Many businesses choose to work with contractors when completing projects. Hiring contractors may offer cost savings, making it important to determine the true cost of working with a contractor. Knowing how to calculate a contractor rate can help you hire reliable contractors who bring value to your business. In this article, we discuss why calculating contractor rates ahead of time is important as well as steps you can use to calculate your own rates.
Why you need to calculate contractor rates
Before bringing any freelance contractors on your team, you first need to determine how much pay they should receive. There are a few reasons why it’s important to calculate a contractor rate ahead of time, such as:
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To determine whether it is more cost-efficient to hire a salaried employee or a contractor
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To identify a fair pay rate for contractors that will encourage good work
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To know how much you can afford to pay contractors
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To plan what tasks to outsource to your contractors
To determine whether it is more cost-efficient to hire a salaried employee or a contractor
To determine whether it is more cost-efficient to hire a salaried employee or a contractor
To identify a fair pay rate for contractors that will encourage good work
To identify a fair pay rate for contractors that will encourage good work
To know how much you can afford to pay contractors
To know how much you can afford to pay contractors
To plan what tasks to outsource to your contractors
To plan what tasks to outsource to your contractors
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Contract rate vs. employee pay
Contractors’ rates often differ significantly from those of an employee. Contractors’ rates are usually an agreed-upon amount of pay that is structured hourly, per task or per project. This is in comparison to employee pay, which may be hourly or annually.
Comparing the cost of a contractor versus an employee is not always an equal comparison. While you could add up the number of hours that you expect each team member to work and then divide this by their annual cost, this fails to consider other factors that affect compensation and costs, such as:
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Employee benefits: Full-time salaried employees often receive benefits, like health insurance and paid time off, which are not included in their salary.
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Overhead costs: Having employees on staff often means paying for overhead costs, such as office rent or utilities.
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Office support: You may have to employ administrative support for full-time employees, such as payroll and human resource professionals.
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Indirect costs: You may have other indirect costs like employee taxes, computer programs, equipment and interview costs.
Employee benefits: Full-time salaried employees often receive benefits, like health insurance and paid time off, which are not included in their salary.
Employee benefits: Full-time salaried employees often receive benefits, like health insurance and paid time off, which are not included in their salary.
Overhead costs: Having employees on staff often means paying for overhead costs, such as office rent or utilities.
Overhead costs: Having employees on staff often means paying for overhead costs, such as office rent or utilities.
Office support: You may have to employ administrative support for full-time employees, such as payroll and human resource professionals.
Office support: You may have to employ administrative support for full-time employees, such as payroll and human resource professionals.
Indirect costs: You may have other indirect costs like employee taxes, computer programs, equipment and interview costs.
Indirect costs: You may have other indirect costs like employee taxes, computer programs, equipment and interview costs.
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How to calculate contractor rate
Use the following steps to calculate a fair contractor rate:
1. Create a job description
It can be helpful to first create a job description to gain a clearer understanding of the duties that your contractors will handle. This ensures that everyone is aware of their responsibilities. These are a few things to include in your job description:
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An estimate of how much work you will have for each contractor
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The length of employment for each contractor
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The specific tasks and expectations of contractors
An estimate of how much work you will have for each contractor
An estimate of how much work you will have for each contractor
The length of employment for each contractor
The length of employment for each contractor
The specific tasks and expectations of contractors
The specific tasks and expectations of contractors
Read more: .css-1v152rs{border-radius:0;color:#2557a7;font-family:”Noto Sans”,”Helvetica Neue”,”Helvetica”,”Arial”,”Liberation Sans”,”Roboto”,”Noto”,sans-serif;-webkit-text-decoration:none;text-decoration:none;-webkit-transition:border-color 200ms cubic-bezier(0.645, 0.045, 0.355, 1),background-color 200ms cubic-bezier(0.645, 0.045, 0.355, 1),opacity 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-bottom-color 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-bottom-style 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-bottom-width 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-radius 200ms cubic-bezier(0.645, 0.045, 0.355, 1),box-shadow 200ms cubic-bezier(0.645, 0.045, 0.355, 1),color 200ms cubic-bezier(0.645, 0.045, 0.355, 1);transition:border-color 200ms cubic-bezier(0.645, 0.045, 0.355, 1),background-color 200ms cubic-bezier(0.645, 0.045, 0.355, 1),opacity 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-bottom-color 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-bottom-style 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-bottom-width 200ms cubic-bezier(0.645, 0.045, 0.355, 1),border-radius 200ms cubic-bezier(0.645, 0.045, 0.355, 1),box-shadow 200ms cubic-bezier(0.645, 0.045, 0.355, 1),color 200ms cubic-bezier(0.645, 0.045, 0.355, 1);border-bottom:1px solid;cursor:pointer;}.css-1v152rs:hover{color:#164081;}.css-1v152rs:active{color:#0d2d5e;}.css-1v152rs:focus{outline:none;border-bottom:1px solid;border-bottom-color:transparent;border-radius:4px;box-shadow:0 0 0 1px;}.css-1v152rs:focus:not([data-focus-visible-added]){box-shadow:none;border-bottom:1px solid;border-radius:0;}.css-1v152rs:hover,.css-1v152rs:active{color:#164081;}.css-1v152rs:visited{color:#2557a7;}@media (prefers-reduced-motion: reduce){.css-1v152rs{-webkit-transition:none;transition:none;}}.css-1v152rs:focus:active:not([data-focus-visible-added]){box-shadow:none;border-bottom:1px solid;border-radius:0;}How to Write Job Descriptions (With Template, Examples, and FAQs).css-r5jz5s{width:1.5rem;height:1.5rem;color:inherit;display:-webkit-inline-box;display:-webkit-inline-flex;display:-ms-inline-flexbox;display:inline-flex;-webkit-flex:0 0 auto;-ms-flex:0 0 auto;flex:0 0 auto;height:1em;width:1em;margin:0 0 0.25rem 0.25rem;vertical-align:middle;}
2. Determine the average annual rate of a full-time employee in the position
Do some market research and identify how much someone in a similar position would make if they were a full-time employee. This is usually in the form of an annual salary, but some companies may also list this as an hourly or weekly range. This rate will vary depending on the industry and location.
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3. Compare this rate to the going rate of industry contractors
Continue your market research and identify the going rate of a contractor with the specific skills and experience you need. Find out what other companies are paying for similar services, which can help you establish how competitive your rates are when seeking contractors. Be sure to factor in the experience level you desire.
4. Calculate any additional costs you may incur
Most employers choose to work with contractors because it reduces their overhead costs. However, contractors can have some costs, including:
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Hiring costs
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Training materials
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Membership to an online database or platform
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Employees to manage contractors
Hiring costs
Hiring costs
Training materials
Training materials
Membership to an online database or platform
Membership to an online database or platform
Employees to manage contractors
Employees to manage contractors
Calculate how much it costs you to hire, train and manage a single contractor per year. It’s important to consider some ways you may be able to reduce some of these costs when you hire additional contractors. For example, you may be able to streamline a training program or utilize the same project managers across multiple contractors.
5. Decide on a payment method
Because contractors differ from regular employees, you may decide on a different payment method. Most states require that you pay a contractor as a 1099 worker rather than as a W-2 employee. However, you may have some flexibility when it comes to the payment type, such as paying your contractors per hour or per assignment. Each business has different needs, so it is important to consider what methods work best for your company.
6. Make adjustments as needed
Over time, you may find that your rates are not attracting the level of experience that you need. You might also find that you are paying too much and it is significantly cutting into profits. After a couple of months, it can be helpful to evaluate your contractor team, their quality of work and how much it is costing the company. You may decide to adjust rates for new hires.
Calculating contractor rate
There are two formulas you may use for calculating a contractor rate. The first involves determining the rate to pay contractors by the hour. Here’s the formula to use to calculate a contractor hourly rate:
Annual salary of a full time employee with similar job duties / (40 hours per week x 52 weeks) = contractor hourly rate
You may choose to pay your contractors per project. Use this formula to calculate a per project rate for a contractor:
Value of assignment – desired revenue = contractor per project rate
Example of calculating contractor rate
Use the following example to assist you in calculating a contractor rate:
Dina’s Data wants to outsource an IT project for one of its clients. They have set a budget of $4,000 for the project. They want to evaluate how much it will cost to hire a contractor to complete the project. They also want to evaluate if they should pay a contractor an hourly rate or a flat rate for the project.
Here’s how they calculate the two different rates:
Calculating contractor rate by the hour
The project manager determines the average salary in their area for an IT professional with similar responsibilities need for the project is $50,755 per year. The project manager begins their calculations by multiplying 40 by 52 for 2,080. They complete the equation by dividing 50,755 by 2,080 for a result of 24.40. This indicates a fair hourly rate for the contractor is $24.40 per hour.
Calculating contractor rate by the project
The project manager determines Dina’s Data will receive $4,000 from the client to complete the project, and they want to earn a minimum of 80% of revenue. They determine 80% of $4,000 is $3,200 by multiplying 4,000 by 0.8. To determine the contractor’s pay rate, they subtract 3,200 from 4,000 for a difference of 800. This means the company can afford to pay the contractor a rate of $800 for the project.