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'[PICLIST] [OT] How to price freelance work...'
2002\06\16@213855 by Jesse Lackey

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Hello all,

I'm attempting to switch careers from Windows C++ applications on salary
to freelance electronics design.  This is both out of necessity (very
bad job market) and personal passions (I love electronics + have a BSEE
never used professionally and I hate microsoft).

Well I have a client who wants a bid for a project.  The design is
straightforward, it is half-clone & half-modernization/update of an
existing product that I'm very familiar with.  Sorry for the vagueness
but there is an NDA involved.

Now he needs a revamp of this thing for use with other stuff in a
"packaged kit" that he will sell.  This is a critical piece of the kit
and there is no reasonable currently-existing alternative.  He has a
small line of various products (that he doesn't manufacture, he's the
retailer) into a niche market for years and knows his audience well.  He
expects to sell 500 to 1000 of these kits a year.  He does not want to
do any manufacturing.  I would be delivering finished product to him as
his orders come in.  I also own the IP and can sell to other retailers
or whomever else I'd like to.  He would get "preferential pricing".  I'm
not sure how many I could sell elsewhere a year, 200 @ $100 markup ?

A rough guess (detailed guess TBD very soon) is 3 weeks for the
electronics design / pcb layout work to get to finished prototype, then
whatever additional time for things like coming up with an enclosure,
FCC issues, manual, etc.

I will need to buy a schematic capture & pcb layout program.  Using
xcircuit and pcb on linux will be too laborious.  It will probably be
the $200 version of Eagle, so $400 total.  There will be chips and other
parts to order, 2-layer pcb prototyping run, some SMD parts to solder, etc.

I guess I'm looking for some rules of thumb for all this.  I think
$20-$25 an hour is a good figure, I'd like to get more but this is the
first "real" freelance project and I need to build a client base that
can give solid recommendations.  However things are not so
straightforward since I will be making money for each unit he sells
(maybe $50-$75) you could look at it like he shouldn't have to pay me
much at all, because over time I'll be making decent money (hopefully if
his per-year estimates are reasonable - they seem fine to me).  On the
other hand, he doesn't have to nor want to deal with manufacturing them
100 at a time.  That's my job.  And who knows, maybe this kit will be a
flop and he only sells 50 a year.

My current thought is budget $500 for prototype devel costs, absorb the
cost for Eagle, have him agree to cover whatever FCC certification costs
there are TBD, and another $3000 for my 6 weeks of time (i.e. about $12
an hour).  Am I being too cheap?  My rent alone (we are both in the new
york city area) is $1300/mo...

I have a problem where I want everyone to like me and so I'm hesitant to
put in a higher bid that might cause some disgruntlement towards me.  I
suppose I have to get over this, since its business.  How much room for
negotiation is customary?  (the aforementioned prices leave almost no
room for me to go lower).  Is it acceptable to bid one price but agree
to a counteroffer from the client?  Does this look bad / sleazy?  The
"digital analogy" of submitting a bid, take it or leave it, if leave it
there are no hard feelings has a strong appeal, but the world is analog
and everything is negotiable.  What is the typical process for this in
freelance electronics work?

Ok this is quite a bit longer that I'd like but I wanted to get all the
facts in place.  The piclist is a great resource and I hope to
contribute back my experiences and knowledge once both have happened.
:)  Any and all comments appreciated.  Thanks in advance everyone.

Jesse

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2002\06\17@005904 by John Dammeyer

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Hi,

Welcome to the world of freelance consulting.  I'm sure you will get a
wide variety of suggestions here. Here is my fairly lengthy dissertation
which some may find controversial.

There are a couple of rule of thumbs that you need to use to determine
the cost for doing custom projects.  One industry standard for employees
is that they cost between 2 and 4 times what you are paying them for
salary.  The high end is for larger companies, the low end for small
ones.

For example,  if your salary expectations are $25/hour your employer
needs to budget at least $50/hour as his true cost of keeping you.
(Taxes, holidays, pension, sick leave etc.  His costs also include the
space he needs to rent/own and the cost of the physical stuff you need
to do your job.  Desk, Chair, PC, software, training.  I personally
believe that in this high tech electronics/software industry that 20% of
your time per year has to be allocated to training and upgrading.  PCs
have about a 3 year life and sometimes the software even less.

Cost of software packages is a very difficult one to access.  The
outright cost of a simple package might be low but the capabilities of
that software mean that you spend an extra 5 hours per week doing what
is trivial in a more expensive package.  At $50/hr cost that's $250 per
week.  It doesn't take long to justify a high end package at that cost.

Firmware generators are the next issue.  You've probably seen the
arguments on this list for assembler verses C for PICs.  That argument
has been raging for decades but the statistics are now fairly clear and
demonstrated by all research in this area that a good programmer can
produce between 10 and 20 '_documented_', '_debugged_' lines of code per
day and the language tends to not matter.

So if, like some of the list members you have a decade worth of assembly
language libraries that do everything including slicing bread,  the code
might be quite FORTH like with 10 lines of calls to 500 line library
functions.  If you are starting out,  10 lines of C code can do a fair
amount compared with 10 lines of assembler.

If the PIC you choose has 8K flash and your application fills 5K of it
any old C compiler will do the job and speed sensitive stuff you could
code in assembler.  But if that project expands to be 8K with the $100
compiler, and you spend the next two weeks optimizing to fit it all into
that 8K, you've more than exceeded the price of the high end expensive
tools that generate 10% to 30% smaller code size.

Test equipment and rent are two other costs that need to be factored
into your engineering rates.

So I think your guess at $25 per hour is very very very low.

Now, on to the development of a product for someone.  Once again the
hidden costs of manufacturing need to be factored into the production
costs.  For example, you need a switching regulator and all the parts
need to be surface mount for size constraints.  The Digikey prices in
100's mean that the price of the product per unit returns you $1 profit.
Buy the stuff in 5K reels and your profit jumps to $30 per unit but your
cost of stocking all this inventory goes from $1000 to $23,000.  (I'm
making up all these numbers).

You've just discovered another expense and that's the interest on the
money tied up in inventory.  If your client only buys 100 at a time and
ends up buying only 100 per year,  you are losing money big time.  You
may need a commitment from your client for 2000 pieces per year to
justify the cost he wants to get.  If you are hand assembling the boards
you'll find your hourly salary needs to be in keeping what they pay
assemblers in the third world to be competitive.  If you go automated,
there are setup costs for each run.  So it may pay to build more and
stockpile than to do small runs.

What I'm suggesting is do a business plan.  If you are not sure how to
go about doing that I can suggest a couple of avenues.  You could try
and find a student doing an MBA.  Part of the MBA program is to do the
exact sort of cost/benefit analysis you need to do to determine if the
project is worthwhile.

Alternatively,  and this may be a very effective method, contact your
local Chamber of Commerce, and see if they have retired businessmen who
consult or donate their time to help start-up companies like yourself.
A mentoring program so to speak.  And do listen to them.  Bill Gates
didn't get rich by being Mr. Nice Guy;   he applied sound management
principals to much of what he did.

So remove yourself from the personal issues of being a good guy or
developing a reputation so you sell yourself short.  The only reputation
you may get is that you are someone who works cheap while others reap
the benefits.

Hope that helps,

John Dammeyer





Wireless CAN with the CANRF module.
www.autoartisans.com/documents/canrf_prod_announcement.pdf
Automation Artisans Inc.
Ph. 1 250 544 4950


> {Original Message removed}

2002\06\17@111924 by Roman Black

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John Dammeyer wrote:
>
> So remove yourself from the personal issues of being a good guy or
> developing a reputation so you sell yourself short.  The only reputation
> you may get is that you are someone who works cheap while others reap
> the benefits.

> > {Original Message removed}

2002\06\17@114829 by Pic Dude

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Agree with Roman here.  When I did web dev some time ago,
I started off cheap and even did a couple freebies to
build a portfolio.  Then, I went out with a higher rate, a
company name, and something to show why I felt I deserved
that rate -- ie: past satisfied customers, referrals, and
samples of my work.  Would never have gotten away with
the full rate with nothing to show for it.

Timeframes are variable though -- I don't necessarily put
any minimum timeframes until turning a profit etc.

Cheers,
-Neil.


{Original Message removed}

2002\06\17@115909 by Joe Farr

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You need to be vary careful with this approach Roman.
What's the point unless you make a profit.
I agree that 'sometimes' you take a loss leader when you believe that there's more work in it for you in the future, but I'm more a fan of value added.
Sure, I charge more for my developments, but you get the source code, documentation and I don't mind if you ring me once or twice on a holiday if it's really important. Most of these things a reputable developer should provide anyway (except for the holiday support) but often don't. I personally don't mind because it gives me the chance to show the customer what a really nice guy I am, AND a change to talk to the customer about projects they might have in the future.
Whenever your talking to your customer and he's the one who called you, your in a very strong position.

The trick is to make a reasonable profit so your client feels he's had a good deal and you do as well.

There's always somebody who will undercut you BUT threes nothing worse for a client finding out you vary the amount you charge depending on what you think they can afford.
You have to make a reputation of charging a fair price for a fair days work.

I also agree that you shouldn't give up you day job until you are, or believe you can, earn enough from your new venture. But it looks bad if your rates keep going up and up for each job you receive. It's a small world out there and you never know if some of your customers talk to each other. Also remember that as time goes buy, your develop new skills and build a library of useful routines so there's a good chance that your development time for projects will go down and you should adjust your estimates accordingly.

If your are a manufacturing business, I agree that you probably can't make a profit for the first couple of years. Buying buildings, machinery, people etc.
But, software development is different. You probably have most of what you need already. You should be able to turn a profit on the first job. Your only restriction is how much business you can generate and handle.

Be honest to yourself and your customers - nobody can ask more.
If after that you decide you can't earn enough, then walk away - or try a new business plan.




{Original Message removed}

2002\06\17@125236 by Larry G. Nelson Sr.

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I have to disagree on this one. If you price your services too low the
clients will not see it as a bargain but will instead question the quality
of the services. When I was starting out I had jobs that I won by being
priced higher than my competition and in one case I subcontracted to the
consultant that lost the bid for what he was charging. I kept the
difference and was responsible to the client but had the other consultant
do the work for much less than what I would have wanted and we both still
got what we wanted. He lost the job and the client as a long term customer
simply because he was too cheap in the clients mind and the client had no
confidence he could do the job at that rate.

Larry

At 01:17 AM 6/18/02 +1000, you wrote:
>John Dammeyer wrote:
> >
> > So remove yourself from the personal issues of being a good guy or
> > developing a reputation so you sell yourself short.  The only reputation
> > you may get is that you are someone who works cheap while others reap
> > the benefits.
>
> > > {Original Message removed}

2002\06\17@130537 by Lawrence Lile

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I've been involved in a couple of basement-style engineering startups.  We
bid each job such that we should be able to make a profit on each job from
the very start.  Although the first couple of jobs were, of course, under
budget and past deadline, we soon got more into the swing of things.
Although we didn't make the expected profit on early jobs, they did pay the
bills and keep us fed.  Lack of capital meant some lean times between jobs,
though, and I took outside jobs while the boss stayed in the basement
answering the phones to get the thing off the ground.  I worked fulltime for
somebody else and part-time in the basement for two years until we got it
going steady enough that I could stay on fulltime.

We also started with fairly low hourly rates, $35 in the 1980's.  We finally
had to raise our rates to $60/hour.  We were pretty hesitant about this, but
suddenly we had more business when we raised our rates.  Lowballing in
consulting is NOT always the way to get jobs.  Eventually we moved out of
the basement into a real office.  A long time later we went broke and folded
up the business altogether.

--Lawrence
>
> > > {Original Message removed}

2002\06\17@150819 by Chris Loiacono

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{Quote hidden}

> > > {Original Message removed}

2002\06\17@161211 by Chris Loiacono

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How can I say that I agree, but I disagree...Hmmm...

This is an area where I can speak comfortably, since I can honestly say the
majority of my work and income come from consulting on the business side of
things, moreso than the technical. I'll preface my statements by saying that
you may agree or disagree with me, but I will offer one opinion that I
learned during my first business economics class in the mid '70's. It is
still taught the same way today, just with some updated terminology. So, if
you disagree with me on this, you are disagreeing with the educated world of
technical marketers and the entire educational system behind them - because
I didn't write the book on this, I just what successful experts wrote &
taught.

The first rule of successful business is NEVER give it away. Always sell at
full price and discount from there if necessary. Your reasons for
discounting may vary from time to time. These may include "soft market";
"selling a new product or service"; doing the work with new, unproven
tools"; "excessive competition"; etc... etc...

One instructor put it this way: "You can always adjust the price downward.
Just try to increase it upward.."

Applying this to technical consulting or design services, I can offer
examples from several leading international suppliers in the field of
digital imaging equipment that I deal with. The largest has a $125/hr.
published rate. The only one who pays $125/hr is someone who calls out of
the blue explains that he is not a regular customer and doesn't  intend to
become one. he just wants one job done one time. This equals the full rate.

Selling services to a reseller should generally be done with a considerable
discount structure. If I want to re-sell the same company's field
engineering hours, they will charge me about 1/2 of the full rate. I get
this rate because I give them a discounted rate also, and because we have
developed a relationship from day 1 that allows both of us to be profitable.

Size doesn't matter. The company I mention is huge, in fact the world leader
in their field. They could wallpaper all their offices around the world with
$100 bills and they wouldn't flinch at the expense. Yet, my full rate is a
full $25/hr higher than theirs. This is only because of two things: I offer
a specialty service that they can't just shop anywhere for, and my team will
be more thorough in researching the project options than their own engineers
ever could be.

The bottom line is that if you have professional skills to sell, sell them
professionally. You know you will never skimp on a customer's design, you
will overturn every stone to find the best way to do each part of it. You
will think and plan when others are sleeping, and they will love and
appreciate the results you will give them.
That shouldn't come cheap. Selling yourself (because that's really what
you're doing) cheaply degrades your value, and takes a long time to
overcome.

Selling low also hurts the economy. It affects others in similar businesses
negatively.
Selling low attracts the kind of less-than-professional customer that you
don't really want.
Selling low can deteriorate your own motivation to do a super-professional
job.
Selling low gets frustrating the first time something goes wrong or has to
be re-done. What does one do in this situation, ask for more money to
correct the unanticipated fault, or work for free to correct it?
Selling low makes prospective customers think everyone else should work so
cheaply also.
Selling low does not contribute to lasting business relationships.
Selling low implies that YOU THINK your work is less deserving than that of
others.
Selling low never seems to include after-sale expenses in the pricing.
Selling low is like serving McDonald's burgers vs. Ruth's Chris, or Byrne's
Steak House.Your customer knows he will get what he pays for.

When people say that they also started selling their work cheaply, and now
they "worked their way up"... or some such thing, what they really mean is
that now that they have more experience and would never sell themselves so
cheaply. "Working their way up..." means it took a long time to grow past
the image of someone who would work for peanuts.

Hey, it's business. If you want to be liked by someone in a business
relationship, do an outstanding job that will make them money. Then they'll
feel good about you for a long time and call you "friend".

Lastly: Perspective. In two areas:
1. Put together a quote that's 1/2 the going rate for a particulat type of
project. Next, think about how profitable your customer will be when you do
a great job and give them the best possible result. Now, do you think he
would really care if you charged him double the amount, as long as the job
went smoothly and he made a small fortune from your work?
If you are confident that it will go that way, go at it hard for full-rate.
If you are not sure how well you will do or how happy he will be in the end,
don't do it at all. Go find the next opportunity, or learn how to get that
kind of confidence from the start and try again.

2. You are a super Engineer, but you are not using Protel in 3D. You only
have $600 in Eagle tools. You may be using a PCB proto house that you have
limited experience with. You may wind up soldering boards in your
toaster-oven. So what. Your customer probably doesn't care. Explaining all
the details of how and with what tools will probably only bore him and be a
waste of his time. All he will want to see is that the end result works
well, lasts long, and makes him money. That's his perspective. He really
doesn't care about how you see things. If he's straight-forward he doesn't
want to become an expert in what you know how to do. He wants to hire a
competent expert instead.If you are ac onfident expert, he will be also. If
he's a real business person, he'll be glad to pay well to get that.

If he starts to nickle & dime you, RUN, or explain that you are too
professional to compromise the quality of your work and that working cheaply
will cause just that. If you really think he NEEDS a lower price in order to
be profitable, ask him to show you the numbers so you can consider his
offer.
And, yes, faster work means more $$. Not full rate, but a premium on top of
that. Neglecting to do so opens more opportunities for you to be taken
advantage of- but I've written too much already - just try to think about
what the customer is really thinking about. This means putting away all the
fear of losing the job or the customer. 99.9% of the time, jobs and
customers lost for these reasons are best lost.

Engineers should be able to do the math.
10 jobs from cheap customers at $1,000 each in a year = $10,000.
1 job with a good customer @ $10,000 per year still = $10,000 and much less
time.

There's a reason that the pro consultants out there get from $75 to $175
per. In time, they don't get to charge higher and higher rates - they get
more & more work at high rates.

I thought Olin would have commented on this by now. I'm sure he would never
work for $25 hours.....Am I right?

Chris


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2002\06\17@163251 by John Dammeyer

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Well said!

John Dammeyer


Wireless CAN with the CANRF module.
www.autoartisans.com/documents/canrf_prod_announcement.pdf
Automation Artisans Inc.
Ph. 1 250 544 4950


> {Original Message removed}

2002\06\17@172103 by Lawrence Lile

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>He would get "preferential
> pricing".  I'm
> not sure how many I could sell elsewhere a year, 200 @ $100 markup ?
>
> A rough guess (detailed guess TBD very soon) is 3 weeks for the
> electronics design / pcb layout work to get to finished
> prototype, then

DOUBLE IT. Always double your initial estimate of engineering time.


> whatever additional time for things like coming up with an enclosure,
> FCC issues, manual, etc.


ADD ANOTHER 3 WEEKS

>
> I will need to buy a schematic capture & pcb layout program.  Using
> xcircuit and pcb on linux will be too laborious.  It will probably be
> the $200 version of Eagle, so $400 total.  There will be

ADD THE FULL COST OF THESE ITEMS. EAGLE COSTS MORE THAN THAT.


Add an hour or two for billing the client, add the time you spent making the
proposal, add four  hours or more for ordering parts, add 5% to 10% markup
on parts, add shipping on parts, and time to pay yourself to be your own
accountant.  Maybe you don't bill your time for accounting, billing, and
ordering parts at the full rate, or maybe you do.   Proposal time should be
at full rate.

No Joke. These suggestions are serious as a heart attack.

--Lawrence

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