Jonathan Sedar

Personal website and new home of The Sampler blog

On contractor day rates

Posted at — 22 Oct 2019

An interesting conversation came up a few days ago on the Pandas Arms1:

as an independent contractor working in data science, what day-rate should you charge clients, and how should you compare this rate to an annual salary?

Now, before we go further, please note that I'm absolutely not qualified, regulated or approved to give any kind of financial advice to anyone about anything. The content of this post is pure personal opinion and rank speculation: please do your homework elsewhere. Don't listen to me(!)

I spent 2005-2009 as a software and decision sciences consultant in PA Consulting Group in London & NYC, and spent 2013-2019 selling and executing work in London & Dublin via my own consulting company Applied AI.

As such, I'm inclined to think of work in terms of projects, deliverables, deadlines, and day rates. I shared the following back-of-the-envelope calculations for day rates and utilisation on the Pandas Arms, and why not share here too: it might be interesting to someone.

TLDR: day rates sound high compared to salaried work, but there’s a lot of risk factors they need to cover (utilization carries the most variance). My rule of thumb is a 1/144 multiplier from annual pre-tax salary to roughly equivalent day rate.

How does an annual salary convert to a day-rate?

This is a pure day-rate calculation ignoring equity stakes, risk/reward, bulk sales discounts, IP licensing, profit-maximisation etc.2

First find the maximum window of opportunity

You sustainably have approx. 225 days per year available for chargable work:

365 days
- 104 (weekends)
- 8 (UK bank holidays)
- 25 (vacation)
- 3 (sick / discretionary)
= 225 days

… this is a nice round number.

Assume a sustainable utilization

Aim for an 80% utilisation:

Assume a simple tax structure and low costs of business

Hire an accountant, a bookkeeper, use modern software and pay your taxes. This post is for UK readers, I've no idea how it works in USA.

Assume approx 20% corp tax, assume minimal VAT offsetting benefits:

Assume dividend marginal tax rate roughly the same as salaried employment:

(Just give me a number!)

Using nice round numbers for example:

A 90k salary pretax earned over a full 225 days, becomes
 / 225 = 400            ('salaried' day rate)
 / (1 - 0.2) = 500      (adjust for corp tax (approximated))
 / (180/225) = 625      (adjust for utilisation)

Collapse those modifiers into
225 * 0.8 * 0.8 = 144

90000 / 144 = 625

… so take your desired annual salary, divide by 144 and there’s your approximately equivalent day rate ex VAT.

Naturally adjust that:

Perhaps food for thought.

  1. The Pandas Arms is a long-standing Slack related to PyData London and attracts a very knowledgeable and engaged group of mainly Londoners, mainly discussing Python-based data science

  2. This also ignores costs of business: the big consulting corps have a considerable cost-base, e.g. a 3:1 ratio of billable consultants to back-office staff, which goes some of the way to explain their fees

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