Freelance or contract developers set their rates across a vast range. How do you know what a reasonable rate is and make sure you aren’t overpaying?
If you’ve never hired a contractor before or feel like you might be overpaying for a project, we can help.
Understand What a Contractor’s Rate Covers
You can’t directly convert a salaried rate to an hourly rate and think that it’s comparable. That conversion doesn’t take into account the following expenses the contractor pays:
- Self-employment tax
- Insurance premiums
- Operating expenses
- Equipment
- Perceived risk of short-term employment
For a W-2 employee, the employer would pay most, if not all of these expenses in addition to a salary. When you hire a contractor, you should expect to pay an hourly rate that takes into account the above variables.
Understand the Project Terms
The terms and parameters of the project also impact contract rate. Consider the following elements of your contract:
- Is it short-term (less than 6 months) or long-term (6-12 months)?
- Is it full-time or part-time?
- What specialized skills are required?
- What level of expertise is being sought?
Short-term or part-time projects generally bill higher per hour than long-term or full-time projects. Likewise, rates may be higher for specialized skills such as computer vision or artificial intelligence. While not always true, rates for data scientists will on average be slightly higher than software engineers, while rates for PMs, QA engineers, or designers tend to be slightly lower than software engineers.
Rates for contractors with more experience will be higher than contractors with less expertise. Less is not always better; the higher rate may end up costing you less in the long run because the contractor is more efficient and works faster.
Keep these elements in mind when designing your project terms and determining your budget.
Convert an Hourly Rate into a Salary
A high dollar amount might seem intimidating, but looking at it as a salary can help you compare the benefits of hiring a contractor to hiring a full-time employee. Bear in mind that annualizing a contractor rate will almost always be more than an annual salary.
Salary Calculator
We’ve built a really simple salary calculator to help you compare the annual cost to your business of hiring a contractor to the annual cost of hiring a full-time employee. The downloadable Excel Sheet has a prefilled example, but you can fill in the contractor hourly rate with your own numbers.
The calculator assumes you’ve hired the contractor through a service that retains a 20% margin on the hourly billable. It automatically adjusts the self-employment taxes and risk ratio, then subtracts the expenses your contractor is paying out of pocket that you as the employer would normally be responsible for.
What you’re left with is a comparable annual salary estimate for a full-time W-2 employee.
Negotiating a Rate
You are likely operating within budget constraints. If you feel a contractor’s rate is too high, understand that most contractors have an acceptable range and may be flexible.
The main takeaway is that you’ll have to adjust your mindset when hiring contractors—the amount you budget for payroll will be more than if you hired a W-2 employee, but your overall operating costs should be comparable.
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