How Much Should I Charge as a Consultant? (Guide)
If you’re just getting ready to find your first consulting project or already well along on your journey, you have most likely grappled with how much you should charge for your services. While no consultant is ever too comfortable with a simple answer, there are a few sound methods to determine your ideal bill rate.
There are three basic strategies to find your ideal bill rate: cost-based, market-based, and value-based,but you can also have a blended rate.
Bill rate (n.): the amount a company or professional charges per hour of work.
Learn 4 basic strategies for determining your bill rate:
1. Cost-Based Rates
The cost-based method of bill rate calculation takes into account the total cost of offering your independent consulting or contracting services to the open market.
The real cost of your services is just one point of reference, but is a valuable way to find what is known as your bill rate floor.
We’ll also help you understand an important concept called utilization—the percentage of time that you can actually bill clients.
By using the cost-based methodology, you’ll be able to develop confidence in your rate, as you will know the exact variable and fixed costs that you need to cover to be generating a profit. Luckily, the exercise is well worth it because the cost-based method does factor in that magic profit margin or mark-up that allows you to act less like an employee and more like a business.
You’ll learn how to think in terms of profit and loss, instead of benefits and salary.
STEP 1: CALCULATE YOUR COSTS
Costs consist of labor, taxes and benefits and overheads; these can also be known as fixed vs. variable 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. A good way to determine this is to ask: How much would you have to pay to do this project if you were to hire someone? You can certainly benchmark salaries offered to you or others for similar work, but be pragmatic and practical. The salary is not what you want to earn, but what you would be paying someone else for the work you are doing. If the work is required to be done at a particular location, then factor in salaries for that local market.
Benchmark salaries for an idea of what is offered to you or others for similar work, but know that salary and hourly rates don’t always equate.
Use these sites and others for research:
Plus 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.
As a self-employed professional, you will be responsible for procuring your own health insurance, implementing your own retirement program and you are required to fund both the employers and the employee’s share of Social Security and Medicare Taxes (also known as Self-Employment Tax). Many clients will also require insurances such as worker’s compensation and professional business insurances specific to your industry.
Don’t skimp here for the sake of lowering your costs, as these are fixed-cost items that, even with proper deductions and tax benefits, can’t be entirely eliminated.
For purposes of estimating the cost of these payroll related taxes and benefits it’s generally a good idea to factor in an additional 30-35% of your labor cost, more if you want to contribute significantly to your retirement.
Don’t forget 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.
While most overhead can be accounted for by simply making an informed assessment, or even an educated guess, others may be more unfamiliar if you’re branching out on your own for the first time.
Overhead can be a vast and varied laundry list of things that can range from office supplies, computer systems, and marketing to professional advisors, training, and licensing fees. As each consulting practice varies, you should carefully consider the things you need to run shop in your line of business that you can’t charge back directly to your clients.
Some items to consider are costs for: subscriptions, advertising, trade shows, general liability insurance, professional liability insurance, books, training courses, website development, legal advice, tax advice, printing, travel costs for business development, etc.
Cross Your T’s and Dot Your I’s It is worth your while to be as thorough and detailed as you can when itemizing your overhead costs. Omit nothing that you use or plan to use for your business
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. However, these expenses are not guaranteed and the IRS has specific rules for the way in which these materials must be accounted for and declared.
Depending on the scope and volume of your business it may even be worthwhile to hire a tax professional, although this will add to your costs.
A better choice may be to outsource tax and expense management to a company such as MBO Partners that specializes in these items entirely, saving you billable time and money that you can plow back into your business as an increase in your billable hours. Whatever way you choose, make sure you are getting the most benefit for incurred, legitimate business expenses.
STEP 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.
Typically the large consulting firms target a utilization rate of 70% to 80%. The remaining 20% to 30% is used for business development, business administration, professional development, holidays, and personal time off.
Let’s now figure out the number of billable hours you have in a year, assuming 100% utilization. A standard used in the industry is 52 weeks x 40 hours a week = 2,080 available hours.
However because no one can, and certainly no one should, work every hour of every day of the year, start backing away from this number until you reach a figure that is both realistic and reasonable.
Be generous to yourself and allocate the time you need to recharge, reboot, and revitalize. Remember, many people choose self-employment because it offers greater work–life flexibility. Build that time into your rate. When you have arrived at your own total number of available hours, you are halfway to utilization.
Not all your available time can be billed to clients. Now, determine the number of hours required to support your business on a non-billable basis.
This is a long menu of items like new business development, training and business administration. How much non-billable time you should allocate depends on your efficiency, your own skills, and your infrastructure. Does managing your own billing and accounting for business expenses make you feel exhausted even before you have begun? Know the effort required and also make it personal—figure out which parts are easy for you and which are a true burden. Don’t ever rush to estimate this line. (As a side note, depending on the value of your own billable hours it’s often smart to outsource those items that are draining billable time and could be better performed by others, but don’t forget to account for that in costs!) When you are ready, input the percentage of hours you can bill of the hours you can work.
Conduct your own “reasonability test” when you set your utilization goals. The lower the number of billable hours, the higher the burden on your rate to meet a breakeven point. Lower costs help when utilization hours are low.
STEP 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 bill rate can begin to turn a profit.
Let’s find this:
- Calculate your total costs (labor, benefits, and overhead)
- 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.
- This is your hourly bill 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 bill rate is a function of cost plus a supportable profit mark-up.
Your risk is based on the reality that you may not be able to bill all the hours you plan, or you may incur more costs than you planned, or you may have a client that does not pay their bills. If you accurately factored in all of your costs, and also accurately forecasted your billable hours and utilization, a reasonable profit could be 20% to 30%—your mark-up.
Mark-up (n.): A percentage that you add to your cost to cover your risk to generate a profit. How much can you demand for your service beyond the bill rate cost?
How to Manage Loss
If your costs are not completely accounted for, and your utilization may end up being lower than you planned, you should factor in a higher mark-up. This provides you with a safety cushion, but it may also make your cost-based bill rate higher than the market will pay (we’ll cover this in the “market-based” section later on). The higher your risk, the more you should factor in a higher mark-up. Of course, the more experienced you are, and the more informed you are, the more accurate your costs and utilization will be.
There will be stretches when you find yourself in the classic “feast or famine” cycle of independent consultancy. Some famines will be natural, such as the downtime as you seek clients and solicit more work, and some will be man-made. Someone just starting out might need to discount their rates just to get their foot in the door, build references, or learn new projects.
Be smart when discounting your bill rate by clearly stating your actual bill rate along with the discounted rate for that particular project. This will allow you to revert to your original figures upon project completion and save you the explanation of why your rates have “gone up.” They haven’t; they’ve just gone back to what your expertise and time are really worth.
The increased number of unknowns (the higher the risk), the higher your mark-up should be… generally higher than 30%.
Because of some of the ups-and-downs of consulting life, profit is something you can plan for, but you only really know after the fact. Profit is a function of your estimated costs, your estimated income, and how that actually comes to life over a period of time—usually annually or quarterly. A simple way to think about it is this: it’s what’s left over.
Profits should be measured in the ability to meet your costs, and have something left over to achieve your life goals.
A 10%–15% profit range is common and a good place for an independent consultant to start and then eventually move up to 20%–30%. Profit is one number you can—and should—consider in absolute. Like a target salary, you should have a target profit you wish to achieve. This is what you know gives you the ability to live to your desired standard, work the way you would like, and enjoy the things that drive you to earn an income. Like a business trying to hit quarterly numbers, plan a cushion for the cycles of profit and loss.
The cost-based method shines a spotlight on the needs of your business, not the requirements of the market. Cost-based calculation is an inward approach that is critical in establishing parameters for your business—but it suffers from a case of self-absorption.
2. Market-Based Rates
The first portion of this guide covered the cost-based method of bill rate calculation, which offers all consultants a thorough breakdown of a consulting business into its cost components. The resulting bill rate was a reflection of the amount you need to charge in order to cover your costs and earn a reasonable profit.
In the market-based approach, you’ll learn how to benchmark your internal cost-based rate against external conditions to remain competitive. Whether or not you share your market intelligence with your customer, understanding this rate can help you stand out from the commodity providers and align yourself with higher value firms competing in your space.
Market-based rates take into account your sector and its competitive landscape at a specific point in time. To do so, you will need to define what you do, seek similar services in the marketplace, and determine what clients who purchase those types of services are paying. In essence, you will determine what the market is willing to pay for your services.
STEP 1: DEFINE WHAT YOU DO
It’s common to fall into the trap of defining what you do by title (for example, as a Director of Marketing). While titles may be good points of reference, they aren’t definitions of the services you provide. Think of yourself not as a person comparing what you do to a salaried role, but rather a business serving a specific audience.
Establish your personal market-based skills definition by asking:
- What service do I provide, or wish to provide?
For example: Marketing Consulting
- Then ask yourself—Is there a specific sub-set of consulting I am specialized in?
For example: Brand positioning consulting within marketing
- Consider the audience you wish to provide the service to:
For example: Fortune 100, or growing midsize firms (each has its own buying power and assumed price points)
Also consider the buyer:
- For example: Which department are you selling to? (Are you selling this to the C-Suite or to a midlevel manager?)
- Who else would provide this service? If you were a marketing consultant specializing in brand positioning, focusing on the Fortune 500, would you be competing with a marketing firm or boutique agency?
STEP 2: APPLY MARKET INTELLIGENCE
Now, it is time to do some competitive research.
Talk to others in your industry, consulting companies, and even current clients. They might be willing to share what they have paid in the past or are currently paying for similar services. In the case of current clients, it will be easiest to pose this question in the sales process: “What is your budget?” or “What are your expectations of what you would normally pay?” are two good probing questions to help establish their market price assumptions. Alternatively, connect with professional associations and network with other independent consultants in your field.
Rates don’t have to be specific; your research is meant to help you find a range of rates.
What if I find that others are charging a fixed cost?
Many of your competitors may be using advantaged pricing techniques to charge a fixed price to the client, and manage internal costs to create profitability. You may do the same if you can package up your services with predictable costs, but for comparative purposes, you’ll have to guess at the amount of time your competitors assume to take to complete a task. This will help you back out to a rate from a fixed project price you uncover through market intelligence. After comparing a few, and doing some networking with other consultants and clients, you should develop a good idea of what the time burden for project deliverables can be.
STEP 3: COMPARE MARKET-BASED RATES TO YOUR COST-BASED RATE
Have you already established a cost-based rate? If you haven’t, we recommend you do so. By comparing it to the market, you can understand if your market analysis results in a boom or a bust. Many consultants find that their cost-based bill rate can become the floor (or the minimum they can charge to cover the cost of providing their service), however sometimes the cost-based bill rate is higher than the market rate. This could be for a number of reasons:
- Your costs are higher than other competitors in the market (Are they working from more-cost-effective
- You are working fewer hours or have lower utilization than others because you need more time to run the back-office or non-billable part of your business (Can you outsource this?)
- You are spending more time on business development which is more challenging because you have a customer that is hard to reach or takes a long time to make decisions (Is there a way someone can help you develop business, either via a referral partnership or by paying for business development help?)
If the market appears to be priced under your cost-based rate, this is the time to re-analyze and re-calibrate where you can lower costs. Simple steps can include trading rented office space with a home office and bundling your telecommunication needs to be more cost effective.
STEP 4: TAKE IT TO THE NEXT LEVEL: OPTIMIZE YOUR MARKETING POSITIONING
Big name brands and indie shops alike spend significant time and effort on marketing and branding—and independent contractors are the same. You’re not just selling your expertise, but you’re also selling yourself to the client. It’s important to “build your brand” and get client buy-in on not just your skill, but also your ability to develop long-term, sustainable relationships.
Branding and Marketing:
- Build your brand. It’s important to brand yourself in your subject area of expertise and demonstrate leadership and credibility. While you may not be a household name in your field just yet, start building a reputation so that in your market your name evokes a strong association with your area of expertise. The more specific and “ownable” the expertise, the better you can stand out.
- Demonstrate how your thought leadership will bring something to the table that will bring value to the client. Does your project allow you to employ strategies that will give the client something that they not only didn’t have before or didn’t even know they needed?
Market your skills well. A client will be willing to pay for experience that they don’t have and that you can demonstrate that you do. Good references, a solid track record, and great customer service will not only get you clients and help you retain them, but may allow you to charge above the market rate as they believe they’ll be getting added value from hiring you as an independent consultant.
Use Proximity to Your Advantage
Your client has the option of choosing providers, some of whom may be far away. You, too, may be pitching for business that is not at your doorstep. No matter what size of firm, every client values strong communicators, project managers, and efficient workers.
Show that you can complete the work in an advantaged way either because you have done so before, or are better suited to complete the work with less supervision than a lower-cost alternative. Location is only a disadvantage if you make it so. Consider the true value of your work and time when comparing your rate to another.
As a Java developer, you might compare to offshore rates and be disheartened, but instead you might compare yourself to a manager guiding a group of offshore developers and interfacing with the client. Your rate is a function of both your skills and your capacity for performing them independently, without assumed supervision. Don’t forget to charge for all the parts of what you do.
3. Value-Based Rates
Value-based pricing is the most sophisticated method of bill rate selection. In this portion of the guide, we’ll walk through the steps to determining a value-based approach to pricing as well as understand how this more sophisticated pricing approach links back to the cost-based analysis and market validation. You will learn specific ways to set a value-based rate including examples that bring each rate scenario to life.
Use this method if:
- The scope of the project is clearly defined.
- The solution you are providing has a proven track record of success.
- You can demonstrate a strong ROI for your services.
- You have a direct relationship with the economic buyer on the project.
Avoid this method if:
- You are new to consulting.
- There is low commitment from the Economic Buyer, or you do not have a direct relationship.
- You are not very confident in how much effort is involved in delivering the solution.
If you’re an independent consultant who can clearly identify the project, discern the client’s objectives, define the measures that will indicate progress towards improving the client’s condition, and ultimately show that value to a client, you’re well on the way to charging a value-based rate.
Better still, if you have some unique intellectual property (IP), process, skill, expertise, or methodology that can create value for qualified clients, you now are ready and able to step away from the traditional models of setting and structuring time-based bill rates and, instead, charge your fees based on the “value” your services create for your clients.
This is perhaps the only instance, where expertise, not time, is of the essence. Instead of being simply a transactional or deliverable-based resource to the client, value-based consulting pricing positions you as a strategic partner, engaging with your client in a true consultative manner. The client may need an outsider to step in and frame, guide, and solve a specific business problem. Perhaps they need help in reaching a new territory, building a new product, creating a new methodology, or trying to save a business process going very wrong. Think of it as not just getting a rate per hour, but a true “piece of the action.” Of course if you cannot deliver, or if it takes a lot more effort than you bargained for, you also will have your share of the loss.
STEP 1: ASSESS READINESS—FOR YOU AND YOUR CLIENT
Value-based projects often arise when a consultant listens hard, truly understands a client’s motivation and needs, and identifies areas where their specific skills can help the client save money, increase revenue, accelerate productivity, etc. Value-based pricing works when the results add measurably to the client’s bottom line or top line.
Are you ready to price for value? Take a long, hard look at your competencies and assets. In order to successfully employ value-based pricing, you must have three things:
- Clearly understand the value your service will create for your client and then be able to effectively communicate that value to them. This requires you to not just be very good at what you do, but also to be very good at selling your skills in a persuasive and compelling manner.Have proven past results. You’ll need to mine your previous projects for success stories that demonstrate your competence as well as the value you’ve been able to create in similar situations in a quantifiable manner. With proven data, you need to demonstrate that your services, your programs, your intellectual property, as applied to a prospective client situation, will most likely prove similar breakthrough results. You must show that you have done it before.
- Be a networking superstar. Finally, you must have an accessible network of clients with similar business problems that you can solve. Are you able to approach a manager or director, or even a CEO, and share a point of view on the issues that trouble them? Which areas do buyers tend to look to you for advice?
If you’re a good communicator and are able to demonstrate to a client that they are going to get increased value or benefits as a result of your services, and if you know some clients personally, your “sell” should be easy. In addition, because you are positioning yourself to solve a problem, you are taking much of the burden of risk away from your client. They are required to pay you for solving a problem, not for your time.
STEP 2: HOW TO SET A VALUE-BASED RATE
In traditional pricing methods, the client takes the risk in paying you for services based on a statement of work of assumed time and delivery. However, in the value-based method, there is a morphing of the traditional model of the contractor/client relationship to a collaborative one where you both share in the risks and rewards.
Value-based pricing ignores time in favor of results, and so the risk must be a measured one. Are you confident you can deliver on solving the business problem? Are you confident you can show results? If so, you can set a value-based fee
4. Blended Rates
To price yourself into a new market, or to compete with a higher-cost provider, you may consider two ways to use blended rates to your advantage:
- Offer a low hourly rate, but include a bonus award for reaching key milestones. You may choose to get in the door by charging your client below market-average rates on an hourly basis. However, when you reach a key milestone, the client agrees to pay a milestone-based bonus, a point at which you recover the discount on your rate for a successful delivery of part of the project.
- Blend team rates into a single client rate. Rather than bill for each of them individually at their respective rates, you can lead the team and the client relationship by proposing an average hourly rate.
This is an easy and convenient way for you to come up with a single fee to present to the client.
MBO Partners can help easily manage paying a team working at different rates under a lead broker or consultant to reduce the time burden and help you enjoy the profits of this approach.
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