Freelancers, a job or a commodity?

(This is a translated version of an old Swedish article I wrote)

Today, there are many who work extra as a freelancer or who as their main occupation work as an independent consultant or freelancer. The fact that there are many who work as freelancers to varying degrees contributes to the fact that there is a wide range of people who are active. Everything from young students who want to increase the money situation a little to experienced developers who have worked on and with critical applications at a professional level for several years. Much of the reasoning here fits in with freelancers in many different industries, but I get my experience mostly from the IT industry.

A popular place for these people to apply for assignments is on various sites focused on mediating contacts between freelancers and clients with projects. Most of these work in a manner where a project client uploads a description of the project and freelancers then “bid”, i.e. presents their price to solve the project. Another popular approach is when the project client sets a budget in advance and the freelancers who want to take on the job must accept to do it for this amount. However, something that has become obvious when I myself have been in contact with this type of site is the price levels which are often surprisingly low. Even if a customer asks for a complete web-based warehousing solution that in rough estimate had taken two man-months to develop, the budget for the project may be SEK 20,000-40,000, sometimes even lower. The same amount of time from a larger consulting firm would have had a bill of around SEK 250,000-300,000. One could think that all freelancers would have wrinkled their noses and wondered in which version of reality the client lived in and let him understand this as no one showed interest in the project. But this is seldom the case. Instead, against all common sense, there are often lots of bids to make the projects for these low prices and sometimes even lower. Why would anyone want to go even lower then? Well, to “win” the project of course. The same can also be found in simpler projects where a client can request a complete Joomla site designed and developed in one week for SEK 1,000. The questions that then become interesting to answer are

• Why are prices so low?
• Do the customers benefit from the prices being so low?
• Does the market as a whole benefit from the current situation?
• Why do I even think prices are low?

Let us start from an example from reality:
A client wants a site for their start-up company. The site will be designed and coded for SEK 5,000. The site shall consist of a front page and four subpages.

If we assume that one person handles both design and coding to get it as cheap as possible, then a fairly normal approach is to make a design idea that the customer can see to get initial input on. This can be done on paper or as an image file in the computer. If the customer wants changes, you iterate here until the customer is satisfied. When the customer approves the design, you transfer it to HTML and CSS. After this is done, you start coding functionality in a language such as ASP, PHP, ASP.Net and maybe some scripting in Javascript.

During the morning, the freelancer works on a proposal that is sent to the customer. The customer has a few changes that he wants to introduce and a revised version will be sent to the customer in the afternoon. The design is approved and on day two the work of transferring the design to HTML and CSS begins. The work is finished just before lunch and the coding of the functionality begins in the afternoon on day two. There are no advanced things to be coded but only a contact forms and a simpler administration system for the customer to post news and pictures, the coding of this is completed by the end of day three. On day four, installation takes place at the customer’s web hotel and the customer is informed about how everything works, etc. Such a simple task has then taken four days and this is given the assumption that the customer has been so precise with his design idea that he only needed to mention a minor change and did not come up with any new ideas during the journey. However, the truth behind this type of “small” project is often the opposite. The customer comes up with the design, and functions emerge, as the project progresses. But, if we still imagine that this project took four days, we have an hourly wage of about SEK 156, including VAT when the customer set their total ceiling of SEK 5,000.

If we make a calculation on this hourly wage and work to fill 100% of working hours with one month off during the year, we end up with an annual profit of SEK 206,000 (ex VAT as this does not affect your profit) for the freelancer. Then you should know that one hundred percent invoiceable time is very, very rare.

After taxes, deductibles, etc., we end up with an annual salary of SEK 122,000. This gives a monthly salary, after tax, of SEK 10,166, which corresponds to a salary of around SEK 13-14,000 if you were employed instead. As a reasonably experienced web developer can be around SEK 25-30,000 in monthly salary and system developers in other languages ​​even higher, you quickly see that the compensation for the job is insanely low. What happened to this project then? Did people laugh at the level of compensation and did they wish the client luck in finding someone who wanted to take on the project? No, instead, up to 70 freelancers fought for the assignment. The project then took longer than the estimated four days and the customer came up with new functionality during the trip. The end result was that the calculated hourly rate for the work was even lower than in the example above. It is probably quite obvious to everyone that this is an unreasonable level of compensation for the work performed, but how is it then that the work is done time and time again at such underprices? Why do freelancers join in and do clients really benefit from this?

The low prices can probably be explained in several ways. First, we have the fact that when we request quotes for work at home, etc., we all chase the cheapest price (something that is not always the best option that a popular TV series has clearly shown). Then add the fact I mentioned before, that freelancers consist of everything from students to professional individuals who have worked for several years with development, perhaps have a family, a house and plan for things like their pension savings. Which of these two can offer the lowest price? The student will probably win that fight. The student can afford to work at a discount as their expenses are often not close to those of a working person with a family and a house. The little extra the student earns from his freelance work is still a big plus in the pocket for him. But the long-term effects may be that the market acclimatizes to these sub-prices. The student will shoot himself in the foot as he, a little later in life, himself will notice that the compensation can not sustain a living wage. Then it is easy to think that you can easily get more compensation as you now have more experience, but just like for everyone who today tries to sell their services, you will notice that there are new students with low prices to match.

One could imagine that the experience of senior developers weighs heavily for clients. But if it stands between two people who both promise to solve the task and one says he does it for SEK 250/hour and the other wants SEK 800/hour, then almost everyone chooses the SEK 250/hour option. However, something that has proven itself over time is that many who take the “best price” in the end have to pay expensively for their choice. Of course, there are developers who work at a discount, but still do a good job. But many customers testify about people who pushed their prices to get the assignment. Once that happened, the collaboration itself was not as painless as the customer first got the impression that it would be. Communication is often deficient, delivery dates are constantly pushed forward, people drop out of projects in the middle and some solutions are simply technically ill-conceived, which is often due to a lack of experience on the part of the person carrying out the project. A more experienced developer who pushes his price to match all the low prices in the market can also easily get into trouble. You have to plan the time precisely to have time to squeeze in as much work as possible to get in enough money to go around. The problem then is that it becomes very difficult for the project to be dynamic and grow over time as the developer will most likely have to have parallel projects running.

What will the result be of this in the long run, does anyone really benefit from a market acclimatizing to a price level that is unsustainable? How does the market react when the breaking point comes and freelancers realize that they have to start charging for their services, and why do freelancers find themselves being a commodity? Will the freelance market be emptied of competent people as they would rather take employment for sensible salaries?