How much should I charge per hour?

When starting an IT business it is always hard to know what to charge.  The top IT businesses seem to be charging a lot and winning clients, so if you undercut them would you get all their clients?  I’m afraid it doesn't work this way. While the market will give you an indication of what you might get you need to remember all businesses are different.

When I started an IT business back in 1998 the largest local competing computer business was charging $120 per hour.  I started by charging $65 per hour.  I was working for a large corporate IT company at the time, which was charging me out at $150 per hour, and I was moonlighting to build my business up. I did not do any math to get to my charge-out rate; it just seemed like a good way to get business and of course I had no overheads.

I remember doing a server install at a large Dunedin law firm and talking to the IT manager about starting my business - when he asked how much I charged he laughed at me and told me there was no way he would hire an IT consultant that only charged $65 per hour because his perception would be that I’d be rubbish if that is all I could demand. His comment played on my mind for about a month, and it made sense.  If I raised my hourly rate would my clients change from tyre-kickers to professionals?  I was spending all my nights working; if I charged more I could work less hours for more.  I increased my rate to $100 per hour.

Ok, if I was starting out with no industry qualifications and little industry experience then this could have been a bad option.  But I had very little resistance to the increased rate and I do believe it helped growth in my target market, which were professional firms.

I admit that my approach was arbitrary.  A better way to work out chargeable rates for either yourself or an employee in your company would be to apply some maths.

In my company a full time employee who works 40 hours per week is expected to average at least 20 chargeable hours per week. Some businesses look for 25-28 hours per week, and depending on what you do that could be fine, but I like to work it out on more conservative figures.  IT is constantly changing, and to keep ahead of the game you need to speed a lot of time learning and training - you simply cannot charge out all of your time.

First calculate the costs of the expenses. This is often easier to work out as a yearly cost. Add up how much is spent on rent, car leases, petrol, phone, power, Internet, computer costs, hosting costs, training, PSA software, RMM tools, books, accounting etc. Add in the employee’s salary. If you have support staff (any staff that are not bringing in the average chargeable amount) then add a portion of their annual salary based on the number of employees they support (e.g. Part time Bookkeeper $12K divided by 3 employees means $4K per employee). Now you have the total yearly expenses.  Add 10% to this figure for unexpected costs and inflation.

So based on the above calculation we will say the employee is going to cost the firm $70K per annum. We will want the firm to make a profit so for this example lets mark them up by 30% (To keep the numbers simple now our goal is to bring in $100K).

To calculate whether that is possible you now need to work out how many weeks the person is likely to work. In New Zealand an employee is entitled to 4 weeks paid holiday, 12 days public holidays and 5 paid sick days a year, so on average we work about 46 weeks per year. Divide the target $100K by 46 weeks – this is $2174. Now divide that by the 20 hours the employee is expected to charge out, and your charge out rate should be $108.7 per hour. You would then add sales tax eg GST/VAT on top of that rate.

If you are a Managed Service Provider you don't really have 20 chargeable hours as it is all pro-active work and you probably do a lot more for your clients in a week. Still the same principle applies but rather than counting chargeable hours you are looking at your reoccurring income to ensure you are marking similar sort of profit on each person. We will cover this in more detail in another post.

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