Everyone loves getting paid — especially contractors who can quickly run into cash flow issues. If you run your own independent contractor business, though, one thing you’ve likely wondered is how to set your pricing.
How do you know if you’re charging too much or too little?
How do you stay competitive in your market?
And how do you adjust your pricing over time?
This is one of the most important aspects of contractor business training, and we’re here to help you figure it out.
5 Steps to Price Your Work as a Contractor
As a contracting business, you have a lot of competition.
Stay competitive and keep your head above water with these five smart pricing tips.
Step 1: Start by Determining Your Ideal Salary
How much do you want to make each year? $50k? $100k? Once you know how much you want to get paid, you can work from there. While there’s no limit to what salary you can set for yourself, you do want to make sure it’s reasonable and reflective of your experience. If you price yourself too high from the get-go, you’ll make it challenging to participate in the market.
Step 2: Understand Your Overheads
Next, it’s time to understand how much it costs to run your business. You have to calculate your overhead. In this case, your overhead includes all of your outgoing bills, and how much they add up to annually. Count things like:
• Marketing
• Office rent
• Website costs
• Equipment and tools
• Business insurance costs
• Stationary and office expenses
• Third-party software, services, subscriptions, and reference materials
• And anything else you pay to keep your company going
If you’re just getting started, you might not have a reliable number for many of these expenses, and that’s okay. It’s fine to estimate, but you might want to lean on the high side to ensure you’re not short-selling your final number.
Step 3: Determine Your Profit Margin
This is where many contractors go wrong. They set their prices without considering a profit margin, and they end up not making money as a result. As a general rule, profit is a percentage of the total costs for each job. While there’s no standard profit percentage, most contractors choose to take 10%-20% on top of their salary.
Step 4: Understand Your Schedule
Now, it’s time to think about how you want your daily life to look. How many days will you be working each year? How many hours on each of those days would you like to work? As you plan your schedule, make sure you’re leaving time for unplanned breaks in work, like contracts that end unexpectedly and dry periods during the year.
As a general rule, you’ll want to give yourself about 20-30 days of vacation time each year. That will help you set the rest of your schedule and working hours. For example, if you decide to take 20 days of vacation annually, you’ll work 48 weeks out of the year. This is 240 working days, or 1,920 billable hours.
Step 5: Calculate Your Hourly Rate
Finally, it’s time to set your pricing! As you do this, you’ll pull together all the information you’ve gathered so far in this exercise. Here’s an example:
• You want to make $70K annually, and you have $30K in annual overheads. Add these two numbers to get $100K.
• Multiply this by your profit margin.
• Divide the total by your annual billable hours. This will determine your hourly rate.
And there you are! This is a great place to start when it comes to properly setting your prices.
Set Prices That Reflect Your Value
When it comes to setting prices, most contractors do one of two things. Either they call everybody else in town and find out what they’re charging, or they charge whatever their previous employer was charging.
The problem with both of these approaches is that they’re not personalized, and they don’t reflect what it costs to run your company. This is why you need to understand your pricing. You need to charge what it costs you to cover your cost of operation and generate a reasonable profit.
Make Your Contracting Business More Profitable
While these five tips are a great place to get started, our contractor business training can help you complete the circle and establish a pricing structure that helps your company grow for years to come. We’ve helped thousands of contractors learn how to run a profitable contracting business, and we can help you, too. To get started, contact us today!
