Project Management

Planning for rate increases in your IT consultancy

How do you insure that your IT consultancy's rate increases happen on a reasonable schedule? Chip Camden answers that question.

The owner of the firm met me at the airport, then explained the details of the case as he drove through the snow-lined streets of Chicago.

"We sued them for non-payment, and now they're counter-suing us for non-performance," he said. "It's so stupid, because they were one of our first clients, and we never raised their rates. They're still on our books at $40 an hour, and now we have to fight to get that!"

I wondered to myself how much of what the client termed "non-performance" came from a reluctance of the firm to do more work at $40 an hour when they had other clients offering them business at triple that rate or more. This story might have had a happier ending if the firm had raised its rates at regular intervals to keep this client competitive with their other business. Not only would the firm have pursued additional work for them more cheerfully, but the client's opinion of their work might have improved. In business, you not only get what you pay for, you also tend to look down on what you buy cheaply. Money can be a sign of respect.

This situation isn't at all unusual, though. A consultant signs a client at what seems like a good rate at the time, then they're loathe to go back to the well for more. I've been guilty of this myself. We don't want to scare off the business, or perhaps we just don't like having to ask. But if we never ask, we're unlikely to ever receive.

TechRepublic member viProCon was thinking ahead when he asked about planning for regular rate increases. He didn't get much of a response to that question, but I think the topic bears discussion. How do you go about insuring that increases happen on a reasonable schedule?

In my own business, I've been inconsistent on that score. For some clients that I started at too low a rate, I don't have any trouble requesting and receiving an annual increase. I spell out where they stand, and they know they need to come up in order to keep me. It's not as easy with the ones that already pay more. They tend to sit at the same rate for years, because even though they might not be paying top dollar anymore, the difference doesn't feel worth the trouble of hassling them. I rationalize it as a reward for their loyalty.

"What's all this about asking?" I hear you cry. "My plumber doesn't ask me when he raises his rates! Are you really independent, or are you an employee without benefits?"

That argument holds some water, and I have sometimes taken the presumptive close approach: "Here's my contract for the new year with a rate increase to $XXX an hour. Please sign and return one copy." In the United States, autonomy in determining your rate may also provide evidence for the IRS that you are not a statutory employee. However, the relationship between you and your client differs somewhat from the one with your plumber.

Your plumber probably has more clients with less repeat business. A rate increase therefore immediately affects no one specific client. The rate increase's impact on the availability of new business due to price resistance is much more granular. The work that plumbers do is rarely considered optional, and the alternatives include going to another plumber or doing it yourself. Consultants, on the other hand, tend to develop long-term relationships with fewer clients who may have the option of suspending a project or getting an employee to do it. Because each client represents a larger slice of our business, it makes sense to at least sound them out instead of just running up a new priceflag and seeing if they salute. I usually let my clients know a month or two in advance that I'm planning an increase. I don't ask their permission explicitly, but I give them an opportunity to register a reaction.

If you could write a provision into your contract for regular increases, that would be full of win. Or would it? The idea somewhat offends my meritocratic sensibilities. Besides, you don't get something for nothing. What price would you have to pay for that clause?

How do you present rate increases to your clients? Let us know in the discussion.

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...

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