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
- 10 mistakes that rookie IT consultants make
- Five tips for being profitable in IT consulting
- Five things you should never say to a client
- Five items all IT consultancies must stock
- 10 legal issues that consultants should know about
- 10 things you should never do on a consulting job
- 10 really dumb mistakes to avoid in the field
- Five survival tips for new IT consultants