(contractor pricing – 3 minute read)
You are self employed. From a tax point of view, you own a business. But you’re a business of one. You are an independent contractor!
A contractor is an individual that does work on a contractual basis (as the name suggests). This is different from an employee who receives a fixed salary on a regular basis. A contractor gets paid when the work gets done. An employee gets paid for an ongoing stream of work.
Contracting work is becoming increasingly popular with the rise of the gig economy. Many individuals are turning to side-hustling as contractors to supplement their full-time income.
I’ve had lots of questions from clients about becoming a contractor and I’ve answered most of them in this article:
Click here to read our Super Awesome Self Employment Guide
But this guide will take a look at how to price your services as a contractor. We’ll take a look at three different models for pricing, starting with:
Contractor pricing – hours based
An hours based approach is the closest a contractor can get to working an ’employed’ salary.
The concept is simple – you work X amount of hours, you get paid $X for each hour. This is a very common pricing approach. Lots of larger employers will typically hire contractors on this basis.
Builders, dentists, doctors and even babysitters can be hired on an hourly basis. The hourly basis is simple to understand and easy to calculate.
Advantages of the hours based model
Everyone understands the hours based model for contractor pricing. Capitalism has taught us that everyone’s time is worth something. This is why all employment contracts have set working hours and an hourly charge rate (even if that doesn’t actually match up with the hours you are working).
It is an easy to communicate form of pricing. But it’s not the most elegant solution.
Drawbacks of the hours based model
Well, for one you’re trading time for money. If you can’t turn up for work, you don’t get paid. Also, the hours based model sort of incentivises you to take your sweet time with completing a job. I mean, if you’re getting paid by the hour, why do a job quickly and efficiently if it means you get paid less, right?
The hours based model is also difficult to scale if you’re planning on expanding your business. You only have a limited number of hours a day, so there is a hard limit to how much you can extend yourself to make more money.
Contractor pricing – projects/deliverables based
A projects based contractor pricing approach means that you get paid per project. For example, your client hires you to develop a financial model for their new investment. Instead of working out the hours required to do the project, you charge them for the deliverable at the end of the project. In this case, that deliverable is the financial model. You charge a fee of $1,000 for the deliverable.
Working out the pricing for deliverables is trickier than the hours based approach. You still need to consider:
- What your personal hourly rate is
- How many hours would you normally take to finish the project
- The cost of developing/completing the project (includes the price of hiring other contractors to help you)
So you are still thinking in terms of hours, but you’re trying to make sure you get your time’s worth with a flat rate quoted to your client.
Advantages of the projects based model
Well, for one it incentivises efficiency. If you can complete the project to satisfaction quickly, you are getting more value out of your time. This also encourages you to think about scaling your business. You can even hire junior contractors to work for you to complete the project.
For your client, it also means that they won’t be hit with surprise charges from extra hours worked on the project. A fixed cost approach means that they can budget their resources better.
Drawbacks of the projects based model
The flipside is that if the project takes longer than expected, you are losing value out of the project. Unexpected hurdles in project development can mean that you may be spending more time on the project. This is especially true if you have junior contractors working for you on an hourly rate. With a fixed price agreed upon, it is often difficult to add extra cost to the project.
In an hours based model, if you work more hours, you get paid more. In a projects based model, you are expected to finish the project within the time allocated. If you go over that time, it is hard to demand extra payment. Clients who agree to a projects based approach expect certainty in their spending and will not take kindly to any cost overruns.
Contractor pricing – subscription based model
A subscription model contractor pricing approach is a relatively new innovation (compared to the previous two). This is when your client pays you for your services with a fixed recurring fee. Typically, this fee is paid every month. The simplest example I can think of is our business model at SH Advisory. We charge our accounting clients a fixed fee each month and in return we provide them with quality accounting, tax and financial advisory services.
Technology in process automation have made the subscription model more profitable. Virtual assistants, Lawyers and even some GP clinics are using the subscription model to generate steady streams of revenue.
Advantages of the subscription based model
It creates a steady, predictable stream of income for you. It also clearly communicates to your clients the value that they receive from subscribing to your services. For example:
Cookie, a Virtual Assistant (VA) charges their clients $50 a month for VA services that include:
- Invoicing and debt collection
- Basic bookkeeping work
For an extra $30 a month, they will provide the services plus package that includes the above AND:
- Customer database management
- Paying business bills on time
The subscription model also forces you as the contractor to develop even more efficient systems and adopt technology to deliver value to your clients. More importantly, the subscription model can be scaled easily once you’ve got a system in place. Having a subscription model means that you will still get paid even on days when you’re not actively working so long as you have met client expectations.
Drawbacks of the subscription based model
A subcription model is only profitable once you’ve built up a decent sized client base. At the beginning, you will get paid far, far less for your time than you would working the same job with a bigger company. Also, you will need to design automated systems that can reduce the time you physically spend on delivering service to your clients.
In a subscription based model, you will also find that some of your clients will demand more of your time than others, even though they are paying the same amount of fees. For example:
Tybo runs a GP clinic on a subscription model. For $25 a week, his patients get:
- Up to 20 minutes of consultation/advice per week
- Quarterly health check ups
- Discounted pharmaceuticals
On average most clients only see him once a month. Most clients forget about the quarterly health check ups and only see him once a year. However, he has one client, Mr. Hypo-Kondria who sees him EVERY WEEK and sometimes takes up to 45 minutes each meet up. He also frequently emails and calls Tybo about every little issue he has. Naturally, Mr. Hypo-Kondria always turns up for his Quarterly checkups.
In some ways, your more profitable clients (who demand less of your time) will be subsidising your less profitable clients (who demand more of your time) because everyone gets charged the same fee.
Contractor pricing – what’s best for you?
The hours based model will often be the easiest pricing structure to get into and will allow you to get paid what you’re worth. But nothing more than that.
The projects based model encourages efficiency, but you can end up losing value if the project goes overtime.
The subscription based model demands a lot of investment in systems development but it is more scalable than the other two models.
It really depends on what you are comfortable working with and how much you plan to scale in the future. To start off with, an hours based approach may work for you. You can charge per project if you are working on specific deliverables. If you’re not afraid to make the initial time and energy investment in setting up a subscription model, that may be the best option for you in the long run.
Have a think about what suits you best and if you need any free advice, feel free to get in touch with our team at www.shadvisory.co.nz!
Stay positive!