• renaissancer

How much should I charge for my consulting services?

Updated: Oct 21, 2021

This is one of the first challenges you will face, once you have set up your consulting business. What you charge will depend on your area of consulting, your experience, reputation, and skills.

Charging by the hour

For your first estimate, begin with what your earned in your last job and search online to see what salaries are being offered for similar jobs. If you are going into consulting, you should be planning on better pay after your expenses than when employed by others in a regular job.

For example, if you earned $100,000 per year, you might make the mistake of expecting that all you need to do is divide your salary by 52 weeks = $1923.08, then divide by 40 hours per week = $48.08 per hour. Let's call it $48 per hour. This would give you a big drop in your income. Why?

Your employer had overhead. They paid for your computer, software, phone, office space, utilities, and other expenses. They provided your benefits, such as health insurance, perhaps contributing something toward a 401K retirement plan, group life insurance. You may have paid premiums or contributions, but without the purchasing power of an organization behind you, you would have paid more. During those 52 weeks, the leave time for vacations and public holidays would not decrease your pay if you use them. If you were sick for a week during the year, your salary would remain the same. If multiple people stop by and interrupt your work, your hourly pay is not changed. The simple calculation would not include possible end-of-year bonuses.

As a consultant, especially in the beginning, you may spend half of the time looking for clients and consulting work and performing non-billable work, such as invoicing your clients, doing your books, and other work. If you decide that you will take two weeks total off for vacation and sick leave, you would be left with 50 weeks work (that is 40 hours per week x50 = 2000 hours). If half of your time is not billable, you would only have 1,000 hours left to earn a living. So your earnings would likely be 1,000 hours at the $48 per hour that you estimated you should charge, a total of $48,000 per year. That's less than half of what you were earning when employed by someone else!

It's worse than that. You now have to pay for your own equipment, software, internet connection, phone bill, and likely the services of a bookkeeper or accountant and lawyer (to review contracts).

You may need to bill at 2.5 to 3 times the hourly rate you previously earned. You should be charging closer to $150 per hour rather than $48 per hour.

Your clients know that as a consultant you may be fulfilling a temporary need or solving a problem for the organization. Sometimes it can take a long time to bring a new employee on board. When the job you are doing is done, then the contract ends. If they make lot of effort to hire someone, and their needs change, they may have to let that person go. Consultants usually have contracts that can be ended with written notice by either side. In some cases, then, it is easier and it may be less expensive for a client to hire a consultant despite what seems to be a higher rate.

It is best, in most cases, to use the hourly rate for deciding how much you should charge.

Charge by the project

You could charge by the project, but most people underestimate how much time a project will take. If your projects for different clients are quite similar, you may gain a good sense of how long they take. Then charging by the project becomes a good deal, and billing is less time consuming because you don't have to take don't have to spend as much time tracking hours and in dealing with more detailed invoices.

If you have developed a successful presentation, seminar, or similar product that takes a clearly defined time, you can charge a fixed amount for it. It could be a standard product that is useful for multiple clients.

Hired on a retainer

Being hired on retainer is attractive. You would be paid a regular amount monthly. It is even better if you receive an upfront fee or your first month in advance. For my first consulting job, I was offered a monthly retainer with a maximum amount for the year. I turned down a retainer and they hired me at my hourly rate.

The hourly rate that I charged was a bit above what they typically paid consultants, but not above their range. I factored in what we had paid consultants in my previous jobs and the 1,ooo billable hours and the considerations mentioned above for estimating a realistic hourly rate.

I'm glad I went with the hourly rate rather than a retainer, because the projects and their need for help rapidly expanded. We did not need to renegotiate the contract. They were happy to allow the hours billed to expand as needed.

As I was intricately involved in their projects they knew that I was busy and they had a clear picture of the work I was doing. It worked out better for both parties. At the same time, I always make sure that my contracts do not restrict my work with other clients. I had other ongoing projects.

At a later time, for one client, I worked on a retainer paid monthly and they made allowance for billing at my hourly rate, if the hours exceeded 10% of the number of hours per month in the contract.

As their projects continued to expand and new ones continually arose, it was a good deal, but the preparation of invoices was tedious because the number of hours continued to expand and always required hourly billing.

Value based consulting or return on investment (ROI) consulting

Those who favor value based consulting emphasize that it begins with establishing what the client regards as value. You estimate how much your client return on investment your client would make as a result of your services..

Based on the perceived value to the client, you offer the client options for a high level of your involvement (all the bells and whistles), or a mid or lower level of involvement. These options range from the highest to the lowest price and are based on a percentage of the perceived ROI.

With value based consulting, the client can contact you at any time without feeling that they are paying an hourly charge. That's also true for other methods of charging a fixed amount for your services. If it's not an hourly payment, it is in your interests to complete all of your work as quickly as possible or comfortable.

Value based proponents say that hourly billing is not good, because there are only so many hours a day, month or year, and try as hard as you might, you have a built in maximum income. Also, when you charge hourly, it is easy for clients to turn consulting into a commodity. There is a limit to how much you can expect to be paid per hour. Value based fees are considered by many to be the most lucrative.

Value based consulting fans also regard hourly billing as unethical because it does not provide an incentive to complete the work as quickly as possible. With hourly billing, the longer you work on something, the more you would get paid. Though, it is in your best interests to get things done quickly when charging by the hour, because clients usually have an idea of what a reasonable time would be to perform the work. Also, if a client feels that you are overcharging, repeat business is in jeopardy. On the flip side, if the work is much more time consuming than anticipated, billing at a fixed price, such as by project, the consultant may have to work at a very low hourly rate.

It can be difficult as a beginner to accurately predict how much a client would gain from your services to develop a value based proposal. Also, you have to be sure that you can ascertain how much they actually benefited from your services after your consulting is done. This method of structuring fees does seem best suited to areas such as business management consulting.

In research and development, where many projects end because experiments or clinical trials have negative results, you might save your client money helping the client to get to the answer more rapidly. It would be very complex in this area to do value based consulting, though not impossible.

Some companies may give stock options to consultants in addition to paying the consulting fees, to ensure that they remain engaged and have a vested interest in improving the return on investment. It seems that stock options are more often given in longer term consulting commitments. So it is sometimes possible to get a piece of the ROI while charging your clients without using value based consulting. This opportunity to obtain stock options can occur not only established public companies but with start up companies that have not yet gone public, where ROI may be difficult to estimate in the short term.

What method should you use to charge your clients?

This is up to you.

As you gain experience, you will find which method of establishing your fees will work best for you. Doing an estimate of what you need to earn to make a consulting opportunity worthwhile can just be a starting point. Often the hourly rate you would need to charge to make the project worth you time, enable you to cover your expenses and make a profit is a helpful baseline. You can factor this into charging by the project, going on retainer, or as part of considering what you bottom line would be for value based consulting.

In the end, it is between you and your client. There is a price below which you may not work and a price for services above which your client will not hire you. Also, some clients have preferred ways of structuring payments and may prefer paying by the hour, the project, or a retainer. In your negotiations, it is important to focus on the client and understand their needs and expectations.

What are your thoughts?

9 views0 comments