Service Industry Day Rates Explained

First Things First

If you are an employee it's easy to get confused about consultant or freelance rates. The thing to remember is freelancers can only charge for the time they are actively working for a client. However, they are not necessarily active for a client for 40 hours a week, 52 weeks of the year. Therefore their rates have to take into account all the time they are not billing a client and their running costs. It's all explained below.

Why Have Freelancers and Consultants?

Freelancers play a vital role in the economy. Without freelancers companies would have to hire and train all their own staff. Can you imagine hiring a member of staff to carry out a specific specialised task that only needs doing once or twice a year? 

How Day Rates Work 

Companies providing services in many industries such as web design, SEO, engineering etc base their charges on day rates. These can be the source of confusion or contention for the companies who need to hire firms using day rates as the headline rate can seem high.

Often, when evaluating rates, people will take the headline day rate, multiply it by 261 (the number of weekdays in a year) and assume they are being ripped off. For example, a day rate of £325.00 is made to look like a salary of - 261 x £325 = £85k! Nice money if you can get it.

In fact this is a nonsense. In simple terms day rates are calculated thus.

Number of weekdays in a year = 261

Less - 25 Holidays
Less - 8  Bank Holidays
Less - 5 days allowance for being ill
Less - 24 days of non billable time
Less - 10 days for marketing and business development

Total - 72 days 

Total billable working days in a year = 261 - 72 = 189 Days

Now the per person costs for running the business

£500 - advertising
£500 - Hardware and Software
£1000 - Servers etc
£100 - Affiliation costs (professional bodies etc)
£2000 - Client visits etc
£150 - Insurances etc
£500 - Accountancy fees etc
£2000 - Phone/Office etc

Total = £6750.00

This equates to a daily overhead of £35.71 (overhead divided by billable days)

Now the required salary including Employers NIC etc

 A well qualified and experienced consultant salary = £40k (£44475.52 with NIC etc)

This gives a day rate of £235.32 (salary divided by billable days)

Next comes profit and 20% is an accepted level of profit = £54.21 

Now add it all up - £35.71 + £235.32 + £54.21 = £325.24

So the day rate of £325 gives the consultant a salary of £40k and the company a profit of £10k, not what you might call earth shattering and  this assumes the company don't get thrown a curve ball.

One other thing. The next time you see web services or SEO services that cost £90 a month, ask yourself this question. How much time and effort am I getting for my money? Based on the above, less than two hours.