How rates work and what’s a good rate

Hourly or daily rates are often the most debated element of a contractor’s contract. How are rates calculated? What’s the market rate for the role you are pursuing? Do different industries pay different rates for the same skills and experience?

There are so many elements involved in calculating a rate, how do you know what’s a good rate and what’s not? You need to have a basic understanding of how rates work to enable you to get the most out for your relationship with your agency.

How are rates calculated?

There are many factors that influence the rate calculated for a particular role.

  • The market rate – it’s often used as the baseline when calculating the rate for a new role.
  • The role specifics – how important the role is to the company, how senior the position is.
  • Role profile – level of experience required, skill set, knowledge and relative scarcity.
  • Location – central London positions will offer more than the average due to the cost of living.
  • Industry – certain industries are known to offer higher rates of pay than others; financial services companies pay considerably more than publishing companies.

N.B. If you work via an umbrella, you need to factor in the employer NI contributions in addition to other factors as this will effectively be deducted from your rate before you are paid.

These factors relate to both permanent salaries and contractor rates. Contractor rates often fluctuate based on supply and demand but the average market rate tends to remain the same.

If you are sourcing your contract through an agency, the negotiation of the rate is handled by the recruitment consultant. The employer has a ceiling rate and the contractor a floor; the recruitment consultant negotiates in between to agree the rate. The rate the client is charged is not the same as the rate the consultant is paid. The agency takes a cut of between 10 and 20%, but some agencies can take even more. Whilst it is not compulsory for the agency to tell you their rates, you can ask and they may divulge this information to you. It’s important to understand that agencies need to make a profit, they need to cover their costs and anything less than 10% would not be worthwhile.

Daily vs hourly rates

Daily rates tend to be offered for fairly standardised roles, particularly interim roles. They are also common for the higher rates (more than £40 per hour) and for roles that require fluctuating hours. This can offer the client consistency for billing and the contractor usually recoups any extra hours worked over the period of the contract. Care should be taken when entering into daily rate contracts to ensure your working hours are capped at a reasonable level.

Hourly rates are more manageable as they offer complete transparency for the client and flexibility for the contractor. Clients will often cap the amount of hours a contractor can log each week.

What is the market rate that applies to you?

Market rates are a good indicator of what you can expect from standard roles but what if you are a specialist filling a niche requirement? Market rates have their place in understanding your worth; they are a guide and a benchmark that you can pitch yourself against, but it is important to understand how you stack up against your peers in terms of experience, skills, niche knowledge and marketability.

You can find market rates through professional bodies as well as specialist publications for the industry you work in. You can also verify your assumptions through researching rates included in contract advertisements on the main and specialist job sites.

Do different industries pay different rates?

Rates do differ from industry to industry, with the top payers being financial services, oil & gas, IT and software development. All are established industries and utilise highly skilled contractors to bring in specialist expertise. The industries paying the least are education, healthcare, publishing and hospitality. The larger and more complex the industry, the more they will pay to bring in expertise.

What is a good rate?

As a contractor, you are in control of setting your hourly or daily rate. Discerning the best rate needs careful consideration as you need to ensure that it is in line with comparable contractors. Set your rate too high you are in danger of pricing yourself out of the market; too low and your value may be queried.

Your rate needs to cover your income, benefits you’d usually attract from being a permanent employee, downtime such as holidays and gaps between contracts, plus the deductions for tax and NI. Most contractors base their calculations on working 46 weeks per year.

Test your rate and be flexible

Once you’ve calculated your basic rate, test it. In your discussions with your chosen agencies, they will ask you what rate you are looking to achieve for particular roles. This is the time to test your rate. If there’s no resistance to the rate you provide, then you can increase the rate in discussions with subsequent agencies, negotiating a rate down is always easier than negotiating an increase.

Remember that contracting offers flexibility and if you aren’t comfortable with the rate you achieve for a particular contract, you can address this in your next contract or in negotiations for the extension if there is one. This is another reason to ensure you have a roster of agencies you are in regular contact with as this gives greater flexibility to alter your rates through increased opportunities being available to you.

If you are new to contracting, it is best to take short contracts initially to gauge what you are worth. That way you can adjust your rate regularly until you are comfortable with the level you are achieving.

Short contracts also allow you to hone your contract knowledge and if you find out that the conditions you’re expected to work under aren’t beneficial, you’ll have less time locked into them. You need to have a good understanding of how contracts for services work to ensure that you get the best deal and you’re not unwittingly locked into anything you don’t agree with. We explain all the main areas of a contract in Signing a contract, so that you understand what to look out for in the small print when signing up with your agency and signing on the dotted line for each contract term.