Calculating your hourly rate

One of the first questions that we are asked by newcomers to the contracting world is how to work out what your hourly rate should be.

Contract rates are generally determined by the skills and experience of the individual contractor combined with the market demand for those particular skills at the time the contract was offered.

Many people assume that if you are earning $80/hr then your equivalent salary must be $156k, but this is simply not the case. What must be taken into account is that as a contractor you do not receive annual leave, sick leave, professional development, superannuation or any of the other benefits that permanent employees enjoy. So the lack of these provisions should be taken into account when you are working out what hourly rate you would like to be paid.

Below is an example of how to estimate your hours, and therefore what you should be asking for in a daily rate.

Number of hours worked per week (37.5) * number of weeks in a year (52) = 1950 hours 

From this you should subtract:

13 public holidays = 7.5 * 13 = 97.5 hours
4 weeks annual leave = 37.5*4 = 150 hours
10 days sick leave = 7.5 * 10 = 75 hours

Total hours off = 322.5 hours

1950 – 322.5 = 1627.5 working hours in a calendar year.

So now let's recalculate using our earlier figure.
$80/hr * 1627.5 hours per year = $130,200 per annum.

If you are a contractor on a short term basis you should also take into account the time and overheads involved in seeking contracts. Other items that you might also like to think about are superannuation, professional development, insurance etc.