I'm having a minor disagreement with a co-founder of a startup.
At our day jobs at software companies, he's a full-time employee and makes $40 an hour. I'm an intern at a different company and make $20 an hour. As far as coding skills and time needed to finish a given task go, I'd say we are pretty much even.
We are about to take on a project for another company, and they're asking for a price quote. To provide this, we're taking our estimated number of hours to complete the project, and multiplying it by our hourly worth to come up with a ballpark figure.
The disagreement comes from what our hourly worth is. According to my friend, we are worth "whatever people are willing to pay us" (at our day jobs). To me, this sounds ludicrous. We both have the same skills and are contributing equally here, so our time should be worth the same.
Which of these approaches sounds more reasonable?
The value of your services to your current respective employers is not related to the value of the service that you will provide to your new ventures customer. I do not believe that it is a good place to start.
There are several models for determining pricing. One of those is the prevailing or market hourly rate times the estimated number of hours it will take people to do the job.
Another is that actual costs -- full cost (see @Robin Vessey's posting). Your respective rates should be determined by your own agreement of the respective value each of you are bringing to the project.
Another is the value that the customer has for the delivered outcome. How much is it worth to them to have this completed?
If you are getting stuck on his perspective that his time is worth twice yours -- then you have a deeper problem than figuring out how to price this current bid. Ask him honestly if he believe that the value he will bring to the project is twice yours. Forget payment -- forget who is paying what -- is it?
Because in his model of the market value of your respective time, your NEW marketable rate will be determined by the first customer who chooses to engage your firm for the amount that you put in an agreed upon proposal. And will be worth that only as long as other customers will pay it.
He is right that value is relative -- and because of that -- it is not a determinate. Together you need to find agrement that you will determine your respective value in delivery of a project based on the actual value you bring to the delivery of that project.
No it should be more, employees have a lot of oncosts and taxes, insurance etc that is paid for by the employer.
Rule of thumb for contractors is take your total yearly income
Eg $100,000 per year including taxes .... Divide by 2 and take off the 1000 thus: $50 per hour, 8 hours a day for the 42 weeks per year would come out.
You're both contributing the same amount and you feel you have the same skill set so in your consulting venture you're worth the same amount. How much you make at your day job is irrelevant.
For example, you both buy the exact same car with the same features from two different dealerships at the same time but you pay different amounts for them. Who's car is worth more? How much you paid for it has little to do with the value to a prospective buyer. Similarly what you get paid in your day job means nothing to a potential seperate client.
You get paid what the market will bear. You just have to make sure that you are priced at a point that will accurately cover costs. Also keep in mind costs are more than just how much you want to pay yourself per hour. There's overhead that can add up real quick.