Outsourcing

How to determine your consulting fees


In my previous post I mentioned that I'm raising rates for most of my clients this year -- which brings up the question of how we consultants should determine our rates to begin with.

Most people starting out as independents have no clue how much they should charge, and they typically ask for too little -- which their clients are all too willing to pay.  I was either unwittingly brilliant or blindlingly stupid but lucky when I asked one of my early prospects how much I should charge them.

They replied, "Well, what we charge our clients for consulting is $90 an hour..." (this was in 1992).

I replied, "Sounds good to me," trying not to sound overly excited.  This was about twice what I was charging my other clients, and it made my head spin a little.  I began using that rate for all subsequent clients, and couldn't believe my good fortune.  But it turns out that not only was this rate very reasonable, it was actually too low.

There's a lot of good advice out here on the Internet that says that you should start with what you want to make, add expenses, factor in unbillable activites, and then (assuming you're billing by the hour) divide it out by the number of hours you want to work (PDF).  Using the rule of thirds (in which you presume that one third of your rate goes respectively to salary, expenses, and some combination of unforeseen overhead vs. additional profit), that means that your rate should be about three times what you would expect to make as an employee performing similar tasks.

While I think that you absolutely must figure out how much you need to charge in order to keep your business afloat and profitable, I don't believe this should be the primary determinant of your rate.  It does provide a floor, however, below which you don't want to descend.

What ultimately determines how much you can charge (and collect) from your clients is how much value you can provide to them.  What are some key components of value?

  1. Supply and demand.  If you're one of a handful of available people who can perform a much needed task, you can charge a lot more.  On the other hand, if you've got the same skill set as the hordes of offshore developers who'll work for $15 an hour, you probably need to make some career changes.  Sometimes it can be difficult to get a pulse on competitive rates in your area of expertise.  Online services like Real Rates and Hot Gigs can provide some benchmarks, but often they don't have enough samplings to give a clear picture for a specific niche.  And remember, it's not what other people make that counts -- it's how valuable the service is to your client.  If the going rate is over their price threshold, they may either dump the project or assign an unqualified person to do it (without realizing that they're stacking up future costs thereby).
  2. Quality of work.  If you can demonstrate that nobody does it better than you, then you can add on to your price.  In software development that means that your products are not just ingenious and clever, but also maintainable, extensible, and easily incorporated into the client's products and support.  As a consultant, you should also be providing guidance on how your client uses your creation.
  3. Relationship.  If you have a long-standing relationship with your client, you are worth more to them than someone new.  You already understand the problems they're facing, and you know some of their history.  More importantly, you've hopefully learned how best to work with them -- what their expectations are when they ask for something, what they mean when they're describing a problem, etc.  That's why you should get a raise from existing clients from time to time.
  4. Additional benefits.  You are worth more to your client than just the work you produce.  Having you involved with their staff should improve their staff, if you can become part of the team.  If you have a good understanding of their business (and if not, why are you consulting?) there will be numerous observations and insights that you can share with them that go beyond the strict definition of your assignments.  You might even become part of the company's public image, which could be mutually beneficial to the company and your career.

So, if the value provided to the client exceeds your "floor rate" (your minimum requirement for doing business), then you've got room to come to an agreement.  The trick is to distill that value into a figure.  Good luck, and don't undersell yourself!

About

Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant b...

47 comments
DonnaMitchell
DonnaMitchell

Hello! It is always very hard to start your own business as you are responsible for everything about it! As for me what I currently do is trying to work harder on my mp4 to mp3 converter free which belongs to this web site http://mp4tomp3converter.org/ Your tips are so vital and important for me you have barely no idea! Thank you very much for this great article!

EmmaParker86
EmmaParker86

I'm currently working in a software development company and YouTube Downloader - http://downloadyoutubevideo.net/ - is one of the products it distributes. We are doing our best to improve it, holding conferences and working on design. Making it extensible, as you said, is a very good idea. Kudos and thanks so much!

muku70
muku70

wt abt billing on a prorata basis...

jpp
jpp

There are some downsides to Chip's expectation that he get a "raise" when working for a "long-standing client." Your very familiarity with the client that you think earns you the raise also makes your work a lot easier. > You already know the ins and outs of the client's business (as it pertains to you), so less time is spent familiarizing yourself with things. > You already know the people, who you can count on, who to avoid, and so on. > Since the client already knows you, they are more likely to give you freer rein in what you have to do, rather than your having to justify every little step. Some clients will actually expect to pay less for subsequent services, particularly if your past services are closely related to what they need next. I usually figure that if my past experience with the client enables me to get the next job for them done faster, charging the same fee usually amounts to an indirect raise, especially when I'm charging by the job rather than by the hour. Of course, if a past client keeps coming back for more, it's only reasonable to increase rates a little bit, just to account for "increases in the cost of doing business."

jbrunner007
jbrunner007

3 times my full-time rate? are you crazy? do you think anyone will pay $250 per hour for it consulting? even in NYC? only if you got Oracle or SAP's corporate goons pushing that rate... try $100 if your lucky (this from park ave)

reisen55
reisen55

Once you set an hourly rate, and I work with annual agreements with my clients so all is on the table and square - you also set the future. Increases have to become marginal at best and your clients gets used to paying you your original LOW BALL fee. I tried a good jump on a contract this year and damn near lost it, had to backtrack. I am keeping the loss income in my mind for future emergency billing however. Be careful about setting the present - it impacts the future.

Sterling chip Camden
Sterling chip Camden

Do you ever negotiate a rate? Or do you just state what you want, take it or leave it?

t1n0
t1n0

I wish I could say I've charged over $200, but I haven't. I guess I have some crappy clients, but that's the way it goes, it seems. The average for network/server support is about 75/hr. Some very old customers are billed at $50, but the work is very comfortable/hassle free, and practically a social call because I have had reign over their systems since inception and they always take my advice as to policies, procedures, etc, so there's very little 'thinking' on my part. As far as getting over $75/hr, it causes the work to taper off, one way or another. As far as travel, I charge my time, one way. Usually just a flat half hour, as most locations are withing 15-20 minutes. In those instances when I have had to drive distances, I charged a little less than my rate, plus mileage at the IRS approved rate of .41c/mile, which on the highway, is about 30/hr, so it ends up being more than my hourly for revenue, but remember that you are consuming fuel at about 12/hr, and depreciating your car at about 10/hr (15c/mi, 70 MPH), plus about 5/hr in maintenance (tires, brakes, and oil changes: 1200/20K mi, I drive a Merc), so in effect, I am netting still netting close to my rate for essentially driving a car. That pretty much covers that :) In the end, I am the only one to blame for not advancing to newer, hotter skills. However, after being on the learn/use, learn/use treadmill for a few years, I gave it a break and have been coasting on my skill set, partly from some burnout, and partly because I am gearing up to return to University to finish my last year of EE. I haven't done an integral in many years, lol, so I have some reviewing to do before I can just stroll back into upper level courses. There's only so many hours in a day. Nice segue into billable time... Calculating your salary is thus: an employee will cost them twice what the pay you. If an on staff guy is salaried at 60K, he is costing that company, with benefits, office, equipment and taxes, almost 120K. Another point is maximum billable hours. If I bill 8 hours in one day, that is a very good day. Administrative stuff, research, and appt slack causes most days to average about 4-6 hours. Some days are slower, a single 2 hour visit, and sometimes I can multiple full days. This year, I have had $300 weeks, (very sad) while just last year I had many 2K+ weeks. And from 99-03...woo-hoo, not uncommon to top 3K+ per week. But now, margins are razor thin, computers and servers are much cheaper and much more reliable, And if the client lets me do my job the way I want to, with a firewall and antivirus and group policy, once I'm done, I'm done. Also, in South Florida, every Joe Blow says he does computer work, albeit shady and hit and run work, and it drives the initial price down, yet they unscrupulously milk customers for continuous visits. The beginning of this year was very slow, but thankfully since June, things are starting to pick up.

Sterling chip Camden
Sterling chip Camden

... it shouldn't be about how easy it is for you. Billing by the job is a different matter. You do get an indirect raise if you charge the same amount for the same work. Most of this article is about hourly rates. But I still maintain that if the value for the client has increased, so should your compensation.

Sterling chip Camden
Sterling chip Camden

... and got it. I know others who bill $250. It all depends on your niche and how badly you're needed.

whitepaper
whitepaper

I am seeing $100 for work in my area as well. Some say it is as you say, "if you are lucky". We are doing Storage consulting. I am just getting started in the field, but I am hoping that the rate is better. I read some articles that said if is less than $200/hr don't waste your time. Then some in the field say $75 is sustainable. My thinking though is knowing what some of the big vendors bill out the engineers ($250/hr Senior level) means the clients are willing to pay. My strategy, unproven as of yet, is to come in lower than $250 but over$100. My strategy further, was to investigate what people were charging in their government approved rates (we will be going after set aside contracts federally), or their GSA schedules. I am coming up with $175/hr. Now, let's test that theory!!!

apotheon
apotheon

"[i]3 times my full-time rate? are you crazy? do you think anyone will pay $250 per hour for it consulting? even in NYC?[/i]" Well, let's see here . . . [b]> irb irb(main):001:0> rate = 250.0 / 3.0 => 83.3333333333333 irb(main):002:0> weekly = 40 * rate => 3333.33333333333 irb(main):003:0> salary = 52 * weekly => 173333.333333333[/b] Are you claiming that you've had corporate employment where your annual salary was more than $170,000 doing the same sort of work you do as a consultant? I'm just curious.

Greg K
Greg K

Hello JB Just to get some more numbers in this. Back in So Cal (Orange County, on the beaches). For Independent Consulting, 80/hr was sustainable. Move up from there with marginal success. Hope this helps someone out there. Happy Trails

Sterling chip Camden
Sterling chip Camden

It's just like taking an entry-level employee position at a ridiculously low salary. The only way to eventually get a raise that brings it into line is to change jobs. OTOH, it also depends on just how much they need you, versus someone else. You might be able to pull off the huge increase if nobody else can do it.

jck
jck

1) How helpful the customer is in doing things. If they are like a little helper, I will give them a break on something. 2) I have negotiated, but it was with people I knew that I give breaks to anyways. It's good to keep the people who talk you up happiest. Nothing like good, massive amounts of free PR. 3) Again, a pretty woman is likely to get more free outta me than anyone. Well...except maybe my niece...I give her the most stuff...cause she's like my first kid. She's getting a free new laptop outta me, and didn't even ask!! :^0

STSanford
STSanford

I don't allow discussion of rate. It is what it is and isn't a topic for discussion. People either get the value or they don't. With all that us IT people are responsible for, I don't believe explaining benefits of using professional consultants is part of the job description and while it may seem arrogant, I give the client or prospect the impression that if they don't get it, they certainly don't need to use me. Period, end of story. 80 / 20 rule you know... And this does a nice job of weeding out the bad apples.

dbrown486
dbrown486

I set a price for my on site services, phone support and maintenance contracts. I give "rewards" for referrals. Negotiating the prices I set for those services would show I'm unsure of the value of my services. If a potential client can't afford my prices, they're not MY client.

PMPsicle
PMPsicle

This is a sideways answer to your question. There is one element that is missed in the blogticle. I refer to it as "Market Habit". Similar to supply and demand they are usually lumped together under the heading "Market". What is "Market Habit" ? ... simply put it is the combination of market forces exclusive of supply and demand. Many of these have a memory or inertia to change. In fact, they are a major source of the definition of a market as being efficient (i.e. reactive to supply/demand) or inefficient (non-reactive). So much for theory ... what does that mean in the real world? Some markets will have conditions/situations/structures that will resist change or force a situation. The comments about being unable to change prior customer prices are examples. In Toronto, for example, rates are negotiable (meaning they are set by the client). Why? We are heavily influenced by the banks, insurance companies and major corporations. All of whom deal ONLY through Recruiting firms (and only the big ones). Only the people who deal exclusively with small companies can set their own rates (and then other limits kick in). The result is an excess of power in the clients' hands. So they choose what rate they pay. The most we can do is keep looking and jump ship if the rate is too low. Sad but if you treat consultants (actually freelancers in our market) as employees then they can only react using an employees tools. It's also why Toronto's rates rose slowly during the Y2K/Dot-com boom and fell more slowly than the US following the crash. The fact that most employers (and employees and hr people and recruiters and ...) have no clue how to quickly estimate, or even calculate in detail, their own cost of service/billable hours only makes things worse. If they did at least then they'd know they were trying to negotiate an hourly employee rate not a contract rate! (For you Americans that's W4 versus corp-to-corp ... we don't have W4 contractors per se). So knowing your market's "Habits" is important. It can even make the whole discussion moot.

ManiacMan
ManiacMan

If they don't like it, they are free to find someone else for a cheaper rate and get the crappy quality of service they're paying for. I know the worth of my work and the quality I deliver, so why should I shortchange myself and budge on my rate? The negative consequences of doing so can be a reputation that you are a pushover and work for chump change. I'd rather be seen as someone who is expensive, qualified, and having a reputation of delivering excellent service than a cheap alternative to everyone else. If they want cheap, they can always go to one of them outsourcing body shop that employs clueless fools who've never touched a computer before. I on the other hand beg to differ.

jpp
jpp

I cannot charge my customers based on what my services do for them - that's too subjective. I'm asking them for a piece of their action, if I do it your way. What if they realize less income (or, at least, less profit) after I perform my services. Do they then deserve a discount? (Of course, if I screw up and they lose money because of my screw-up, then I should repair the damage I caused, but that's a matter of doing business the right way.) To be able to justify an increase in charges, I would need to be able to determine just how much they have gained from my services to that point. I can't raise my rates just because their business is making money - that just being a blood-sucking leach. Keeping my charges the same - even on an hourly-charge basis - amounts to a raise. If it takes me less time to service a repeat customer, that leaves me with more time to service other customers. If I have other techs working for me, it could mean reducing the number of techs I have, thereby reducing my overhead. Or I have more free time (which is always a benefit). If you raise your rates on a repeat customer, the first question you're likely to be asked is "why the increase". If you can't provide the customer with adequate justification, they may very well not be repeat customers in the future. I would like to see how justified they think you are when you tell them "You're making money off my services, so I should get some of that money."

apotheon
apotheon

In a niche where $250 is reasonable for a consultant, something in the neighborhood of $85/hr for a salaried full-time employee is surely reasonable too. . . . but in a niche where $250/hr is unreasonable for a consultant, you can bet real money $85/hr is unreasonable for a salaried full-time employee, too -- all else being equal, of course.

Sterling chip Camden
Sterling chip Camden

More like 30 hours (billable) times 50 weeks, which comes to about $125K. Not unreasonable for a consultant.

serge
serge

This is similar in Ottawa, where many contracts are with the federal government. The federal government only does business with "supply holders" that have qualified at a specified rate. That rate is usually low already. Furthermore, every opportunity is competed within these companies and the lowest compliant wins. The "small" consultant gets only a cut of the winning bid and I have seen max rates as low as $30/hour for a mid-level vmware specialist. I also heard the position was filled! I am such a small company who always have to work through the larger firms that have a supply agreement. Some ask for a 15 to 20% cut on the winning rate and a few go nuts and ask for 40%! Being a sub-contractor cuts you from the rate negotiation with the end client and locks you to the maximum rate. .. If they tell you. You either have to agree or look for other work. There is always seem to have someone to take the low rate so this brings the entire rate system to a low value. This may be good for the federal government but is not sustainable in the long term with the current economy.

Violetw
Violetw

Toronto rates... hey, you have a lot of third-world 'developers/qa' people there. All your good people are here (USA) ... errr, 'hello!' I charge 175/hour, that is my flat rate, but for certain jobs I charge $250/hour. No one quibbles. I also have my own business (llc) and present myself to the big companies through my company, not through a 'big agency' as you suggest. The key is to KNOW the movers and shakers, which I do. If you know people high enough in the organization, then you don't need to go through a 'big agency'. That's certainly true in my own career. However, I didn't figure out my billing rate 'on my own'... I approved someone for hire onto a project I was managing and found out that he was getting 50% more pay than I was (back in the 70s when I was still an 'employee'). That night when I got home I stood in front of the mirror repeating over and over until I believed it: "I want 20 bucks an hour". The next day I went back to the office and repeated that demand. They fired me instead. heh heh But two weeks later I was 'freelancing' for 25/hour. Doesn't sound like a lot, now, but in 1972, it surely was! Unless you are making over a hundred an hour now, you have only an 'idea' but don't know for sure, that money does, indeed, bring happiness (or should I say 'you can drive right up to it' at the very least). BTW, it's not w4, it's w2. P.S. My family is spread across Canada,from Toronto to Vancouver. They think I'm a traitor. I think they are what they are, poor.

Sterling chip Camden
Sterling chip Camden

Yes, that dimension does impose another floor/ceiling scenario where you have to evaluate whether or not the whole enterprise is worth it to you.

MikeJC
MikeJC

How do you balance your expert work with customer service? In my dealings, the customers will have form their opinion based upon their first interaction with you, if it is billing then there can be a negative perception.

Sterling chip Camden
Sterling chip Camden

If I was providing exactly the same service to each of my clients, then I would agree that the fee should be the same. But my services differ from client to client, not only in what I'm doing but in how much work they send my way. Those differences justify differing rates.

jpp
jpp

My basic assumption (which you may or may not share) is that I should charge each client at the same fee base. Not all of my clients realize the same level of benefit from my services. Am I supposed to charge each client according to the level of success they're having? What if your grocer charged you $3.50/lb for beef while charging others only $3.00. Reason? You make scads of money from your TechRepublic gig, and no doubt the grocer's food is keeping you in tip-top shape so you can do your job better. What if your ISP charged you more for service because you make money from the internet connection she provides? I'm not trying to be contentious here - The differentiated fee scheme is one that caused me tons of hassles (and cost me one prestigious client) because my fee scale gave 20% benefit to small non-profit organizations (budgets of less than $250,000/year). I no longer give discounts. I also freelance as a grant-proposal writer. One of my former clients wanted to pay me half of my fee, then give me a percentage of how much money he got (unethical, and possibly illegal). If I ran my business that way, I would be inclined to work only for the big non-profits with multi-million-dollar budgets, rather than for small organizations looking for $60K here, $10K there. My expectation would be that a successful client would be loyal enough to keep plenty of business coming my way. And I would be sure to increase my rates if it seemed fair and plausible - but fair also to my other clients, as well.

Sterling chip Camden
Sterling chip Camden

... they will be willing to pay you what they think you are worth to THEM. If you aren't improving your worth to them, then you won't earn an increase. If you never increase your rates, and just get the job done faster to make more money, you'll eventually top out your potential income. You can only work so fast.

reisen55
reisen55

Any business these days will increase their rates to stay in business and they understand this about their trade and will understand it about IT rates. Keeping to a known standard works wonders.

apotheon
apotheon

Yeah -- I'd be breaking my piggy bank to pay rent if $30/hr consulting was my only source of rent money. Holy cow.

Sterling chip Camden
Sterling chip Camden

... markets differ considerably. My head spins when I think that some markets won't bear more than $30 an hour for a consultant, as scott said above. That rate would definitely break the bank, as far as I'm concerned.

scott
scott

When I contracted, I could accurately forecast my annual gross income by taking my hourly rate and multiplying by 1000. I charged $30/hr, and I couldn't make over $30,000/yr. So, if you want $60,000/yr income before expenses, then I suggest you charge $60/hr. My market could hardly bear to pay $30/hr, so I had to quit consulting to get a full-time $21/hr job to feed the family. The joy now is that I am actually paid if I work 10 or 20 hrs over estimate instead of working for free.

apotheon
apotheon

I was referring to the numbers for working as a full-time salaried employee, not consulting pay. The problem is that jbrunner seems to be suggesting that it's crazy to demand three times as much as an hourly rate for a salaried full-time employee of about $85. My point was that if it's crazy to bill at $250/hr as a consultant, it's similarly crazy to make almost $85/hr as a salaried full-time employee. I'm not saying either is necessarily crazy. The actual work being done, coupled with the quality of work a given consultant or employee can provide, cross referenced with the market's supply and demand characteristics, may in some cases add up to even more than that (especially as this country's out-of-control inflation spirals upward these days) being a perfectly reasonable number. I'm just recasting jbrunner's incredulity in the proper light -- pointing out the actual relationship between the consulting rate and the employee salary rate.

Sterling chip Camden
Sterling chip Camden

My pleasure. So then it's agreed that clients are willing to pay that much. It then becomes a question, as you indicated, of whether an agency is worth their cut. Going indie doesn't mean you get to pocket all that change, though. When you're on your own you have greater costs of finding business and managing it. But I personally wouldn't give up the freedom it provides.

IT.Consultant
IT.Consultant

Thanks for your response! It was quite encouraging as I have a long way to go before I reach $215 / hour, but at least I know that you can be still so in demand at that level that you have to turn away business. Personally, any respectable consulting firm that employs me would bill me at that rate and even much higher. Though, I would see less of a cut. I think that many agencies especially the large ones would bill me at about $200 / hour, but would pocket most of the money for themselves. Like you, I want to get to a point where I simply lose my dependence on agencies as many, if not most, charge too much for their lack of service.

Sterling chip Camden
Sterling chip Camden

... over at your initial question. It depends on your level of experience, but I don't think $100/hr is too much. For me, it would be too little. My customary rate for new customers these days is $215/hr, and I've had to turn away some business at that rate because I'm too busy. Not trying to brag, just making the point that all rates depend on what you bring to the table and what the client needs. I do not use an agency. I get most of my business through word of mouth, although increasingly it's coming from my Internet presence. I mostly work with software vendors rather than end-user sites. Most of my clients develop software packages for resale. One of my clients markets a programming language and software development tools. My focus is on how to move these products forward as technology advances.

apotheon
apotheon

"[i]I'm looking to move to California.[/i]" Ugh. Why? "[i]I'm wondering if I could charge >= $100 / hour for the type of work I do now. It seems that I'll need to do so in order to get the same compensation I would as a permanent employee.[/i]" Never charge less than it would require to maintain the same level of income per hour of work you'd get as a permanent employee. Never.

IT.Consultant
IT.Consultant

I'd like to know what is it that you do and whether you ever go through an agency. I do contract work as a Senior .NET Developer in Toronto, but I'm looking to move to California. Right now, an agency is considering me for a contract position in healthcare. I'm wondering if I could charge >= $100 / hour for the type of work I do now. It seems that I'll need to do so in order to get the same compensation I would as a permanent employee. Could you please share some thoughts? I post my question here: http://techrepublic.com.com/5208-6230-0.html?forumID=102&threadID=255587&tag=4-1-1-0-0 Thanks.

Sterling chip Camden
Sterling chip Camden

Yes, a goodwill freebie usually warms things up, even though you build it into your price. It's not about the net, it's that impression of giving -- like when we give Christmas presents to each other. It all nets out, but it's the thought that counts.

reisen55
reisen55

For what it is worth, I have discovered that you can have the best contract in the world for all parties (and I have to raise my rates and do so every year) ... but all I do is put in one good " cookie " for my client, something for free. It is a nothing item that I do not want to use unless I have to and BOY DO THEY ZERO IN ON IT. You can fund Project Apollo on a little cookie. Take it out and they SPOT IT PRETTY FAST TOO.

z_s
z_s

Most of the time my new business is a referral from another client - so I figure they are fore warned about my prices. Still though - I always lean towards getting the job done and then letting them get the bill later. I focus on the service and the bill has never been an issue.

ManiacMan
ManiacMan

No free lunches on my account because I too have a family to feed and bills to pay. I state my hourly rate or if they don't like it, I can bill them a flat monthly fee based on retainer, but it too won't be chump change. Every customer will have a negative perception of billing because everyone expects something for nothing, but that's not reality. Do not confuse poor customer service with a firm stance on billing rates, because simply not wanting to haggle on price does not mean I am looking to stiff the customer on service and support. That's what they're paying for and that's what they expect, so I must deliver. If the customer thinks I am overpriced, they are more than welcomed to find someone cheaper to do it for them. I don't force them into anything, but my rates are final and I will not haggle like some old woman at a flea market. Doctors and lawyers have a set fee and don't haggle about it because they are professionals and value their work and expertise. Why should us IT professionals be treated any differently? We too endured many hours of training and spent a lot of money to get where we are. It's those who are willing to work for peanuts that are destroying this industry and are going to turn into the same kind of mess as the medical field with HMOs' taking the bulk of the profits and giving doctors the leftover scraps.

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