How to calculate an hourly rate.
Hi,
I've been watching job boards for Ruby related contracts lately and have noticed some low rates being offered with high expectations. It's happening frequently enough that I wanted to post my understanding of how to calculate an hourly rate. Setting reasonable standards of pay for the appropriate level of expertise is vital. There's a lot to say on the matter, so I've tried to be brief.
For some reason it's very easy for software developers to match their experience and knowledge to a full-time rate, but for contracting there is less awareness.
The difference between full-time employment and self employment.
Employers gain certain benefits from contractors. On a financial level, they have less commitment, which means they do not have to pay for sick, parental and annual leave, training, redundancy payouts (for redundancy see http://www.netlawman.com.au/info/retrenchment-and-redundancy-australia.php) or superannuation (at least 9% of base income). To hire someone on a full-time basis is a serious commitment for an employer, and if the relationship isn't successful they cannot simply end the agreement (see unfair dismissal laws - http://www.fairwork.gov.au/resources/fact-sheets/conditions-of-employment/Pages/termination-of-employment-fact-sheet.aspx).
So, employers can take project risks, using contractors, to build a profitable application, without the consequences of supporting long-term staff. If they (read large corporations especially here) had to commit to long-term employment responsibilities before their endeavours became profitable it would be prohibitive to start them. Good contractors are essential for ventures hoping to build a profitable application and it's a typical scenario that applications are initially built with contractors and then, when mature, transition to full-time internal staff.
Expertise.
In addition, there's expertise to consider. Contractors are often experts (or aspiring ones) in their domains. Full-time staff might specialise on a particular use of a technology and the business. Contractors are expected to specialise in the technology, and to bring new perspectives and expertise to inhouse practices. So, these sorts of contractors also enrich the development habits of their employer by showing them new ways to solve problems which their own employees haven't had time to research.
Remember, if these things don't happen, the agreement between the contractor and the employer can quickly end.
The basic rate.
The rough calculation is your expected annual income, at a full-time rate (including super, paid leave, etc.), divided by 1000. For e.g., for $75,000 pa (including a super payment, holiday pay, potential sick leave cover, etc.), the matching hourly rate is $75 (GST not included). This sort of package would like be advertised at somewhere like 62k with benefits attached, if converted to a full-time role.
If you pull out a calculator and multiply the number of working weeks in the year by the number of working hours (46 x 40) then times that by the hourly rate, you'll find that this adds up to 138k. This seems to be excessive of the targeted 75k income. But that's okay, for two reasons.
- The employer hasn't hired you for 46 weeks in the year.
- If you are able to bounce between short-term contracts continually, then that's a good thing, but the employer's agreement with you doesn't guarantee this and it can't be used as a justification to lower the rate. The reality is, in the contracting scene, there are sometimes gaps in employment for upskilling (open source coding, etc.), rest, or securing the next role.
This rate leaves to one side the notion of expertise. If you're an exceptional candidate, for whatever reason, or if the technology you specialise in has a rarer skillet, or is in high demand, then these rates can adjust to such things. The reality is that Ruby and the frameworks around it are an in demand skillset, so if anything the rates should go higher.
So, beware of contractual roles which are, in reality, heavily benefitting a company or (more than likely, a middle man agent), and offering incommensurate rates for skillsets. Support the employers that do offer fair rates by doing good work.