In a previous blog post, How to Price Yourself In Health IT Contracting, we discussed how to calculate the minimum hourly rate you need as a contractor in order to know that you’re making a sound financial decision.
In the above blog we covered how to determine an hourly rate based on total income (including benefits) as well as hours worked.
We discussed that, as a contractor, you want to plan for time in between contracts, so we calculated the hourly rate based on 1,600 hours worked per year (40 weeks) versus 2,080 hours (52 weeks).
Many times when I run through this exercise with prospective contractors, I anticipate what they believe to be a high-risk situation. Due to their concern, they unknowingly taint the numbers in such a way that will produce a standard that they won’t be able to attain.
For example, they take their current income for the best year they’ve ever had, the best bonuses, and any raises they “expect.”
Once they have what they believe is their total compensation number, they divide it by 2,080 hours to get their hourly total compensation rate, including benefits. But since they’ve used the absolute best possible scenario (or even a scenario that has never actually occurred before), they’re already starting the process with a tainted number.
The next step in this process is to take that total compensation and divide it by a realistic number of hours they can expect to work. I normally suggest 1,600 hours a year.
However, in order to be safe, some people will lower the “realistic” 1,600 hours to a “safe” 1,400 hours.
Since they’ve already taken a higher total compensation and divided it by a much lower hours-per-year worked, they will produce an hourly rate that’s much higher than it really needs to be in order for them to break even.
The trend I see: People who don’t really want to get into contracting allow their emotions to come into play regarding how they’re calculating their desired hourly rate.
If an individual has already decided against contracting, he or she will tend to underestimate the number of hours they’re going to work. Using the formulas I’ve discussed, this will create a higher dollar-per-hour amount that may be more than the market can compensate. Once they see the spike in the hourly rate, they convince themselves it’s going to be unobtainable and eliminate the option of contracting.
Be true to the numbers. Find out what they really are. If the numbers don’t work for you, or you’re just not feeling like it’s the right thing to do, then don’t do it. But you’re not doing yourself any favors by using false numbers to make yourself feel better about not doing something you were going to seriously consider in the first place.