Banking

Five tips for setting (and getting) a reasonable hourly consulting fee

One of the trickier aspects of the consulting business is trying to determine a fee that will attract clients but still keep the wolves from your door. Susan Harkins offers some practical advice.

The biggest mistake new consultants make is to charge too little for their time. They think they can do it for less than the competition or they simply fail to consider all the mind-numbing, money-grabbing factors that go into working for yourself. For instance, do you know that you'll pay twice the Social Security and Medicare tax you would pay as a traditional employee? Here are just a few tips for determining a reasonable rate that won't send you running back to conventional employment (unless that's what you really want to do).

1: Don't undercut the going rate in your area

Do a little research and learn the going rate for your expertise in your area. Then, ask for it. Resist the urge to diminish your worth in your own market. You must compete with your competitors, but pricing yourself out of business isn't a way to compete, it's a way to fail. Keep the going rate in mind when setting your hourly fee. Set your price too low and the best clients will steer clear -- you get what you pay for.

2: Do the math

Once you know the going rate in your area, do a little math. First, what's your income goal? How much do you need to maintain your current standard of living (or even improve it a bit)? Be sure to include costs you can't invoice clients for, such as vacations, sick time, taxes, health insurance, and special training. That's all overhead, just as much as office rent would be. It all goes toward your earnings goal.

Now, let's work through a quick example. Suppose you want to make $55,000 plus benefits and additional costs of about $30,000. That's an $88,000 goal -- not a $55,000 goal. Let's break that goal down to an hourly rate:

$88,000 / 48 weeks (allows for four weeks of vacation, and you'll need it!) = $1,840 a week

$1,840 / 20 hours = $91

You must charge $91 an hour -- if you can secure at least 20 billable hours a week -- to meet your $88,000 income goal. So you settle on $95 an hour.

You probably don't need my help for doing the math, but it's a good way to determine whether you're aiming high enough. Compare the result of your math with the going rate (#1). If the going rate is higher, and you're uncomfortable charging the going rate, find a reasonable compromise between the two. Just don't go too low because there will probably be weeks when you don't bill a single cent.

Note: This example doesn't consider overhead, such as an office, furnishings, telephone, legal fees, and business permits. However, this fee might work for consultants working out of their home and with minimal overhead.

3: Be realistic about billable hours

In #2, I used a 20-hour work week instead of the traditional 40. Most consultants are lucky if they bill 20 hours a week. Oh, you'll work 40 hours or even more, every week. You'll invoice, schedule, update your skills, canvass for new clients, and so on. You just won't be able to bill anyone for that time, not directly. Your hourly rate needs to be high enough to oblige your non-billable hours.

4: Discounts are allowed

Never lower your hourly rate, but do offer a discount if you think doing so will help you win a project. Just make it clear that it's a one-time deal. Be sure it's identified in the contract and on the invoice as a discount. That way, when the client calls you for the next project, you can charge your regular consulting fee.

A discount gives you a lot of flexibility. You can secure those first clients without setting a precedent for future fees. You just have to find a legitimate reason for the discount. Your lack of experience as a consultant might be your reason, but don't share that with the client.

5: Use a behind-the-scenes figure

There is a way you can charge less, in an effort to get those early clients, without reducing your established hourly rate or offering a discount. Simply invoice for fewer hours than you actually work. For instance, if you think the project is worth $1,000 and your rate is $135 an hour, your client will expect you to work about seven and a half hours. That's what you'll invoice the client, even if you spend 15 hours on the project. You're making less per hour, but you're glad to have the work. The client is happy with the deal and never needs to know you spent twice as much time as invoiced.

Don't make a practice of this -- do it early in your consulting career and even then, only if absolutely necessary. The important thing is that the client knows your fee is $135 an hour when contracting the next project, regardless of what you actually made on the first project.

Additional reading

About

Susan Sales Harkins is an IT consultant, specializing in desktop solutions. Previously, she was editor in chief for The Cobb Group, the world's largest publisher of technical journals.

8 comments
jbrunner007
jbrunner007

If you are really a good consultant - you can simply state the product type (i.e. 1 Firewall Instatllation, 2 Server installation). something that takes a great consultant 4 hours may take a joker 40 hours (if they can even finish). So you can put the flat price for 25 hours, knowing even with user change requests when entering service the systems will take 8 to 12 hours. You look "cheap" but the client doesnt know you really made like $500 an hour to do the work you're so good at...

maj37
maj37

Spending 15 hours on a project for a customer and then only billing for 7 without telling them also has its draw back. The next time you bill for the full 15 hours they are going to wonder why this project took 15 but the first one only took 7. Better to make the discount up front and visible and make sure they understand it is a onetime special. maj

PMPsicle
PMPsicle

Just a couple of things though ... in 2 you (Susan) say "If the going rate is higher, and you???re uncomfortable charging the going rate, find a reasonable compromise between the two." Wrong. If the going rate is higher then you've most likely made a mistake. Second. The calculation in 2 is fine as it stands. However, it gives a very wrong impression. First, you indicate that the 20 hours is arbitrary and second you hint that the extra $30,000 is generic extra costs. (4 weeks vacation plus stat days = roughly 6 weeks unbillable). So the calculation should have been based on 46 weeks. In fact, as a consultant or employee you will max out at about 1500 billable hours in a year (presuming someone else is doing the marketing) based on 2 weeks vacation. If you are hoping to keep to 40 hours/week then 20 billable hours/week average is probably pushing the envelope (which is why most of us work overtime or outsource the stuff we don't want to do). When you hire any employee (including yourself) there are a number of extra costs that suddenly appear. For example, here in Canada we have CPP & EI both of which you might assume are included in the $55,000 (they're paid by the employee after all). But in fact, the employer also pays a portion (more than the employee). Plus you also have benefits and other employment costs. These employment taxes can easily reach the same amount as the amount paid to the employee. And that's not yet including the extra costs associated with running your own business. Generally speaking, one of your competitors is the direct employee. To estimate their cost all you need to do is divide their annual salary by 1000. That's roughly what an internal employee is costing your customer (plus overheads such as management salary, desk etc.).

allen
allen

This is how I do it, 20 hours billable per week is a good way to estimate. Just don't forget to adjust your rates every year or so, it's too easy to fall behind, and making the same amount does not equal the same life style year after year!

ssharkins
ssharkins

Well, I can appreciate your problem -- if I were facing that sort of decision, I guess I'd have to look at those traveling hours as cutting into my private life. If your visits are infrequent because you can do most of your work at home, a bit of traveling's not so bad. If you're doing it every day -- wow... I would hate that.

Alpha_Dog
Alpha_Dog

Our primary area is defined by an extremely low cost of living, but also very poor demographic. I have also found that our services are valued in a major metro area 2+ hours away to the point where clients in the metro area have no problem paying mileage, hourly, and per diem (where needed), so that their actual hourly rate they're paying may be 6-8 times what our local clients are able to pay. I don't want to move. Between the low cost of living here, the need of local services at a price that's affordable, and goodwill we have in the community, I can't justify a move either, but it's clear where the demand is. Further, we were running at about 40% capacity last year, but with things being tight, we're at less than 20% right now. Break point is 12%. We are moving into a somewhat larger community this summer, but my question is should we just move to the larger community and be done with it? I am asking for opinions and advice.

ssharkins
ssharkins

I wouldn't suggest doing this for a repeat project -- it's a good one-time trick that lets you get a bit of work without compromising your set fee. But you should be careful how and when you use it. If you're going to be doing the same type of work for them, you're right, you can't do this.

ssharkins
ssharkins

I don't think the 20 hours is arbitrary, but you need a place to start. If you know your first job going out is only going to take 5 hours a week for 10 weeks, you can't charge that first client a wage that will sustain you.

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