone whose business you value as much as they value yours.
I only have $6 per hour but that's enough for me.. (P.S I'm not a consultant :D)
Yep, different locations will have different rates, and that's ok.
First!
👋
@@IAmTimCorey I love your content. You've probably heard it a bunch before, but your SOLID playlist completely changed how I write code. And I do mean completely. I feel like things just weren't clicking before that series, and afterwards I'm able to carefully implement maintainable solutions and identify solutions that would be difficult to maintain during code reviews. Now I'm in the unique position where an intern is able to occasionally give useful tips to senior devs!