Negotiating Bill Rates as an Independent Contractor | DCR Workforce Blog

Negotiating Bill Rates as an Independent Contractor

NegotiationThe work we do is not something we take up to fill our time. For most of us, it helps to feed and clothe us but more than that, it fulfills our need for a purpose in life and desire for achievement. So, unemployment is abhorrent to the spirit of a human being. When I establish myself as an independent contractor, the onus of having enough work falls on me alone and my success is directly correlated to my ability to market myself at a price that meets my requirements and expectations.

Figuring out how much to charge for my consultancy services is, to say the least, not an easy task. I would require a strong understanding of market conditions to take stock of whether my services are in great demand and short supply or vice versa. To illustrate, if the prices have been brought down because most or all components of the service are being performed by machines or outsourced to cheaper locations, it makes sense to bring my prices down rather than fight the flow, as I would be left with no work. Of course, any good marketer will tell you that pricing a service is a balancing act between market driven and cost-based services.   A failure on my part to understand the larger picture– where everyone tries to sell high but buy low – would translate to financial hardships and disturb everyone whose lot is linked to mine.

For many services, social media has expanded the competition and turned many services into commodities.  Talent exchanges have routinely been used to find translators, graphic designers, and copy writers for pennies on the dollar.  They are now expanding to include “higher” skills in IT, R&D, Legal, F&A and other professional disciplines.  While many freelancers use these sites to find business opportunities, the challenge is to determine whether one can be competitive while covering required costs.

Being an independent contractor can be expensive.  As an independent contractor, I am solely responsible for paying federal and state employment taxes, paying for healthcare insurance, and carrying liability insurance.  When I work on a time and materials basis, I am only paid for hours worked.  I am not compensated for the hours spent marketing my skills.  Pension planning rests with me.  After factoring in all of these costs, the rate paid must justify the effort extended.

Here are some universal truths I have gathered along the way. A regular job provides the kind of safety and stability which independent employment can never offer. Even for skilled workers, there is an attraction in not having to manage their own affairs, find work for themselves, and undersell their services so that they can get the contract; even if the income is lower.

So, if you are considering a career as an independent contractor, you need to have a strategy in place to calibrate your bill rate in such a way as to keep the contracts coming in. I trust that some of the following tips on managing your bill rate may come in handy, to your endeavors:

  • Find a way to provide added value.  You will constantly be facing declining market rates if what you offer is something that is available on the market, of an equivalent quality. To maintain higher prices, offer something unique, which is not easily come by. If you ensure that you link your services to the value you bring to the client, you will find that you will never be questioned on the price. No painting in the world is valued at the cost of the paints and brushes used in its making; and corporate assignments also demand that unique attribute that differentiates a Picasso from a Dali!
  • Charging a single hourly rate could put you in a position where you face direct comparison (read, competition) with what is offered by other contractors (independent or corporate), online workers and offshore locations –which put you in a weak bargaining position.
  •  Proposing a strategic plan with different rates for the different aspects of the project may not only get the client to recognize the value of your services, but also your strategic agility and work-related expertise.
  •  Never bid for fixed rate projects unless you have a strong understanding of the project requirements, and are confident that you can meet the project deliverables in the time frame laid down.
  •  If you know that you will not find work unless you reduce your rates below your cost-based price, try offering one-time discounts, and wow the customer into seeing why you deserve higher rates. Segment the project into phases, where the first phase serves as a loss leader for subsequent phases.  Avoid falling into a rut and keeping the rates low, if you do not realize sufficient value in the additional custom coming in!
  •  If the customer expects you to be on stand-by and respond to every beck and call; making it difficult for you to spread your wings and expand to other locations, do not hesitate to charge a retainer which is fair recompense to you for the forfeited income.
  • When revising your rates upward, strike a balance between the value you are offering and market realities. Keep all the above points in mind and get the customer to recognize and accept why your rates need to be hiked.

It is better to go seek employment, if you find that what you are earning over a period is consistently not paying you enough to meet your expenses, overheads, payments to others employed by you and leave you with reasonable profit margin (which should at least be equal to what you would be earning if you had a paid job; if not more!) If any of you have perfected a different approach, please write in and share it with us!

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.