Contract Rate: Everything You Need to Know
The contract rate will be calculated by the contractor based on the terms of the contract and the work to be performed. In the case of a contractor, this could include the cost of materials, equipment, fuel, labor, fees, and other expenses. 3 min read
2. Taxes and Fees
3. Time Off
4. Business Expenses - Marketing
5. Other Types of Contract Rates
The contract rate will be calculated by the contractor based on the terms of the contract and the work to be performed. In the case of a contractor, this could include the cost of materials, equipment, fuel, labor, fees, and other expenses.
Determining the Rate a Contractor Should Charge
How much an independent contractor should charge for a fair day's work is a legitimate question. One thing to keep in mind in determining a contract rate is all the factors that must be considered. Calculating the contract rates for a project is important whether the rate is calculated as a lump sum price or per unit. Things to consider include:
Taxes and Fees
- There will be more taxes to pay as FICA tax is your responsibility.
- A contractor must pay the employer's share of Social Security.
- There are additional taxes and fees such as state and local business tax, business property and inventory tax, and fees for business licenses.
- It will be necessary to buy your own benefits such as health and dental insurance, life insurance, disability insurance, retirement savings, and professional/business liability insurance.
As nice as it is to work as an independent contractor, there must be time off to avoid burning out. Factor in vacation time, which will reduce billable hours.
Other situations that may require time off include holidays, sick days, personal days, and medical leave.
Business Expenses - Equipment and Accessories
Regardless of the type of business a contractor operates, there will be a need for office startup expenses. Most expenses incurred by the business are deductible, but they will take a toll on the profits. It is best to estimate any expenses that will be deducted from your hourly rate.
- Computer hardware.
- Computer software.
- Office equipment such as a printer/fax/copier and office furniture.
- Business stationery, business cards, and marketing materials.
- Programming and design for a business website.
- Initial inventory, if applicable.
Business Expenses - Marketing
- Marketing and advertising.
- Vehicle and other related business travel expenses.
- Business entertainment.
- Telecommunications services.
- Professional services such as an accountant and a lawyer.
- Subscriptions to professional magazines, memberships, and work-related books.
- Payments to debt incurred by the business.
Once an estimate of all applicable expenses is in place, consult with a financial planner or accountant who can calculate the numbers to determine a reasonable hourly contract rate based on the billable hours.
Compare the estimated rate with the current market rate, then decide your hourly rate based on what the market can tolerate. It is better to charge too much than charge too little.
Other considerations when determining a contract rate in the construction industry, for example, include the bill of quantities. This document is used to itemize parts, materials, and labor and provide, in detail, the activities to be performed by the contractor as stipulated in the contract.
Estimated quantities provide the estimates of the materials listed along with a rate quote for each material per unit and the entire estimated quantity. The end result is the rates, as a total, represent the activities to be performed by the contractor and represent the contract price.
A deviation is a provision that should the estimated quantities deviate it will result in either an increase or a decrease of the contract price.
Other Types of Contract Rates
For a business that offers carrier services for an extended period, a contract rate is a low freight rate offered to customers agreeing to a commitment for large volume shipments.
A contract rate, which is also known as the stated rate, nominal rate, or coupon rate is the interest percentage listed on a bond or a note. The listed rate is what is used to calculate the amount paid on the principal balance throughout the duration of the bond or note.
A lump sum contract is considered a "fixed fee contract" with a single lump sum agreed to before a project begins.
Unit rate contracts are based on estimated quantities of material and their unit price.
There is also the possibility of combining a unit rate contract for one or more parts of the contract with a lump sum contract or other types of contracts.
If you need help with a contract rate, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.