How much should I charge a former employer (that laid me off) for contract work?

September 18, 2012 4:16 PM

I was recently let go ("cost cutting") from my job as a web developer, one that I've held for well over a decade at the same employer. After they gave me the news, they mentioned the possibility of me doing work for them in the future on a contract basis and asked what I would charge them. How much is a fair amount to charge them while making sure it's worth my while?

I'm having trouble figuring out what to tell them because I've always been a salaried employee and don't know what's a fair way to calculate the proper hourly rate. Would it be my pre-tax yearly salary divided by roughly 2000? That number times 1.2? Something else entirely?

I'd be doing similar work to what I did for them as an employee, but I want to be careful not to give too high of a quote since the reason they let me go was "cost cutting."

posted by anonymous to work & money (26 answers total)

Salary divided by a thousand plus 50% to compensate for the instability, so 60k/year is 90/hour. You can also ask other contractors; sometimes contracting and salary rates are way out of line or lockstep for various reasons.
posted by michaelh at 4:21 PM on September 18, 2012 [5 favorites]

Fair would be an hourly rate equal to your annual fulltime salary, divided by 1000. I would not worry about being fair here, as no matter what non-ridiculous amount rate they pay you, they will certainly be spending less than if you were full time (on pay alone, never mind benefits and payroll taxes).
posted by zippy at 4:23 PM on September 18, 2012

How much are you going to save them per year? You have to factor in a bunch of different things to figure that out, including your base salary, plus benefits, plus the cost of administrative overhead, plus the cost of your space, plus the cost of hardware and software and all that.

As a rule of thumb, someone 10 years in is going to cost the company $100,000 total. If you charged them $50 an hour and worked full time for a year, that's $96,000. However, they probably would hire you for 60% of that time at most, so that brings it down to $57,000 a year.

I would assume that they have $50,000 a year budgeted for professional fees for what you are doing, so maybe bring the rate down to $45 and hour or something (which might be more psychologically acceptable that something starting with 5).
posted by KokuRyu at 4:26 PM on September 18, 2012

Wait.

Why would you want a contract with someone who just let you go? 90 to 100/hour.
posted by msamye at 4:27 PM on September 18, 2012 [7 favorites]

but I want to be careful not to give too high of a quote since the reason they let me go was "cost cutting."

Employee salaries and outside contractors very likely come from entirely different budgets. Don't overthink that one. Salary divided by 1000, with or without an additional percentage depending on local market rates.
posted by DarlingBri at 4:29 PM on September 18, 2012

I have no idea why you'd want to consider the client company's finances when setting your own rate. You should charge them what the market will bear for your work; anything less indicates that you are willing to compromise for their situation, which will inevitably result in them nickel and diming you in perpetuity. In particular, as an independent contractor, you now need to pay your own health insurance, your own vacation time (as weird as that sounds, it's something a lot of people ignore), your own unemployment insurance (since you don't get state unemployment), an additional employer's share of Medicare/Medicaid/Social Security, and any fringe benefits you'd otherwise expect from a full time employer. You should absolutely not undercut yourself, and I suspect that your suggestion of only upcharging your hourly rate by 20% is definitely undercutting yourself.

For what it's worth, I charge an hourly rate that is equivalent to about 2.5x of the annual salary I demand (rounded to the nearest $10/hour). I think this is highly industry-dependent. In particular, my industry is very willing to hire consultants, but very unwilling to hire full time workers, so consultants can essentially set their own rates. However, to a naive outsider like myself, web development seems overpopulated with workers, so consultants can't set as high a price. I think in your example, michaelh's suggestion would be rather high.
posted by sockmypuppet at 4:29 PM on September 18, 2012 [12 favorites]

However, to a naive outsider like myself, web development seems overpopulated with workers

Nope. That's almost exactly the opposite of the case, especially if you're talking about workers who are actually good at what they do.

Name a high number. The worst they can do is say "no," or come back with a lower number. As someone with 10 years of experience with their code and environment, you are immensely valuable. The last thing they want to do is train someone new from scratch.

Depending on what your FT salary was, I'd ask for somewhere between $75 - 125/hour.
posted by drjimmy11 at 4:34 PM on September 18, 2012 [6 favorites]

Every time you reach a number that is "too much", remember that you'll be paying 30-40% of it in taxes.

$75 at the absolute minimum, $90 seems closer to right.
posted by Lyn Never at 4:36 PM on September 18, 2012 [1 favorite]

Nope. That's almost exactly the opposite of the case

I will note here that I am unfamiliar with web development entirely, so I appreciate the clarification.

I don't know why anyone is suggesting a particular number without knowing where you work and what you do.
posted by sockmypuppet at 4:37 PM on September 18, 2012

As others have said, annual salary in thousands per hour is the bare minimum as that is only slightly more than it costs them anyway to keep you on staff. Add 50-75% to make up for your loss of benefits and instability. Double it if you want a decent rate.
posted by seanmpuckett at 4:39 PM on September 18, 2012

You also know their company very well, and that should be worth quite a bit to them. Also, keep in mind that your actual salary is not what their total cost is for your compensation. They're also paying for vacation/sick time, benefits, and payroll taxes.
posted by quince at 4:42 PM on September 18, 2012 [1 favorite]

Working for a company as a contractor is a bit different than as a regular employee, and it can go both ways. Some companies will pay way more for a contractor than they would just to hire full-time, because the money can come out of a different budget. On the other hand, they may just want to string you along and get you at a reduced rate, in which case it's your call whether you want to take that job or not.

I highly recommend reading Design is a Job for some excellent advice on payment and contracts.
posted by fifteen schnitzengruben is my limit at 4:59 PM on September 18, 2012 [2 favorites]

Three additional factors that may influence your rate. First, are you planning to be a full time contractor now? If not, the hassle factor of taking a contract job on the side is going to be higher (and should be reflected in your rate). Second, how many hours would they throw your way per year? Every job has a start-up cost to get contracts and billing figured out -- I would quote a lower rate for 1000 hours a year than I would for 100 hours a year (and probably wouldn't take anything less than 100 hours/year). Third, what does "web developer" mean here? If you are, for example, working on their Java or .NET based super-secret-sauce company app in a niche vertical for the last ten years, that is a very different thing than administering the company website using WordPress. In other words, how valuable is your legacy knowledge of the company and their web properties?

If you want to send me a memail, I can send you more detailed info laying out all of the costs and considerations of contracting and how to back into a rate -- I just sent a couple of longish emails to an acquaintance who is also making the transition from W2 to contractor.
posted by kovacs at 5:22 PM on September 18, 2012

In my former industry (government contracting) the standard calculation was ((annual rate / 260) x 1.2) / 8.

The 20% bump was to compensate for benefits and regularity.
posted by charmcityblues at 5:30 PM on September 18, 2012 [1 favorite]

When I left my old position earlier this year, my former employers asked me to contract with them. I took my current (new) salary, multiplied what that hourly rate would be by 1.50 (time and a half) and quoted that rate.

We negotiated down to about 1.10 times what I currently make at my new position, which is more than I expected, but the savings they get and the convenience they get in keeping me on-board instead of hiring someone else to do the things I know how to do and to train someone else in the ways of the company is worth it to them.
posted by xingcat at 5:33 PM on September 18, 2012

I've always been told, and have worked with, that your contractor rate is 2x your FT hourly rate. Essentially this works out to your FT yearly salary / 1000. You charge double because you are now in the hook for providing your own medical & dental, equipment (pc, printer, etc), a roof over your head, heat, AC, insurance, etc etc. Your company paid considerably more than your hourly salary to keep you as an employee, they should not be saving money at your wallet's expense.
posted by cgg at 5:43 PM on September 18, 2012 [4 favorites]

How timely does the company pay vendor invoices? Are you going to have to chase them down for months? Might be worth putting in a higher rate, discounted if paid net 15, and penalty if paid post 90 days.
Also the Graphic Artists Guild Handbook: Pricing & Ethical Guidelines is a good resource.
posted by anon4now at 5:47 PM on September 18, 2012 [1 favorite]

Depending on your benefits, your employer's "burden rate," or the amount it actually costs your company to employ you, is at least an additional 1/3 of your salary, and is probably closer to 1/2. Do you have a good relationship with them? Try starting with double your salary/1000 and be prepared to go down to 1.5x.
posted by Etrigan at 6:28 PM on September 18, 2012

You're better than another developer because you know the company and the software. That'll save them time. I'd charge more just based on that.
posted by backwards guitar at 6:29 PM on September 18, 2012

However, to a naive outsider like myself, web development seems overpopulated with workers, so consultants can't set as high a price. I think in your example, michaelh's suggestion would be rather high.

It's a bit region-dependent, but I am a web developer who both contracts and is contracted. I should have mentioned that in my answer.
posted by michaelh at 6:59 PM on September 18, 2012

In a similar situation my hourly rate was annual base+bonus, divided by 1000, times 1.4. That was about fair, and I only had one year of experience; you could probably get a higher multiplier.
posted by phoenixy at 7:33 PM on September 18, 2012

The important factor here is, how hard would it be to replace the institutional knowledge in your head? I would guess the answer is, well nigh impossible. Unless you're working at the web development equivalent of a Bic assembly line, and your internal documentation is managed by the Library of Congress, and they just offered the same deal to a dozen of your fellow ten-year men, everyone in this thread except michaelh is lowballing you, and I wouldn't be surprised if you could do even better than +50%. Can you say more about what you're doing?

It would also help, since these things aren't entirely linear, if you could ballpark your current hourly rate, although I could see how that might be too private.

Also, have you looked for any jobs elsewhere? Sometimes people who have been at one place for a long time are underpaid relative to the market, and it's useful to update your sense of what the market will bear.
posted by d. z. wang at 9:09 PM on September 18, 2012 [1 favorite]

Find what a similarly skilled developer typically successfully charges in your region, and add a markup to reflect the value add of your specific experience. Your old salary and benefits are irrelevant. Good, efficient web developers who can do more than brochure type ages are very expensive these days.
posted by MattD at 4:48 AM on September 19, 2012

I've never been able to hire a good developer for under $125/hr so I'd make that your bottom limit. You probably deserve more if you have been with the company so long and already know everything about what they do.
I don't think your former salary has much to do with it, since they probably got a really good rate on you. Think more about your replacement rate.
How much would they have to pay for a developer with 10+ years of experience? Now add at least 10% to that because of the training and startup time they are saving with you.
I'd bet you should be making more than $175/hr, depending on your region.
posted by rmless at 8:24 AM on September 19, 2012

Don't forget that when moving from salary to contract hourly that not only do you pay your own vacation (and with 10 years you should be getting 4 years at least IMO) but you also pay for your own stat holidays. Here that is 10 a year or an additional 2 weeks. Each week amounts to 2% of your hourly or 12%.
posted by Mitheral at 4:52 PM on September 19, 2012 [1 favorite]

so, they want you to do the same work for less money is how it basically comes down, right? you are negotiating from a position of strength. i'd say high ball them, and even if they balk some time later they still might come calling because they'll only realize a few months from now that they fired a guy with critical knowledge that they can't replace.
posted by cupcake1337 at 7:43 PM on September 19, 2012