Costing your services – how to make sure you don’t undersell yourself

Costing your services – how to make sure you don’t undersell yourself

There are a number of ways to price your services but most of them require an underlying knowledge of what it actually costs you to provide work for your clients.

It’s an easy mistake to make, especially in the early days of business, to think that you can simply sell your time at the same rate you were paid when working for an employer. Successful businesses charge a realistic rate.

A good starting point is to work out what you, or your firm need in simple cash terms to stay afloat. Include all of the things that go into running your business. If you are self-employed then you’ll need to think about what the minimum amount of money you’ll need per month or per year is.

Don’t add any profit in – yet.

Next think about other things that you’ll need to be paying for. How much does it cost to advertise for clients? Do you pay commission for leads? What is the cost of producing a business case?

Think about all of the costs of obtaining work and make sure they are factored in.

Next think about your direct costs. These are the costs of a contract that vary ‘directly’ with the amount of work done. So for example driving to a client’s place of business to do the work. If you have no work then there will be no direct cost.

Other examples of direct costs are subcontractor’s time, materials used, hotel bills whilst staying away to work.

Finally think about your ‘indirect’ costs. These are things that you’ll have to pay whether you work or not. Typical examples of these are office costs, car lease, insurance.

What you’ll end up with is the cost of doing business for a month or a year at your budgeted level of activity.

Now you’ll need to divide this by the number of hours you’ll be working and this will require a healthy dose of reality.

Normally people tend to spread these costs over a 37 ½ hour week, 52 weeks of a year but of course that isn’t what you are actually going to be working.

First of all we’ll need to assume that you will want to take some vacation. Maybe four weeks? This gives you 48 weeks of work.

The problem is that it is unlikely that you will be working for 37 ½ hours. In fact some estimates have suggested that as little as 15-20% of a self-employed person’s time is actually spent doing the job they are paid to do.

Think about how long it takes to do the administration of a contract, how long you spend marketing, doing your accounts, finding subcontractors, networking and training.

This is where you need to be very realistic. People too often overestimate how long they can actually devote to client work.

Only once you have worked out what your costs are can you think about adding on profit.

A worked example

Let’s look at an IT contractor.

He used to work a 37 ½ hour week for  major company and has estimated that he needs a minimum of £20,000 per year to survive.

He will spend £5000 on marketing activities, £4000 on some shared office space and phone line and will need to use the services of a subcontractor for the price of £5000 and will spend £3000 on fuel getting to clients.

This gives us a total of £37,000 to stay in business.

He wants to take four weeks off and knows that he’ll work a five day week of 40 hours.

This gives him 40×48 = 1920 hours available.

He may think then that his standard price is £37000/1920 or £19 per hour. He’s pleasantly surprised because he knows his competitors charge a lot more.

However what he then realises (after he has committed to a contract) is that there are a lot of things that he can’t charge the client for.

In fact he works out that he only spends 30% of his time actually on billable hours.

This gives him only 576 billable hours to charge for and if he wants to stay in business then he’ll need to charge a more realistic £64 per hour. (£37000/576)

Suddenly it becomes clear why his competitors are so much dearer than him and why it was so easy to get that contract!

Conclusion

There’s an old saying ‘Turnover is vanity, profit is sanity’. What this means is that anyone can buy work simply by working at a loss.

A business can have a million pound turnover but if every hour it works is costing it money then it won’t be long before the directors are looking for a new job.

When you are costing your services think about the points above and add in a healthy pinch of realism and you can be confident that you’re not working for nothing.

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