How do I calculate how much my hour is worth?


6

I run a software development company (mostly potential so far, not amazing amounts of income). I am often in doubt of how much I should spend in order to save one of my own working hours. I know that I could look at cash flow, but what I am really after is to make a decision on whether it is profitable for me to outsource one hour of my own work and pay 100$ for this. Please make a specific example on how you would calculate this.

Management

asked Apr 1 '11 at 19:25
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David
1,567 points
  • Sorry, I mistakenly voted to close, but there doesn't seem to be a way for me to cancel that. In addition to Matt's answer, you might want to see this about hourly rate, and then outsource work which is substantially cheaper outsourced than what you bill per hour. http://www.brightjourney.com/q/much-charge-jobJesper Mortensen 8 years ago
  • Don't forget to **add** your own project management **and** administrative time at your own billable rate to the cost of the outsourced work. – Joseph Barisonzi 8 years ago

3 Answers


4

In a startup situation where the income is not particularly healthy yet, I used to look at it this way (although whether we actually outsourced depended on whether the budget would cope with it at the beginning)

Is it a task that is either
a) Menial or junior level
b) Totally outside our domain and likely to be a one off

The rationale being we could get on with something much more productive in the meantime.

This is an interesting take on why your headline rate may not be as you think (essentially stepping you through productive time, tax overhead and the like):

http://blog.asmartbear.com/consulting-company-accounting.html

answered Apr 1 '11 at 19:36
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Matt
2,552 points

4

This may or not be exactly what you requested. But it is a model to think about. But first:

Your time is worth what someone will pay for it. That's it. It's called capitalism. Or reality. But the bottom line is that your time is worth what someone else values it to be. What they value it to be will be based on numerous variable including but not limited to their pain, the pleasure you provide, and how much money they have to spend.

Now, back to our regular programming:

  1. How much do you want to be your take home pay on an annual basis. (Say $50K)
  2. What are the annual cost of your overhead? (taxes, rent, insurance, blah, blah, blah) (Say $25K)
  3. Combine 1 and 2 -- that is what you need your total income to be (say $75K)
  4. What percentage of the time can you actually bill clients? (say 70%)
  5. Multiple 2050 (total workable hours) by the number in 4 (say 1435)
  6. Divide the total from #3 by the total from #5 (say $52/hour)

Now, remember that is assuming your taxes, payroll deductions, marketing, accounting, advertising, memberships, rent, phone, internet, car, food tabs, insurance . . . are all kept to the number in #2)

And remember that this assumes that you can bill 70% of your time. That is more than 5 hours a day. You can't bill time selling, networking, blogging, reading, researching, answering questions on here.

And remember -- that in the end that number from #6 -- say $52 -- is irrelevant if the market in your area only pays $25/hour for the service you provide.

answered Apr 2 '11 at 04:10
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Joseph Barisonzi
12,141 points

1

If you can do something that makes you more money, then it is worth it. The simplest example would be someone doing landscaping. The owner of the business bids a job for $2000 and works it all by himself, keeping $1500. Now he has to let that carry him while he hunts for a new job to do. If instead he spent $500 on labor, reducing profit to $1000, but lands another contract that starts the day the first one is finished, he makes more, than if he had spent the time doing the work himself.

If you are wanting to grow a business, most of your time is probably more valuable in that vein than in doing the actual work. If you are wanting to feed yourself only, then Joseph's answer is what you want to follow.

One alternative to that is, can you find someone else to drum up the business while you do the work? A sales person can be paid based on sales, so the risk is minimal, and they might cost you less than hiring out the actual work. However in a knowledge field like software development, you might find that sames sales person costs you more jobs and is therefore more damaging to your reputation.

If you are good at getting business and designing how a project should unfold, then selling and designing belong to you, and coding to more junior individuals.

answered Apr 27 '11 at 00:31
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Mark0978
274 points

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