Some of the best advice I ever received for freelancing pointed out how few billable hours I really had available. Sam Mullen, a freelance open source developer, has a post on the frontpage of Hacker News with the same advice about billable hours. TL;DR: freelancers should plan to bill about 1,000 hours per-year, and should price their rates accordingly. More than that is “profit” and might mean you found enough solid, long-term clients to cut down on biz dev and marketing time.
Fortunately I came by the advice early in my career, and gave it some weight because of who it came from. That rule-of-thumb helped me survive the dot-bomb period and has proven itself true time & time again.
Here’s the story of how 1,000 hours/year carried enough weight to stick in my head…
My first year of freelancing was in Chicago during the original dot-com boom. Riding the train into the city every day, I attracted attention from a Sr McKinsey consultant when he noticed a stack of Palm and BlackBerry devices in my bag. At the time pagers were common, mobile phones were the size of bricks, and only early-adopters even had a single Palm or BlackBerry device … a stack of the devices meant I was either a lucky pickpocket or somehow involved in the tech/.com industry.
Thankfully the latter case was true, and I was working with the devices to build the first virtual football pool for the NFL (really, really the 1st: it was only remotely web-based: the Palms required a sync to update, and the “hot” BlackBerry device was just a multi-line pager with a keyboard). McKinsey is a rockstar management consulting company but didn't specialize in tech work at the time. The consultant, who I think was named Roger, had plenty of questions about the stack of devices I was working with. It was easy to see he was picking up info he might steer clients with later.
Roger talked with me on and off over the next few weeks, eventually asking about my freelancing and “how few” hours I might be billing. With the market for software engineers of any type booming and my mailbox full of recruiter messages I hadn’t thought about hours in terms of how few. But he asked me to do an off-the-cuff estimate of how much time I might spend checking email, writing proposals, and on vacation. I figured about 8-10 hours/week. At the time I was young, single and probably working 50-60 hours/week, so it didn’t seem like much.
But he felt like leading a horse to water and mentioned that I should base my rates on 1,000 billable hours/year. To back it up he shared some great info about how his practice at McKinsey priced their time: their associates and consultants were expected to be 80+% billable (out of a 40-hour week) while the support staff, accountants, and partners spent far more time on non-billable and biz dev work. In the end McKinsey breaks even when they average about 1,000 hours/year/employee. McKinsey happens to bill more hours/employee, but that really just means they're very profitable, not that breakeven is any different. The same 1,000 billable hours/year went for most of the services companies he had evaluated operations for. Over and over it takes 1,000 hours/employee/year for a company to breakeven. Below that isn't profitable or the company needs to pay employees below-market rates.
And, to back it up, an 80% billable expectation at many accounting and law firms also indicates break-evens around 1,000 billable hours/employee: Benefits typically cost 15-20% of a full-time employee's billables. Company overhead (partner’s biz dev time, office rents, lights, non-billable admin/IT staff, etc) typically costs another 15-20%. Those 15-20% ranges add up to roughly 1/3 of an employee's billable fees. Full-time employees are then expected to bill a minimum of 80% of their available time, or [ 80% * 40 hours/week * 47 work weeks, 2 weeks of vacation, 2 of holidays & 1 of sick time ] = 1,504 billable hours/year. Minus the 1/3 for overhead … and break even is 1,003 hours/year.
If you're a freelancer or small shop, run the numbers yourself. Solid, repeating clients may take your hours above 1,000/year, but can you live on or pay market salaries on less? If you wonder why your lawyer or accountant charges as much as they do per hour, keep this in mind too.
<edit reason=“a friend emailed and thinks there's more than one conclusion … he's right, there are several”>
- Plan a freelance work schedule and billing rate based on 1,000 hours/year
- If you're doing more than 1,000 hours/year, those might be good clients
- Spending too much time on billable hours (above 90%) might mean you're not spending enough time on business development and networking
- Know when to take some vacation, are you a lifestyle worker or do you enjoy late nights?