Deciding how much to charge is a challenge for independent consultants and contractors. Your rate can be as high as what a client is willing to pay — but finding out how much that should be is the tough part. The most important step is understanding the scope of the project and the needs, wants and urgency of the potential client. How do you calculate a bill rate that doesn’t undersell your services or lose you the contract to another consultant?
Let’s start with understanding what a bill rate is — the amount a company or professional charges per hour of work.
How much should you charge?
There are three main techniques used to decide how much to charge for consulting services:
1. Cost-Based Rates
This is the most common starting point for calculating a billing rate. It helps set your baseline or ‘equivalent W-2 number’. It factors in the costs you need to cover to make your target income. Although this is an ideal method for many consultants, it does have its drawbacks. First, it does not take into account the value you are providing the client, so this method could have you undercharging people. You also aren’t factoring in what the competition is doing or charging or how urgent the client may need your services and how scarce of a resource you are to find.
2. Market-Based Rates
As you might remember from your basic economics class, the market rate is based on supply and demand. If your billing rate is market-based, you can assure that the amount will meet your client’s expectations. In order to assign a market rate to your work, you must be performing a task that is definable – what do you do? Defining what you do can take into account your experience, industry, title, and region. You can also define what you do in terms of what you make or provide – website design, training sessions, etc. To accurately calculate a market-based bill rate, you must have current market data. Your best source of information is competitive research: who are your competitors, what do they offer, and how much do they charge?
3. Value-Based Rates
If you own the only gas station on a 300 mile stretch of highway, you’ll be able to price pretty high. The same holds true for independent consultants who have a unique, valuable and scarce skill. The best way to determine the value is to know the client. Try and find out as much as you can about the scope of the project to understand the value you can provide. Simply put, this bill rate is very specific to your client and your contribution. As you may have guessed, it’s based on the value you provide to the client and the ROI they receive. This can be a very profitable billing method, but is only appropriate for consultants with a wealth of experience. The client must walk away feeling that they actually got enough value for what you were charging, or else your reputation will suffer.
How to calculate your ideal bill rate
There are 3 steps you can go through to determine how much to charge for consulting services.
1. Calculate Your Costs
Costs consist of labor, taxes and benefits and overheads; these can also be known as fixed vs. variable costs.
Labor Costs: Instead of considering just salary (that is, how much you are currently paid as a full time employee for your work), you must instead consider the cost of your services or the labor cost in the open market.
Taxes and Benefits: Once you have your labor cost, now add on all the benefits that are generally required or expected of an employer such as employer payroll taxes (the employer’s share of Social Security tax and Medicare), workers compensation insurance, unemployment insurance and contributions to health insurance and retirement savings.
Overhead Costs: Your overhead are costs that you incur to run, maintain and grow your business. These costs can’t be directly tied to the services being delivered and thus generally do not get invoiced to your clients.
Tax Deductible Expenses: Getting down to the details can be worth it at tax time. Self-employed individuals are able to deduct many expenses used to run a qualified business, including home offices, car leases, and professional supplies and office equipment.
2. Calculate Your Billable Time
In building the blocks to an hourly billing rate, you can—and should—calculate your utilization, a number that takes into account how many hours you are actually billing as a function of how many hours you have available for work.
3. Factor in Profits and Losses
At this stage, you should have calculated—or understand how to calculate—your bill rate cost, or the point at which your rate can begin to turn a profit. Let’s find this:
1. Calculate your total costs (labor, benefits, and overhead)
2. Now, divide this number by the estimated number of billable hours. This number represents the hours you plan to work multiplied by your utilization rate.
3. This is your hourly billing rate cost, just to break even. You’re in business to make a profit. You’ve taken risk in even considering going independent and you need to be rewarded for it. In addition to your bill rate cost, your final hourly rate is a function of cost plus a supportable profit mark-up.
Whatever your strategy, you should review your rates often (at least annually).
To learn more about how to determine what you should charge for consulting services, download our bill rate guide by completing the form below.
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