Project Management optimize

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...

24 comments
Greg Miliates
Greg Miliates

In the 5 years I've been consulting, I've raised my rates 7% - 8% each and every year in January, and have continued to increase my business both from repeat and new clients. In addition, for new clients, I recently bumped my rate up aboutu 15%, and haven't had anyone balk at the rate. For existing clients, I charge $150/hour; for new clients, I charge $175/hour. I'm very fortunate to be able to charge that much, but the main reason I can is that I'm in a small niche. I have experience & skills that are valued, and while I charge less than a large vendor, I bet my clients would be happy to pay even if I charged MORE than the vendor, since I have more expertise, can deliver quicker, and can provide more comprehensive solutions. If I chose to be a general computer fix-it guy, there's no way I'd be able to charge anywhere near my current rates. So, while I am very fortunate, making the decision to focus on a profitable niche has made an incredible difference in the success of my business. If you want better ways of reaching clients, identifying a profitable niche, setting your rate, etc., you can check out my blog. Greg Miliates StartMyConsultingBusiness dot com

reisen55
reisen55

For my larger accounts, I know begin with an Executive Summary outlining the costs of the previous years, and with three years on one, I can see a good snapshot of retainer hours and those nasty one shot visits that also come along, the emergency kind. Three years shows a very consistent record so I am raising my fee a bit, upping the hours but time management for those emergency visits. In effect, I am advising the client that I have a well of XXX hours for you, and when that limit is reached, we shall see, but it is also easier on checks and financial management. With a verified history as well. I underprice a bit to stay lower than the competition, but the gap is getting closer now so I will make more money next year. Each account has it's own problems though and in this economy everybody seems reluctant to write checks. A co-consultant at a franchise is really pulling his hair out so we are meeting this week to see if we can work better together and not fall apart as individual consultants. Generally, my group pays on time or within 15 days which is not bad at all. I have one account in Manhattan, a bit of a stretch, that pays on the spot. I may have to adjust for travel costs a bit on that one. Remote work is the killer. Whenever I am remote accessing systems from home, it just seems evil to charge for that particularly with a nice glass of red wine on my desk, and yet I have to find a way to do that too. The beauty is that no gasoline expense is involved. And THAT is a consideration too for driving to Orange County is twice as expensive now as it was 2 years ago. Case by case, account by account is way I manage my rates but keeping a time scorecard is a big help indeed.

SerrJ215
SerrJ215

I live in an area where there are no IT consultants. Most people get lumped into the all inclusive "computer guy" model. Alot of times I have to explain why I can't give them "$79 fixed your computer" rate that many of the computer shops offer here. (I also do repair) The difference between a project and me fixing there stuff is not understood. However things are not getting cheeper and the rates have to go up. (my family likes to eat)

rpnadal08
rpnadal08

Been in a rural city, my prices are govern by what the local economy can handle. The average wage here is around $8 hr, $35 hr seems to be the magic number in my area. Many computer firms have come in my area at $90 plus and I have watch them leave. So, my advice for those who are thinking raising the rates or starting up see what the competition is doing. Do a mass mailing questioner (targeted area) asking (among other things) what kind of rate they could realistically handle. Front shop/store vs office in home will also come to play in your hourly rate. Some yrs ago I closed my shop and open a office in a extra room of my rec-room. My expenses and overhead drop so drastically that I was able to lower my rates which made my customers very happy. And if must raise the rates notify all your customers (via email, regular mail, website) when the new rates will take place. I would say at least 45 to 60 days in advanced PS; Don't forget PR, lots of PR

timl006
timl006

It's an interesting question. As I do consulting as a sideline (I have a full time job as a consultant/analyst elsewhere), I like to charge somewhat less than the going rate used by those who are independent consultants full time. I think it only proper as I can't take on the complex jobs and/or large clients that the aforementioned full time consultants can. As a result, I find out what the going rate is and charge a little bit less than that. That being said, I have no problems in raising my rates as demanded by the marketplace. My clients know that what they are buying are my expertise and experience, neither of which they tend to have. Even if they do have some proficiency, they also tend to be short on one more commodity: time.

JohnMcGrew
JohnMcGrew

...but the upside is that I have remained competitive and have picked up business as my competitors have faded away. But as soon as both real economic growth and inflation kicks in, they will be going up. I won't feed about about doing this, and my long-time clients know I don't raise rates regularly or otherwise nickel-and-dime them. It won't be a problem. Just got of the phone with an associate of mine in the accounting business I frequently work with. She had just lost a bunch of business because some of her clients moved to someone charging nearly 1/3rd what she was. The upside was that these were clients who were more troublesome than most, so it wasn't that big a loss. One lesson it took me the longest to learn in this business is that the clients that do not respect your time and the same ones who expect you to work the cheapest. They are not worth the agony.

HAL 9000
HAL 9000

But here I can say most defiantly this is not just related to IT or Consultants in General. Many years ago I worked my way through Uni by fixing Sewing Machines. When I first started there they charged $35.00 a service and had done this for more years than anyone there could remember. Then a Edict came down from on High to Increase this to $60.00 a Service and the techs there where terrified that the work would dry up and they would be unemployed. Well that didn't happen and if anything the work from the one big contract that they did have [b]"Schools"[/b] got bigger. So much so that they needed to put on 2 more mechanics to keep up with the work. Though I should say that they went broke about 5 years latter after I left for other reasons but the big one which did hurt was the schools taking up to 2 years to pay. This was one brand service and the Country Distributer so it was all very tight and the Banks which controlled the Parent Company in Switzerland undid the entire company. Then a few years latter I started working for their competition and they charged $60.00 per service. That was in the mid 70's by now and that rate stayed put till the early 00's where it again more than doubled. I couldn't help but think that more regular smaller increases would have been better but by then I was so far removed I wasn't really concerned. Again both places where the Country Distributers that I worked for not the end user Service Agents so we had control of the situation sort of. ;) When I finished Uni I went to a company building Race Cars and our fee was on a Per Car Basis or a Per Job Basis where we could Guestimate the amount of time involved and charge accordingly. Not sure that we made the money we should have but we didn't go broke either till a job at the very end where a guy stopped paying and we had the option of continuing the work or stop it take on new work and then have to dump everything and get stuck back into the original job when he paid again. This had been a common thing he just forgot to pay when payment was due and would then pay a month latter and expect the work to be on schedule. This happened about 10 times and we finally got the idea to just continue with what we had to do and stop messing around. Sure it might be tight for a few weeks but we could always stop payment to the guy in question for items we where buying from him so while we where out of pocket it wasn't as if we would go broke. ;) A word of warning [b]Never[/b] expect the Legal System to do the right thing. but I'll leave that alone. After that I was working for the Importers of Mainframes by now in the early 80's and as all of our work involved servicing stuff [b]"Under Contract"[/b] there where no service fees charged all income came from the Service Contract that was negotiated at the sale of the hardware so we basically had a free hand to do as we please and replace what was necessary as apposed to what the customer could afford. Kept the hardware working well and everyone happy. Then things went to Hell in a Hand Basket with the advent of Personal Computers. Suddenly everyone wanted that Application to work on their Hardware and they no longer employed Programmers to write the applications for their business and hardware and they wanted those applications way to cheap to make it worthwhile to write them and they wanted their hardware repaired at less than the cost of a replacement unit when they broke them. The problem now is that to charge a [b]"Acceptable Repair Rate"[/b] even for a data recovery and reinstall of an OS & Associated Software even at the most basic rate means that you charge more than the replacement cost of the unit that you have for repair. So PC's have become a Throw Away and you can now just justify your fees for the Recovery of their Data and little else. Today we are making more in Installations where the business are willing to pay for our time installing the hardware and getting the user up to speed with the new unit, Recovering the data off the units when the users crash them and very little else. Look at facts the reasonable end NB is very cheap and charging 8 hours even at the rate of $60.00 per hour which we used to charge back in the 70 for service work of any kind is $480.00 which is no where near the time spent to return a unit fully loaded and working the way it was before the OS crashed and stopped the thing from being useful but it's well over 50% of the cost of a replacement. Currently we are supplying i5 NB with 8 GIG of RAM and so on for about $850.00 so why would you even consider repairing a 2 year old NB? That is why we continue doing Small Business work and only do domestic work for staff of the business that we are contracted to. Domestic is way to [b]Cut Thought[/b] and there is no profit margin involved. ;) Col

Trikki10
Trikki10

Why be a grammar nazi when we get the point.of what they were saying?

Sterling chip Camden
Sterling chip Camden

I'm in a niche where I can charge $215 to new clients and $180 to long-time loyalists. It certainly isn't the same business as computer repair. Heck, you can buy a new computer these days for one or two hours of my rate. It isn't about how hard you work, it's about the value you provide. A niche makes you much more valuable, because you're on the right side of the supply/demand equation.

Sterling chip Camden
Sterling chip Camden

As long as you're still providing value to the client, I don't see why you can't charge just as much for remote work. Do you add a surcharge for on-site, or charge for travel time?

Sterling chip Camden
Sterling chip Camden

... depending on your market and the current economy. Unfortunately, one feature of a free market is that some businesses just won't make it, and that helps keep prices from falling further by reducing supply. We all have to take a sober look at what we're trying to do and ask if it will work for us. If so, then set the rate as high as you can get enough of the time -- but no higher.

Sterling chip Camden
Sterling chip Camden

I couldn't even do business at $35 an hour. In this city, auto repair shops are getting $90 to $120 an hour.

Sterling chip Camden
Sterling chip Camden

There's nothing wrong with doing a little bit less in order to be more comfortable. That's why many companies opt to stay off the bleeding edge of technology, even when the latest technology offers to solve a problem better. To ride the edge, whether we're talking about price or technology, requires massive effort to stay on top of it and keep it from going south. A safety buffer, in either case, absorbs those fluctuations.

Sterling chip Camden
Sterling chip Camden

An engagement is about coming to an agreement on a value proposition. If you and your client don't agree on that, you're wasting your time trying to keep them. Not that it isn't hard to let them go, especially if you don't have any replacements.

Sterling chip Camden
Sterling chip Camden

That one company who kept their rate at $60 from the 70s to the 00s has got to be some sort of record. How many other prices can you name that stayed constant (or didn't at least double) during that period?

JohnMcGrew
JohnMcGrew

I frequently fantasize about moving somewhere where houses, taxes and other factors are 1/3rd less of where I live now.

JohnMcGrew
JohnMcGrew

...it's so true: Clients that are both a pain and unprofitable are not worth the trouble.

HAL 9000
HAL 9000

However the company in question didn't want to make money from Service, it was a section there for the Customers Benefit and was never supposed to make money. It was used to train Dealers and supposed to only deal with the [i]"Real Problem Customers Issues."[/i] Besides it's hard to have a profitable section of a company when there is only 1 staff member who has to run all over the state for training Courses and the like so any repairs have to be known that it could take longer than expected. However having said that I've never run a department that hasn't made a profit and it's not something I'm comfortable with. Though the best one happened with a customer who's son took a half inch drill to the bottom of a machine and then stuffs a self tapping screw into a Machines Thread. After the casting developed a crack and the self tapping screw fell out several times she wanted it repaired [b]Properly.[/b] Pity that the unit was by then 30 years old but I did a quote for Labor & Parts got the approval and then ordered the parts. Well they where in the Parts List so they should have been available even if they had to be Specially Ordered and take 6 months to arrive. My Immediate Boss rang me wanting to know what the Hell I was playing at and when he figured out what had happened he told me that he had some paint damaged parts would they be OK. As they where Paint Damaged they had been written off and couldn't be charged for so it was just the cost of labor. I got the customer to agree to using paint damaged parts and as she was getting them free I thought great and when it was returned she rang the State Manager complaining that she only had a sub $200.00 Bill when the original Quote was close to 1.5K. Apparently she was upset that it was too cheap and that the job had not been done properly. You live and learn as it wasn't what I expected. :D Now do you want me to tell you about my part in Taking the Americas Cup from you? :^0 Col

JohnMcGrew
JohnMcGrew

His problem is that wages are much lower in the sticks, but so is cost of living. Cities usually offer much higher rates, but also much higher costs of living. Of course, if you're in a city during a downturn competing with lots of unemployed talent, then the math is not in your favor.

PMPsicle
PMPsicle

There are a number of reasons for low rates ... too much competition, lack of knowledge on the part of consultants/contractors, lack of knowledge on the part of hiring managers & HR, lack of ethics, sheer stupidity, ... and so forth. Toronto is not exactly a cheap place to live ... yet I'm seeing clients trying to offer $50/hr for IT Project Managers with Mobile experience (no not hourly -- independent contract). I was paying $35/hr for programmers in the 1980s BTW. (Scary thing is that they are finding people willing to take the rate -- despite the fact that others are offering $80+ for less skills). If were only true that cost of living was the only reason!

HAL 9000
HAL 9000

I was working for Big Blue at the time and had nothing at all to do with sewing machines. Then out of the Blue one day a Urgent Phone call comes in apparently I had to go to Sydney to fix something. I just got the Flight details and nothing else. When I arrived I was met but my old boss from Bernina which was kind of confusing [i]well completely off the wall[/i] and he took me to a sail maker where I fixed his Sewing Machine so that the sails could go onto the US and be used on Australia 11. Never did quite work out how that really happened but because when I worked for Bernina I was the Resident Expert on the Special Sail Makers Machines and everyone was after me to tell them how to make their sails better and keep their sewing machines going. Not even Bernina's all of the time but they where the most common back then as they just did a better job easier for the Big Sails. Talk about [b]Special Work[/b] that I did to repair Mainframes fixing a new 217 Bernina and making it work with the Mylar and Kevlar of the day so that they didn't blow out or tear along the seams/joins. It was a new machine that needed to be set up for the job and they even airfreighted the machine to the US along with the bench it was in but got a Motor Locally in the US. Another Air Charter to Sydney and I never fully understood who paid for it or why I was involved. Real High Tech though. :D Col