How do you cover the costs of the pitches and proposals you do? It’s the age-old question of every freelancer, and everyone’s approach is different.
The disclaimers: I’m not an accountant, and I don’t often have to recoup the costs for a pitch that involves lengthy research and hours of preparation time. Also, I’ll keep this discussion broad, because discussing the specifics of pricing can raise all kinds of legal issues.
Probably the most obvious way to recoup the proposal preparation costs are simply to include them in your estimate, and charge your normal rates for the time involved. If the client takes you on, they pay for the time it took to prepare the proposal. If they don’t, they pay nothing. Simple.
You may not feel like you’re in a position to charge for your proposal costs, though — many freelancers don’t. But putting proposals together takes time, so rather than just writing that time off, you might consider an alternative approach: work the time you’ve spent on the proposal in your project costing estimate some other way.
Spreading your costs
Let’s say you know that the labor cost you have to cover for every hour worked is $10. (I’m using small, simple figures here so we (okay: I) don’t get confused.)
Now, let’s say you spend five hours researching and preparing a pitch for Web Project A. And you estimate that completing Web Project A will take 20 hours.
Ordinarily you might estimate a labor cost for that time of 10×20, or $200 — then you’d add your profit margin. That’s okay, but it’s not going to cover the cost of pitching for Web Project A.
Instead, add the pitching time (5) to the job estimate (20). Now we’re looking at 25 hours of work. Multiply that by your hourly labor cost (10) and you can see that you need to recoup $250 to cover the full labor costs of this project.
Now, divide that figure by the number of hours you’re estimating the project will take (that’s 20). We can see that to cover the real cost of Web Project A, you need to charge $12.50 per hour, not $10.
But I have fixed rates!
If you have a schedule of fixed rates, and you don’t want to deviate from that right now, then you might take a different approach. You might consider building the time you spent preparing the pitch into your scoping or project management costs, for example.
The main problem with this approach is that it can add a significant chunk of money to an otherwise ordinary estimate of time in a given area (for example, scoping). And if you add it to the project management estimate, and then need to itemize that cost in your invoice, you might face an ethical issue re: “fudging” your figures.
If I were taking this approach, I’d probably add the time to the scoping estimate — because, after all, preparing the proposal entails scoping — and charge for it openly on the first invoice.
On the average
I know what you’re thinking: what about all those jobs I pitch for, but don’t win? How can I recoup those costs? Well, you could apply the per-proposal formula I just outlined to your annual proposal-and-work load.
Ideally, you’ll set your rates on the basis of how much it costs you to freelance — including the pencils, the paper clips … and those proposals you pitch for but don’t win. That means that you’ll need to total how much time (read: money) you spend on creating proposals each year, for example, and how many of those proposals you win.
If it takes you an average of five hours to create a proposal, and you win one in three proposals, then in fact you spend 15 hours, on average, to land a job (not counting meetings — I’m still trying to keep this simple).
Now let’s say that your average job takes 40 hours. If you wanted to, you could use these figures in the formula I explained above, and come up with a figure that represents the hourly rate that, on average, you need to charge to cover the labor costs of the projects your business completes (in this case, you’d charge $13.75 per hour instead of the current $10 per hour in the example above).
These are the basic ways I’d go about covering the costs of putting together a proposal for a client. If you use another approach, do tell us.