IT Employment

Negotiate for higher IT consulting fees

IT consultants, don't cave at the client's or agency's suggested rate right away. There are strategies you can employ to get higher fees.

 How would you like to have an extra $10,000 or $20,000 in your bank account? Many IT consultants leave this and more on the table every year by simply not doing a good job of negotiating their rates. If your primary source of income comes from billing clients by the hour, think about the significance of increasing your rate by even $1 per hour. Most consultants bill around 2,000 hours per year, so every $1 you can negotiate puts an extra $2,000 in your pocket at the end of the year.

In this economy, we're inundated with news about the high unemployment rate and the multitudes of consultants on the bench for several long months. As a result, consultants looking for new business are apprehensive about attempting to ask for higher fees, for fear they'll negotiate themselves right out of an opportunity. This is ridiculous. Now is the most important time to negotiate, because nobody in this economy is going to just hand you high rates.

Selling to yourself

Before you can negotiate with clients, you must be centered; you must know your own value and what your contribution to an organization is worth. The first step in doing this is assessing where you stand on the commodity-specialty scale. If your skill set is the same as everybody else's, you are a commodity and will have a hard time negotiating; if, however, you have a unique specialty or combination of skills, you're a specialist and have a lot of negotiating power with the right clients.

After building up a great proficiency as a business intelligence and data warehousing specialist, I proactively pursued a competency in project management and process improvement, obtaining a Project Management Professional (PMP) certification and a Six Sigma black belt. Now, I've added leadership and strategy to my arsenal. This combination of skills makes me a very valuable consultant in the marketplace.

Negotiating with clients and third-party agencies

Once you recognize your value, you're ready to negotiate fees with clients. In general, there are three types with whom you'll be negotiating: clients with objectives, clients with budgets, and third-party agencies. I've listed these types in order of negotiating difficulty, with the first being the easiest.

Clients with objectives

These people are typically high-level buyers who have a job to get done, but they're not necessarily concerned with how it gets done. I suggest you try to move them to a fixed-bid contract for your benefit and theirs. It's actually quite easy to negotiate with these clients, as long as you focus on their result and what value it means for them; you must make sure they get a good return on investment.

Clients with budgets

These people are typically low-level buyers who are trying to stay within a budget. Start the negotiation by asking them what they're trying to accomplish, and then listening to their ideas for accomplishing those goals. When you have the right opportunity, tell a story about how you accomplished something similar for a past client, and then have another question loaded so they can continue talking about their situation. At some point (usually after three or four stories), you need to ask the magic question that is the key to negotiating with these clients: "So, what kind of budget are you trying to stay within?" Most of the time, they'll tell you, but only after they trust you -- that's why you tell the success stories. If their budget is too low for your expectations, explain that you're a higher-level resource and ask if they would be willing to group two or three roles into one for a higher fee. If not, try to uncover another skill you have that might be valuable to them and suggest a little higher fee for the combination of skills.

Third-party agencies

This group is the hardest to negotiate with, yet they're the easiest to get access to, so you might be dealing with them frequently. If this is the case, I strongly suggest you take the development of your negotiating skills very seriously. These people are trained to negotiate, and they do it all day long.

The three keys to negotiating with third-party agencies are: believing in your value, having a bottom line rate, and not wavering. I suggest you start the conversation around rates because, most of the time, they're not what you're looking for in terms of new business. Try to solicit rates from them first; but if you play ping-pong on this subject for too long, throw out a really high rate. When they say that won't work, they're almost obligated to tell you their rate range. If it's far off (which will happen frequently), just cut the negotiations short. If their response is close to your bottom line, tell them it's too low, but that you want to hear more about the requirement -- it's worth at least a conversation. (Whatever you do, don't internalize rates that agencies are telling you, even if you consistently hear numbers in the same low range.)

The key things to know when negotiating with third-party agencies are: if this is for a direct client, how long the requirement has been open, and how many qualified people they have to submit. If this is a direct client with a requirement that's been open for a while, and you're the only person they have to submit, you're in a good position. You also want to know how long they've had this client. If this is a new client they're trying to impress, they'll be more inclined to concede to a lower margin, which means a higher fee for you. Emphasize your qualifications and your immediate availability, but stay strong on your bottom line rate. Suggest a rate that's equidistant from their position, on the higher side of your bottom line. For instance, if your bottom line is $100/hr, and they come in with $90/hr, ask if they can do $110/hr.

If their response is at or above your bottom line, see if they can come up $5 or $10 more per hour. Remember, $10 per hour could be another $20,000 per year in your pocket, so don't cave at the suggested rate right away.

Summary

Negotiating is uncomfortable, risky, unnerving, and absolutely necessary if you're going to succeed as an IT consultant. The consistent thread in dealing with all negotiations is having a good understanding of what's in it for the other party. Direct clients either want to get something done or want to stay within a budget; cater to that need to get the rates you need. Agencies, on the other hand, need to get the right resources placed at the highest margins as quickly as possible; make sure you pitch a deal that works for everyone.

Above all, don't be afraid to suggest something that works best for you. They just might say yes.

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About

John Weathington is President and CEO of Excellent Management Systems, Inc., a management consultancy that helps executives turn chaotic information into profitable wisdom.

24 comments
nwnick
nwnick

Herlizness,I have read some of your other posts and you had some insightful comments, I guess that isn't the case here. FYI I use a billing increment that isn't .05 or .00 to indicate for future reference that I have already given "good-will" on that line item, and it is non-negotiable. Its all about positive attitude, go in with a chip on your shoulder and your eating mac-n-cheese tonight. I'm done for the day, only billed 10.00 today ;-)

herlizness
herlizness

What year does this guy think it is? What audience does he think he's speaking to? There's still too many people chasing too few billable hours on a limited number of projects; my own back of the enveloper estimate, based on what I see and the many people I speak with, is that at best maybe 10-15% of the consultant work force is able to negotiate high rates; likewise, actuallly getting 2000 hours a year is almost impossible for the vast majority of people in the business and always has been ... most people getting those kinds of hours in really fit into the long-term contract worker class and not the consultant class. Beware this advice.

BillDodd
BillDodd

Hi, Allowing for holidays, average sickness the number of billable days is about 210. Of these days, there is administration asnd inefficiency. I make it about 1000 hours a year. So where did the other 1000 come from?

yourcomputerpros
yourcomputerpros

"Most consultants bill around 2,000 hours per year ..." The statement sounds nice but seems unlikely on average. That amounts to 40 billable hours every week with two weeks vacation per year. Most of us just aren't that constantly efficient with billable hours over a whole year even when we're working hard and putting in long hours.

Ed.Pilling
Ed.Pilling

I have been a free lance consultant in the past. Although most agencies are ok but there are a number that um stick it to the consultant. Typically I have heard that the consultant should make 2/3 of what the agency is charging. Correct me if I am wrong. I have heard of one agency gets a job req and takes a little off the top and passes it to another agency and so on. Then the consultant who is actually doing the work is only making 10% of the total fee. I have known consultants when they go to sign the agreement just before they sign they ask to see the contract so they know the total rate the company is being charged. If the agency balks and says no, they walk.

johnweathington
johnweathington

I was afraid of this might come up. There's a huge difference between consulting and long-term contracting. The comments I'm making on billing 2000 hrs per year are mainly directed toward people who generate the great majority of their income from billing by the hour on longer-term contracts. If feel there's still a good number of those people in these forums. If you're a true consultant, you have a different business model, and you won't get 2000 billable hrs per year. In fact the math doesn't even apply, because you should be working on multiple fixed-bid contracts in a year, instead of billing by the hour. By the way, anybody can negotiate for higher rates, even long-term contractors.

nwnick
nwnick

You guys must be slackers I've billed out 721.03 hours as of May 1 this year. But I work 6-7 days a week.....

santeewelding
santeewelding

The punctuation in which you couch your warning, having maybe to do with the "vast majority" and "actually" and "always" and "really". If you are relaxed sips into the evening, I will let it go, counsel. Otherwise, watch your mouth when you tender advice.

rjt
rjt

I have been self employed since 1980. Most years I work more than 2000 hrs. A few recently have been less. One year I averaged 90 hrs/wk for 9 months. I don't want to do that again, but the rate was good and I banked a lot. At 1000 hrs/yr you would have to charge at least twice what a standard employee doing the job would charge plus cover your additonal costs for business insurance and other things. Then you have your own benefits to fund. At 1000 hrs you would have to be charging $200/hr to fill a slot the employer could salary for about $95,000. And you would have to be more than twice as productive as the employee (not necessarily difficult). I don't think most of us could make it on 1000 hrs.

johnweathington
johnweathington

There's 52 weeks in a year, and 40 hrs per week, for a total of 2080 hrs before holidays (not including overtime). In the US, there's about 2 weeks worth of holidays per year, or 80 hours. Even if you take sick time, or personal holidays, you can usually compensate with additional hours. By the way, sick consultants still work! Hope that helps. -John

johnweathington
johnweathington

Actually, it is likely on average, if you run your business that way. Most consultants I know who draw the majority of their income from billing by the hour, can bill out about 2000 hrs per year. Of course if you don't want to for lifestyle reasons, that's up to you, but it will be hard to stay on a longer-term contract if you're always gone. -John

buyer
buyer

I agree, 2000 hours a year is what full-time employees typically work. I've seen it quoted in other articles posted here that it's more like 22 hours/week, or closer to 1,100 hours/year. My experience with these exact strategies and tactics is that prospects are balking on the higher rates and going with the guys who are undercutting the bid. Anyone having 40-hour-a-week success with this guy's recommendations, or is this just more anecdotal advice?

johnweathington
johnweathington

Hi Ed, It's a good point. What you're describing here is called an "Open Kimono" style of partnership with an agency, and I think it's really helpful in building trust. That said, I think you should focus more on understanding what your value is in the marketplace, then making sure you get something reasonable based on how much work you needed to do to get the business. With multiple agencies involved, it's very hard to pull that off. I've been in situations where vendors are "imposed," meaning I secured the business with the hiring manager, then they forced me to go through one of their preferred vendors. In this situation, the vendor shouldn't make much of anything (I think in my case they took $5/hr). However, if the agency is bringing business to you, don't be surprised when they ask for a higher margin. By the way, even in the best situation, I think a 1/3 margin (you mentioned the consultant should make 2/3), is a little high. The only way I would go along with this is if the agency really sold me at a high rate (relative to what I consider my value in the marketplace). If they can do it, good for them, I don't care if they charge double what they're paying me. Hope that helps. -John

herlizness
herlizness

> in theory, John ... the sine qua non for conducting a true negotiation is that both parties are capable of differentiating people, process and product one from the next. I think you're right that a large percentage of readers here are in the long-term contract business and what I see in that world is budgets and binary evaluation, meaning they're dealing with vaguely competent recruiters who've been given a fixed dollar rate or tight range and a mandate to find people who can or cannot "code in C++" (or whatever the skill may be) ... they use primitive metrics to measure that ability and typically have no capacity whatsoever to measure the key intangibles which distinguish very valuable people from the merely average. Given that state of affairs, what is there to negotiate around? Once in a while, recruiters or their clients get frustrated with the pace of staffing up and just accede to some demand for a few bucks more per hour. The other scenario is the long-termer with a well-known and proven track record and perhaps some visibility as a speaker, author, etc; they will be actively sought out for engagements and absolutely do have some bargaining power.

cakask
cakask

I am a total work-a-holic and on one of my most recent assignments, I had to step in when the team lead got sick. I was working 15+ hours a day for months and was nailing it. But I am finding a lot of customers will only deal with agencies now. (Don't get why they WANT to pay the overhead??) And the one part time thing I booked, had a budget limited to about 500 hrs in 6 months. SO generate goodwill I have been working more and billing less. So for me it has not been a choice.

Ed Woychowsky
Ed Woychowsky

2000 Hourse sounds about right, because no work, no pay. As a consultant you can only take off what you can afford. I had been consulting for several years when a friend of mine who had just started consulting decided that consulting was great. He proceeded to tell me that he could take off as much time as he wanted. The words that popped into my mind were, "sharp learning curve ahead." My friends paycheck came in and I don't think that he took three days in the next three years.

rjt
rjt

I have been both. For many years my average engagement was about 2 weeks (some as little as 3 days). I charged about twice as much, but I had lots of marketing time, was a spearker at conventions, etc. I still billed close to 2000 hours/yr, but it was hard work. Most of my career has been medium to long term contracts. My first client 30 years ago is still a client, though I or my staff work only a couple of months a year. I work hard to establish long term relationships where we are a known quantity and where they know the productivity and quality they are getting. Given that, they will pay reasonably for it.

johnweathington
johnweathington

You're on a roll, thanks for proving my point. Consultants, stay away from scenario one and stick with scenario two. -John

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