Calculate a floor rate that covers your base pay, tax, CPF, insurance cover and business costs.
When people go freelance, a common way to set a first rate is to take the old monthly salary, divide it by the working hours in a month, and add a margin. It looks reasonable, but it undercharges because it leaves costs out. A rate built from salary alone pays only for the time you spend at a desk. It does not cover employer CPF, leave, insurance, software, admin hours or the gaps between projects. Most freelancers who undercharge are using a number like this, and it leaves about half their costs out.
The fix is to build the rate from the bottom up. You list what the year has to pay for, add it up, and divide by the hours clients actually pay for.
A year's work has to pay for six things:
base pay for 12 months, which you worked out in Module 1 tax and MediSave, using the set-aside estimate from Lesson 2.4 voluntary CPF, if you decided in Lesson 3.4 to make contributions insurance premiums for the cover you plan to hold, from Module 6 business costs, such as software, equipment, a share of the phone bill, transport and professional fees a contribution to the buffer in your holding account, so the account grows or refills over the year
As an employee, you had your employer's share of CPF, group insurance and paid leave as part of your pay, though none of it showed on your payslip. As a freelancer, you have to put these items on your cost list. If they are not on the list, nothing pays for them.
Mei left an agency job to go freelance. She set her rate the common way: her old monthly salary divided by the working hours in a month, plus a bit extra to feel safe. Two years later her diary was full but her holding account kept going down. Her rate covered her desk time and nothing else. It had nothing in it for employer CPF, leave, insurance, software, admin or the gaps between projects.
When she listed her annual costs, her base pay was S$2,300 a month (an example figure) for twelve months, which is S$27,600. Tax and MediSave came to S$6,600, voluntary CPF to S$4,800, insurance premiums to S$2,400 and business costs to S$3,600. She wanted to put S$2,000 into her buffer. Her annual total was S$27,600 + S$6,600 + S$4,800 + S$2,400 + S$3,600 + S$2,000 = S$47,000.
You divide the annual total by your billable hours, meaning the time you spend on client work that a client pays for. Billable hours are far fewer than working hours. Clients do not pay for finding work, writing proposals, invoicing, chasing payments, keeping records, learning new tools, or waiting between projects. Weeks with no work also come out of the year: public holidays, leave you choose to take, and sick days.
Most people overestimate their billable hours because they remember the busy weeks and forget the admin time and the quiet days. To get a real figure, go through your diary, calendar, invoices or time records for the last few months and count only the hours that went on a client invoice. Turn that count into a weekly figure.
To convert it to a yearly figure, subtract public holidays, leave and sick days from the year to get your working weeks. Then multiply your weekly billable hours by your working weeks. If you are new and have no history yet, assume fewer hours than feels right, and raise the estimate once you have real data.
Mei guessed she billed about 30 hours a week. She went through the last three months of her diary, counted only invoiced hours, and got 18 a week. After holidays, leave and the odd sick day she works 46 weeks a year, so her billable hours come to 18 x 46 = 828 a year. Her guess would have given 30 x 46 = 1,380.
Your floor rate is the lowest hourly rate that pays for your base pay, tax, MediSave, CPF, cover, costs and buffer. To work it out, divide the annual total by your billable hours a year and round up.
With her guessed hours, Mei's rate would have been S$47,000 / 1,380, which is about S$34 an hour. With her real hours it is S$47,000 / 828, about S$56.76, which she rounded up to a floor of S$57 an hour. The difference between those two rates explains why her holding account had been slowly draining. The gap between a rate based on guessed hours and one based on real hours is the gap between a business that works and one that slowly drains the holding account.
If you quote by the day, multiply the floor rate by the billable hours in a day. Mei counts eight billable hours in a day, so her day rate is S$57 x 8 = S$456.
If you price below the floor, you are paying to do the work. Each job priced below it takes money from your buffer, delays a bill, or cuts your own pay, whatever the market rate looks like.
Two situations cause trouble. One is a rate above the market that you cannot get. The other is a market rate that sits below your floor. In that case the fixes are more billable hours, lower costs, or a different kind of work or client, and Lesson 1.2 covers these. Lesson 7.2 covers ways to charge that are not tied to hours.
The floor rate is the line your prices should stay above, and your actual prices sit above it. Lesson 7.4 shows how to set them using what the market will pay.
Most of your inputs are already in your notes from earlier modules: base pay, your set-aside estimate, your CPF decision, your premiums and your business costs. Two inputs are new: the buffer contribution you want, and your billable hours counted from your diary. Gather all of them before you open the calculator, so that every line is a figure you can point to.
Put your own figures into the floor rate calculator, then write down your floor hourly rate and floor daily rate.
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