The Business Side of Technology Contractors I

Posted by on Feb 12, 2011 in Career | One Comment

I like Contractors and many times I’ve loved being a contractor, but there are a few small things I’ve learned along the way that outline the Hustle of it all.

As a Contractor you’re an at will employee and the first on the chopping block should a company feel any financial strain.  For that reason, most contractors I know charge a high rate to cover for the lean times should they not have a job in place to quickly fail over to.  Fail over jobs could be an entire post, but the short and long of it is that while you’re working for one customer, you have to at least remain friendly if unavailable to the next set of customers and be prepared to do small weekend projects if they come up, to keep a modicum of good will.  You need to clear these side projects with your current employer, before you take the jobs.  I know this sounds rough, but the typical arrangement is, “Hey boss, you know I’m a contractor, I need to slide some work in next week for an old client.  It will be strictly weekend and night stuff,” and move on.  They can say no, but they have to weigh that against the eventual end of your projects and what they’d feel like if they couldn’t get a hold of you to finish a few things for them.  If they start out with a “No” it’s usually okay to mention the complexities of the contracting world, and move on.

This leads me to how much to charge.  At various times in the tech industry, there have been soft and there have been lucrative times in the technology market.  Competition has appeared from global sources. In the United States, where I live, there’s an old formula for figuring out an hourly rate.

For W-2 Employment the equation is, how much do you want to make a year, divided by 2000, and you get your hourly rate.

Want to make 200,000 a year?  100 dollars an hour will get you there.

Want to make 30,000 a year?  15 bucks an hour will make it work.

For 1099 Contractors the formula is a bit more complicated.  A simple conversion done by many is 16% greater than the W-2 rate.  This covers the 10% self-employment taxes and the 6% that the typical W-2 job pays for pitiful benefits.

Want to make 120,000 a year? divide by 2K, get 60 bucks an hour, multiply by 1.16 and you need to be charging 69.60 an hour to get close.  If you’re under 35, your garbage health insurance policy is 500 a month, not including family members, you’re paying 250 a month in disability and term life insurance(never to be discounted), and trying to squirrel some of this money away for the eventual lay off and/or transfer times.  Many Contractors find agencies, leagues or other groups to help provide insurance benefits.  While some folks can get group policies through their churches or civil work groups, I’m fond of Fractured Atlas a group I joined to support and promote some of my non-developer activities.  While I work to live in the technology sector, I do have those novels and screenplays in a drawer that I keep picking up, have a movie under my belt, and love my Bonsai.  Technology folks tend to have interesting hobbies and many of those hobbies have support groups or guilds that also provide access to decent insurance and benefits to help alleviate the costs.  As a larger note, contractors often should have a Liability policy, if they’re not being represented by a contracting firm.  The liability policy is not a sign that you’re weak and are going to mess up so badly they’re going to need to soak your insurance company for 2 million dollars to cover the hole.  It’s a sign to your employer that you mean business, and should you fail or flounder, you’re willing to pay for your mistakes and make things right, one way or another.

There’s hope though in the above configuration of benefits versus hourly rate.  Life and employers like round numbers when possible.  In negotiations, it’s best to chose numbers divisible by 10 and 25 for rates.  If 69.60 comes up in calculations, it’s usually okay to ask for 70 or even 75.  While it does not fully compensate for the level of quality collective bargaining provides, it does provide more money to even out the road.  That said, what’s better than 75 is 100.  Making 200,000 a year and spending like you’re making 120,000 a year is a great way to save money for lean times and grow your business.  Competition, however, will typically drive those numbers down.

The rate card, does not cover all instances, however.  Sometimes you need to charge for a piece of work, the installation of servers, migration to the  cloud, a redundant MySQL cluster, Data architecture modifications to prepare for a migration to or from PostGres to Oracle.  These are troubling bits based upon what the market will bear.  I like hourly rates, but if I’m leaving my programming comfort zone, and providing a framework of Java or PHP for someone to start their new company with, I like to shape the work and the money around what’s going on.  This part of bidding is more art than science, sometimes coming in at a little less or a little more than what the hourly costs would be.  A typical Spring framework, with spring security, a few portals and an adaptation for Jackrabbit, can run several thousand dollars, plus modification costs.  I might sell only one of these between Java Versions, so the work moving through and making the product both useful, feature rich and profitable depends on whether or not I had a specific customer paying for the initial development, or if I did the whole thing to keep my skills sharp.  In contrast, I’ve played with Grails several times now, but never managed to sell it even once.  I can’t go and charge the first guy on the block for 2 years playing with Grails, now can I?  I might make a bargain rate, hoping for more work and better days.

Well, I’ll probably add a few installments to this particular post.  Contracting is a rough, but rewarding business that has good times and rough times in it.  I know folks who will never settle down and those who have left the field in such disgust that they’ll never work for themselves again.  The back end is rife with accounting, bookkeeping, estimations and overall a drive to do good work and make it all fit together.

1 Comment

  1. Contracting 101 or that letter I’ve been meaning to send, part 1. @ The Developer formerly known as Jason Starin

    […] I’ve already told you how to break out the payments, and you may have read this on  , but it’s also important to figure out how much of the income coming in is yours to budget […]

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