What should I bill for as a contractor?

February 1, 2011 7:21 PM

I recently took on some hourly contract work. I'm running into some grey areas about what I should and should not be billing for.

Well, I recently became a contract worker. My field is engineering for electrical/embedded design. I have a few years experience in this area through internships and the like, but I am still finishing my degree and doing contracting part time. In all my previous jobs I was on salary. The people at the (very) small company I am contracting for were already familiar with my work before they hired me as a contractor.

I work entirely from home (fitting my work around my school work as time allows) and this causes me some confusion about what time I should be billing for.

Essentially I want some rules as to what I should be and should not be billing to the company.

For example:

-Since I’m not yet very experienced, sometimes I have to spend a few hours reading up on a general topic to enable me to complete my work. Should I be billing for this? If the topic is extremely specific to a project I wouldn’t hesitate to bill for that time, but what about reading about general things that it might be assumed I already know?

-What if I spend some large amount of time floundering or failing on some task before I figure out how to do it right and if this initial failing was just because I’m still inexperienced? For example if I spent 6 hours getting literally no-where trying to do some task that only takes 30 minutes if one knows how to do it right or has done it before?

-What about any initial meetings to have a project introduced to me? For example, should I be charging for 4 hours spent having someone explain to me what the project is before I’ve officially taken it on, or should this be more of a “free initial consultation”.

All this boils down to not being sure to charge for time spent that did not actually produce work for the company.

I’m nervous about this whole area because I asked for (and got) an hourly pay rate that is much higher than I’ve had in past jobs and haven’t yet convinced myself that I’m producing that much value of work in an hour. I don’t want the company to look at my first few bills and the work I’ve produced in that time, and wonder why they are paying so much money for what they are getting!

I am confident that I can produce good quality work in the end, but I want to seem like I am a good value for what they are paying and I also don’t want to miss out on large amounts of money that I should have claimed.

posted by Diplodocus to Work & Money (17 answers total)

-Since I’m not yet very experienced, sometimes I have to spend a few hours reading up on a general topic to enable me to complete my work. Should I be billing for this? If the topic is extremely specific to a project I wouldn’t hesitate to bill for that time, but what about reading about general things that it might be assumed I already know?

If it's something that your employer would reasonably expect you to know, and you instead have to teach it to yourself or learn it, then I would not bill them for the time it took to learn it. If it's something that isn't really general, but germane to your field, then you can bill them. As an example, if you have to learn some nonstandard tool (or using said tool takes you a bit longer because of learning curve), bill for the entire time.

-What if I spend some large amount of time floundering or failing on some task before I figure out how to do it right and if this initial failing was just because I’m still inexperienced? For example if I spent 6 hours getting literally no-where trying to do some task that only takes 30 minutes if one knows how to do it right or has done it before?

I would not bill for your lack of experience, or at the very least cut the amount billed to what you expect it should take. This does not mean learning how to do things that are particular to the client's domain -- it's not your fault if their existing system was seemingly designed by monkeys. It does mean time spent learning things an experienced engineer would know.

-What about any initial meetings to have a project introduced to me? For example, should I be charging for 4 hours spent having someone explain to me what the project is before I’ve officially taken it on, or should this be more of a “free initial consultation”.

I don't charge for this time. You might try (up front) suggesting that you and your potential client limit the initial discussion time to an hour or two, and make it clear that any time beyond that is going to be billed.

As a general rule of thumb, if you don't feel right charging, then don't. If your pay rate is "much higher" than past jobs, you and your family won't be starving unless you really do suck at your job.
posted by axiom at 7:51 PM on February 1, 2011 [1 favorite]

People expect professionalism, and shouldn't have to pay for anything more than they'd receive from a professional for the same pay.

If you don't know the basics you're expected to know, or if you screw up or have to revise due to your shortcomings . . . your client should not have to pay for that. It's part of your learning curve.

On the other hand, if you want offer free initial consultations (i.e. meetings before you've agreed to take on a job), that's your decision. You could also, legitimately, charge for these consultations, as long as you make that clear in advance. Many people in professional fields do not charge for initial consultations. It makes them less obligated to not take on a job if they don't like it or the client, and it helps attract people. But that's up to you.
posted by Dee Xtrovert at 7:55 PM on February 1, 2011

I'm doing something similar, for the first time, and I'm wrestling with the same things. In this case I have a lot of knowledge about my client's situation, having been laid off there a few weeks ago. Here are some rules of thumb passed on to me by a mentor at SCORE:

1) You should bill for either time or result. I try to bill on a deliverables basis because my #1 pet peeve is bad requirements. Working on requirements, which I do for free, saves me a ton of aggravation and makes the project in aggregate a lot more efficient.

2) If you bill on a deliverables basis sometimes you win and sometimes you lose relative to an hourly rate. You set the cost bar high enough that you are not pecked to death with tiny nit-picky things and when you lose you gut it out.

3) Your own education (knowing things that are generally assumed you know - or especially, in a ca.us contract, should know in order to represent you can execute the work) is your look-out. If I blunder into a difficult situation, or need some out-of-the-way knowledge in order to execute, I eat that.

4) To produce the same quality of life as your previous salary gave you, you should charge no less than 21/13 of that per hour - assuming you're actually going to get 2100 billable hours per year. When you're on salary, you get a lot of benefits that are not that visible but they are certainly there. If you bill on deliverables you use that as the -floor- of your bid.

5) You always have the latitude to give your client freebies, if you bid too high. This pleases the client every time.
posted by jet_silver at 7:57 PM on February 1, 2011 [1 favorite]

First, these are all MY opinions and should only be taken as such...

As a freelancer, you should definitely charge for time spent 'researching' the particulars. When doing freelance work, I tend to charge much less than most contract IT folks would and feel no qualms about charging for research or preparatory work as the client still gets a better deal than they would from someone else charging twice my rate.

Initial meetings fall, as you already mentioned, under initial consultation and aren't generally billed for; however, 4 hours for them to explain the job seems a little much. Personally, I've found that if I can't find out from the customer what they want in 30 minutes, either they don't really know what they want and were not prepared for the meeting or you aren't ready to take this kind of contract. Pursuing this kind of contract wastes your time and can cause you to lose profits you are entitled to as their consultant. If you have to help them decide what they want and the time required is excessive, then that time should also be billed for; You are, after all, not in business to give them this service for no charge. Obviously, they are paying you for your skills; so when you use them on their behalf you deserve compensation. By not charging for these services at the onset of your contract, you are setting yourself up for being taken advantage of by your clients.

Something to think further on... Are you planning on any type of ongoing support for these contracts? This seems to add to billing complexity in my experience and should be addressed sooner rather than later.

Just my two cents...
posted by schade at 8:01 PM on February 1, 2011

Response by poster: -------------------------------------------------
Thanks for all the answers so far.

I suppose a big part of my problem is having trouble knowing what might be something that I would be "reasonably expected" to know how to do or to know off the top of my head versus something that even a more seasoned pro would be spending extra time on. Especially since the company was already directly familiar with my work and level of ability when hiring me and agreeing to my pay rate (I had previously worked with people from this company at a different company).

I plan to be erring heavily on the side of under-billing rather than over-billing, especially while I try to build my experience and reputation. Fortunately I am confident that I can produce the results the company wants in the end.

I'll appreciate more opinions or other general advice on the topic! Thanks
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posted by Diplodocus at 8:49 PM on February 1, 2011

My department bills our hourly time to our firm's clients. When we hire new people and train them, we have the trainees do actual billable work — but we bill the client for 50% of their time. You might charge something like 2/3 or 3/4 of the hours you work you bill for the first couple of months. That's a reasonable learning curve. Once you start being more productive, bill 100%.

Regarding meetings: Initial meeting should be free, probably. But you should think about a reasonable amount of time for that meeting, and let them know that anything over that will be billed at your standard rate. If you think 4 hours is too much, tell them 2 hours is your initial meeting maximum.

I think your under-billing idea is fine, initially. But don't undersell yourself forever.
posted by clone boulevard at 9:07 PM on February 1, 2011 [1 favorite]

In a nutshell, I'd say whatever midrange is for whatever you're looking to be doing. $50/hr? $150/hr? Whatever it is, don't charge for learning, and if you want to give free initial consults, set a time limit (like 30-60min) and keep a preliminary contract with you so that if they want to keep talking after that you can get their signature on something that makes it OK to bill them from that point forward.

If you really think you're going to be learning on the job, record your time in 15min increments so you can more accurately account for time that could be switching contexts fairly often. You don't want to miss out on time that you actually are working just because you get lost yak shaving.
posted by rhizome at 9:46 PM on February 1, 2011

Out of college I went to work for a contract engineering firm - it was very fun. phds bid on proposals, then we basically were handed project specifications. We would set up meetings with their experts, and then produce the product, meeting with the clients as necessary.

-Initial consult - no charge to the client (overhead)
-Proposal - no charge to the client (overhead)
-Specification meetings - full charge to the client
-Learning stuff you should know - no charge to the client (overhead)
-Learning specialized stuff that you don't know and you have disclosed to the client - full charge to the client - inform them of this during specification meetings or via email that the requirement to use package X will require additional hours of billable time.
-Documentation - full charge to the client (expected documentation should be specified ahead of time along with an estimated time frame)
-Final Reports - full charge to the client (expected report should be specified ahead of time, findings, graphs, data and appendices as well as conclusions should take a fixed period of time as a result then)
-Final consult - no charge to the client (overhead)

Do not over-promise.
posted by Nanukthedog at 9:51 PM on February 1, 2011 [1 favorite]

I've been doing embedded design for ten years. I still have to research and look things up. I'm salaried (with overtime paid), and I do it on works time. My workplace could have selected someone with more experience ( and higher expense) to do the task, but they chose me. That means they get the benefit of my lower cost, and the drawback that I don't know everything. If you didnt misrepresent your skill to your employer, than billing them for this time seems fine. I'd expect as a non graduate, they're saving a ton of money on you. No need to make it even more by working for free.
posted by garlic at 10:55 PM on February 1, 2011

As long as the hourly rate is reasonable for your current level of expertise, you can bill them for any hour that you could not, due to being busy with work you were doing on their behalf, have billed another client, if you had another client.
posted by nicwolff at 11:55 PM on February 1, 2011

My workplace could have selected someone with more experience ( and higher expense) to do the task, but they chose me. That means they get the benefit of my lower cost, and the drawback that I don't know everything.

garlic beat me to it. If they wanted someone who knew everything and didn't make mistakes, they would have hired someone else and paid them more (or given them a salary, even).

If you flounder, that has probably already been factored into your wages. And anyway, you are not really floundering, you are building organizational knowledge. The mistakes you make, so long as you remember them and learn from them, will make you that much more of a valuable worker for the organization.

I would say that intention factors into it a great deal. Are you reading something to address a specific problem for your work? Billable. Are you reading something that in order further your career as an engineer? Not billable.

I would caution against under-billing too much. Eventually you will get better at what you do, and it may come as a surprise to the company when suddenly you are billing many more hours per week/month/etc. I would bill based on a balance of effort and results, not on results alone.

This is especially the case since they knew your abilities and knowledge. They may even be investing in you, with the expectation that you will learn, get better, and they will have won a loyal worker at a low salary who know does accomplished and valued work for them.
posted by Deathalicious at 12:03 AM on February 2, 2011

How did you sell yourself? When I do the (very rare) freelance work, my "tout" ranges from "sure, no problem, $100 an hour" to "I'll give it a try, but I don't have very much experience in that, it might take me a while, $20 an hour".

I'll slightly underbill the $100 an hour client, because they are paying for a premium service and shouldn't have to pay for my inexperience or lack of recall. The $20 an hour client gets billed much more accurately; they signed on knowing that they are getting a bargain rate and understanding that it might take me three tiimes as long to complete the task as someone else.

Kind of like how some auto repair shops simply charge a book rate for various jobs. The book rate for changing an alternator would be how long it takes the average technician to do the job. They do this especially at dealership service departments. The customer expects that the job is being done by a competent professional- they shouldn't have to pay more because the tech assigned is inexperienced, and the shop shouldn't have to lose money because their technicians are very efficient. As someone above mentioned, this is charging by results. For $135 an hour at the Buick place, I get some assurance that the job is only going to cost me 1.3 hours of labor.

But for the guy working in his backyard, he might only charge me $25 an hour. But he doesn't have a support staff or parts runners or porters to shuffle cars around. He is going to charge me 3 hours of labor.

Same thing happens with an IBM service contract versus the local company. You are going to pay IBM $200 a month to virtually guarantee that your server will stay running within the service level agreement. The local place might charge you $50 an hour + parts if something happens. Something happens, and with IBM you pay nothing and a guy in a crewcut shows up in 45 minutes with a crash kit containing all the parts that could possibly be broken, and your workers are back working 20 minutes later, no extra charge. Even if IBM had to go to Ingram Micro and pay $3000 to buy a whole server in order to get this done. The local place might have to say "yeah, that's the power supply alright, I'll order one and have it here at 8:30am day after tomorrow." And they are going to charge you $200 for the part, 1 hour for travel and 1 hour of labor.

Short version: if you sold yourself as a competent professional, charge what a competent professional would charge regardless of how long it actually takes. If you sold yourself as a plucky newcomer who will try his best, and the client went along with that gamble, charge them for your time more like punching a timeclock.
posted by gjc at 6:18 AM on February 2, 2011

I would caution against under-billing too much. Eventually you will get better at what you do, and it may come as a surprise to the company when suddenly you are billing many more hours per week/month/etc. I would bill based on a balance of effort and results, not on results alone.

That's a good point, if it is a reoccurring work kind of contract. You are going to have high overhead at the beginning, and hopefully low overhead at the end. Depending on your rate, the overall rate-per-similar-incident should be flat over time, or have a slightly higher billing to lower billing curve over time. You don't want to be increasing the price per incident/job when you are theoretically supposed to be getting more efficient.

Where you CAN do this is, maybe you signed a contract that averages out to 1.5 hours per incident at $50 an hour over the course of the contract. In the beginning, it takes you 3 hours to get them done, and by the end of the year, you are down to 45 minutes. You should be billing the flat 1.5 hours, or maybe 1.75 in the beginning, 1.25 in the end. Next year, you might re-negotiate, saying "I've gained experience, so I am worth more, so now I am going to charge $60 an hour. But you should benefit too, so I will guarantee that your average incident will be closer to 1 hour." They get a lower bill, you get to charge 1 hour for 45 minutes of work and you have extra time to do more work.
posted by gjc at 6:33 AM on February 2, 2011

Keep in mind that contracted hourly rates are consistently higher than salaried hourly rates because of all the overhead Nanukthedog listed. In return, the clients don't have to pay salaries for staff when they don't need them.

I heard yesterday at an entrepreneur seminar that a consultant is doing pretty well if 30-40% of their time is billable hours.
posted by Heart_on_Sleeve at 8:22 AM on February 2, 2011

gjc: to pervert a phrase, could that be considered "hour-cost averaging?"
posted by rhizome at 4:45 PM on February 2, 2011

Well, the obvious answer is charge people what your worth and they are willing to pay.

Most consultancies figure that 50% - 75% of time billed to clients is a good start. The other 50% - 25% is keeping current on the field. Obviously, their preference is 75-25 but the market dictates 50-50 at times.

There's a lot of great advice above. I will say that regardless of anything else, protect your reputation at all costs and be smart about it. If someone really isn't happy with the outcome of a project or work, make them happy. Hopefully this is a bit of additional work for free (that will repair the relationship and lead to more work) but it may be a financial concession.

As an independent, very few people get by because they are super-smart. If you are that smart, go work for someone else, make a bucket, and retire. Otherwise, realise that your reputation is key.

Golden rule: Always do what you say you are going to do, when you say you are going to do it, and how much you say you are going to do it for. Even if your client doesn't do any of those things.

In The Beginning, you may find yourself pulling an all-nighter or making $1 an hour on a job and pressing to the max to learn. That's good. Keep doing it. Your goal on the next project should then to start earlier in the morning and make $3. Feel it out. F*ck up. Have some fun.

But always deliver.

And buy a suit. Not many people wear suits these days and it's instant credibility.
posted by nickrussell at 6:08 PM on February 2, 2011

One way I've handled some of my learning curve on a new venture (which was in an area I'd been studying but now had to actually DO) is that I charged my full rate, which is on the higher side of the curve for my industry but not outrageous, but gave a discount for the first 3 months while I got up to speed. I didn't want to discount my rate outright and undercut what I really think my work and time is worth (or will be worth when I'm fully up to speed), but I was also forthright that I would probably be slower at performing the work than someone who had much more experience. So on my invoices, which were pretty itemized, I had my hours X rate and then the % discount off the total.

Frankly, I probably undercut myself on the 3 months - it could have just been 2 or even 1 but at least I felt like they knew what the rate WOULD BE and couldn't argue later that it was too high for that work.

I do not charge for any time I spend looking into How to Do something since I feel I have a good grasp on what I think I should know immediately vs. what I really can't be expected to know off the top of my head. If my clients ask me to do, or ask me about, something that does legitimately require some time, I charge for it but am pretty loose about it. Mostly I don't think I have charged for it, but I also bill for my time in quarter hour increments and round up - and a lot of the small stuff comes in there. If I absolutely screw something up, I am not charging for the time to fix it. So far I've not had any complaints.

The initial meeting I had was something I didn't charge for (it's sales really) but I have charged for time to go on-site (most of what I do is done virtually) and do training and have status meetings and pick up documents. I created some training documents specifically at their request but didn't charge for that time since I can reuse them with other clients.
posted by marylynn at 9:15 PM on February 2, 2011