Day Rate vs. Hourly Rate – Considerations For Contractors

private sector
Public Sector vs. Private Sector – Breakdown For Contractors
20 May 2021
day rate vs hourly

Deciding between a day rate vs. hourly rate should be a high priority for any contractor. They will, of course, determine when you receive your pay. Influence how a prospective client will perceive your costs, and recruitment agencies often require this information before you sign up. Understanding the differences between the two rates and selecting the best option for you is a crucial part of your success as a contractor. For an overview of a day rate vs. hourly rates, read on.

Where to start?

There is a lot to consider when weighing up a day rate vs. an hourly rate. Besides the advantages and disadvantages of either rate, there are several additional factors you should be aware of before making a decision. These range from the standard rate expected from your industry to how your client might react. While it is absolutely a good idea to give these factors their due consideration, the best place to begin is with the rates themselves and, more importantly, their differences.

Day rates

When charging a day rate, you will be paid per day worked. It tends to be preferred by contractors working on more expensive projects and is especially common in the finance sector. Generally, contracts that would cost more than £40 an hour best fit a day rate.

A day rate can often be more appealing to clients than an hourly rate for two reasons. Firstly, when quoting for a job that will be expensive, an hourly rate can seem much steeper than a day rate, despite ultimately costing the same. Secondly, as you are paid per day, clients can ask for overtime without worrying about increased costs.

This option is typically used sparingly by clients. With your overtime hours being returned to you in the form of a future short workday. However, it can be abused, particularly in large organisations, with unreasonably long workdays being demanded. For example, were you to be working on a project that had an unrealistic time frame, you may be expected to work much more than just 9-5 and possibly sacrifice your weekends. Situations like this are certainly outliers. It’s worth being aware of the risks if you are considering charging a day rate.

If the idea of putting in unpaid overtime doesn’t seem enticing, then ensure you have all relevant information before accepting anything. If you think the contract has a very optimistic time frame, it might be best to turn it down and save yourself the risk of crunchtime. Alternatively, if you would prefer to avoid this risk altogether, consider charging an hourly rate instead.

Hourly rates

As opposed to a day rate, you will be paid per hour worked under an hourly rate, and is typically used in less expensive contracts, with £40 being the usual cutoff point.

Charging an hourly rate is more of a risk for clients, in contrast to a day rate. Costs can quickly increase beyond what was expected should the work take longer than expected. However, you as a contractor have much less of an obligation to put in additional hours, with any overtime you do resulting in more pay.

In a complete role-reversal, clients should be wary of unscrupulous contractors looking to take advantage of this rate. It is possible to charge a low hourly rate on the surface. Then work for more hours than expected, leading to a hefty bill for the client to pay. To avoid this, knowledgeable clients will specify a maximum number of additional hours in the contract. Effectively stopping overtime costs from getting out of hand. In the event overtime is necessary, a manager will usually be required to grant permission beforehand.

Fixed rates

There is a third option available to contractors, though it is uncommonly employed. Using this rate, you will quote a set price for the entirety of a contract rather than charging for the hours or days you expect the work to take.

There is a reason this type of rate is not often used. For plenty of contracts, it can be hard enough to accurately estimate how long it will take. Now consider accurately estimating your fixed rate, factoring in time, wages, material or equipment costs, and so on. For the experienced contractor, this may seem like an easy task. However, for a newer contractor, this could likely result in a marked over or underestimation. Especially so if the type of work is different than the norm. Due to this, this rate is best suited to experienced contractors confident in both their ability and knowledge of the work a contract requires.

Quote a reasonable amount for your industry

One key aspect to consider when deciding between day rates vs. hourly rates is your industry’s standard. With so many contractors specialising in so many different fields, it is only natural that there will not be a “one size fits all” rate to charge.

Some, like the financial sector, will prefer charging a day rate, while others suit an hourly rate better. To get a feel for how much is sensible to charge, you should look to other contractors in your industry, in addition to the salaries paid to permanent employees working similar roles to you. Doing so won’t necessarily be a quick fix, but it will ensure you avoid anything far-fetched.

By researching the rates typical to your industry, you can avoid overcharging for your services. Thereby reducing the work available to you or undercharging and wasting your time. Moreover, this understanding can help you settle on a competitive rate, which could be especially useful in a saturated and competitive industry.

Choosing your rate

Once you have weighed the options and researched your industry’s standard rates, the next step is to make your decision. Some hold up hourly rates as the best option due to the clarity it affords, alongside the lack of unpaid overtime. This is undoubtedly true, making hourly rates a good choice in most circumstances, though it won’t work every time. As mentioned, daily rates are the better choice for expensive contracts. Provided you can avoid the risk of being saddled with additional hours. Additionally, switching up the rates you charge is always an option if you think it necessary. You aren’t limited to one after you make your decision, so be sure to adjust your rates if one meets the demands of a contract better than the other.

Leave a Reply

Your email address will not be published. Required fields are marked *

Request Callback