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Set (and get) 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).

Note: This post was first published in TechRepublic's Five Tips blog.

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 IT consultant resources on TechRepublic

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
troutledge
troutledge

I have been working as an independent contractor for the past 10 years and limit my business goals to finding work for myself. (Not interested in growing/hiring others). That being said I find most of my work by sub contracting through Big Consulting Companies or Professional Service organizations. One thing I have found is I do not have a lot of down time and ALWAYS bill 100% for all my hours worked (no working 60 hours and billing 40) and have averaged around 2000 billable hours per year. So from my perspective I cannot compete with the sales/marketing of these companies and could not demand the billing rate they do even though I have more skills/experience then the majority of their employees. So for example the going billing rate for a project is 170 per hour I only request 65% (or 110 per hour with expenses paid). At first this was hard for me to swallow, but after a few projects I realized that they have the pipeline to continue to find work and since they are making enough $$ on my engagements (and the clients are happy with my work) it is worth their while to continue to use me. (of course they have tried to convert me to a FT EE on several occasions??? withought success :)) So in summary I agree with this article and wanted to add a sub-contractors perspective. In these cases the math changes since I have limited expenses (they are reimbursed) and keep myself billable.

TAPhilo
TAPhilo

The above also is for most any hourly service work. I do photography part time and I had to figure in camera repairs, upgrades, routine maintenace, computer software, hardware upgrades, scanners lens etc all into my hourly rate to cover all the "backoffice" stuff that happens after you take a few hundred photos at a wedding.

Greendata
Greendata

Agreed with most comments above. Also ensure you weigh up the amount of continual work you get from the client, how well they pay, do you have to chase the money, do they query invoices, do they purchase hardware/software from you etc. We have found that if we have to negotiate, it works if you clearly spell out that due to the continuity of hours contracted per month ongoing at $x per hour set for Yhrs per month only. Anything over and above is at the normal undiscounted rate. This allows you to meet affordable SLA's and still have incentive to return to the customer on the busy months. It also allows for give and take. they give you hrs and you take extra sales. We always charge for call outs as an addition to the monthly contract ie: bill month in advance for contracted work, and then bill for call outs/travel at end of month or week depending on what customer prefers. We also provide them with an SLA calculator (excel) on their intranet so they can see where they are at during the month without calling you for it. Keeps them happy.

karudzo
karudzo

I've been doing IT consulting for quite awhile; great advice. I would also add: 1) resist the expectations of others wanting you to be their "IT buddy"- for free, and 2) never become known as the "Walmart, discount IT" person/place by doing discounts only rarely. That being said, always add some extra value (do a bit more than what's required).

Justin James
Justin James

I've been doing freelance/side consulting work for a long, long time. It wasn't until the last year or so, when I was getting enough business to consider it an actual "business" (instead of "hobby that paid money") that I got serious about my pricing... I discovered that I was REALLY undercharging! One thing I'll add... if someone is going to give you long term work, you can drop your hourly rate. Fact is, I'd rather bill $75/hour to someone who will fill my availability 100% than charge $100/hour to someone who will use me at 50% capacity and the rest of my time is spent looking for more work or twiddling my thumbs. J.Ja

Sterling chip Camden
Sterling chip Camden

Even though it's simple arithmetic. And those clients that only use you for an hour or two here and there but expect an immediate response, should be paying you about twice what you charge your steady, everyday, low-interruption clients.

Justin James
Justin James

I have a client right now who is paying an almost embarrassingly low rate... I set it thinking the relationship would involve some very minor work in 15 minute increments, it's now 10 - 15 hours a week (for someone consulting part time like I am that's "full capacity"). I also set it right before I made a huge hike in my rights to bring myself in line with market value. That being said, the customer is so easy to deal with, pays up front (they actually *pre pay* if you can believe that), and laid back, and the work is interesting enough that I don't mind the rate. And given the number of hours they have me working, I am doing quite well. Not "quit my day job" well, but well. And I've used the confidence from this particular job to greatly increase my rates to levels that I thought were "loony bin" a few months ago. It turns out, what I consider "loony bin" others consider "quite reasonable" especially given that my time to deliver is literally 20% - 50% of what competitors (who charge about the same) are doing (hint... you know that "Agile Platform" thing I keep talking about? MAJOR competitive advantage!). Basically, I show them what they can get done in one "iteration" and all of a sudden, the price per feature delivered is so ridiculously cheap, I'm a bargain despite the hourly rate. It's a win-win all around. J.Ja

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