Searching for the Moon

Shannon Clark's rambles and conversations on food, geeks, San Francisco and occasionally economics

Setting your rate – advice for consultants

Posted by shannonclark on December 13, 2007

A friend of mine this evening twittered requesting help for how to start a consulting business. I twittered back some off the cuff ideas, but this is a topic I have been thinking about for a while now. At present I am not actively seeking to do consulting work (instead I’m focused on launching a new ad network, Nearness Function) however there is a rate at which I would do some consulting work.

Here is my simple advice to my friend.

Reply to the request to “pick your brain” with three rates. 1 – for an hour phone conversation. 2 – for a full day onsite consulting. 3 – for an onsite workshop (which would usually involve multiple days, preparations and follow up). All to also include expenses (i.e. travel costs)

Of course depending on the type of consulting you want to do and the length of the engagements it would require the numbers of the above units you bill for and agree upon might differ widely – some consultants could add a great deal of value in a single, one hour call, others might require ongoing engagements over many months and even years.

But remember if you are consultant you are not a contractor, your time should be seen as highly valuable and even more valuable should be the value you are providing. In fact the best and optimal consulting arangements usually do not involve explicit time units – instead they are project and results orientated. i.e. “for $x (where x is usually a large number) we’ll work together and launch your company’s new strategy/product/service/etc by a specified date”.

However to get started with an engagement some time pricing can be helpful. But how to set the “hour”, “day”, and “multiday/talk” rates?

To start, realize that whatever rates you set you should aim for being fairly comfortable if you end up only being able to bill 50% of your time in a given year – and for the purposes of simplicity (and to factor in holidays etc) we’ll use 2000 hours as a baseline for how many working hours there are in a year (and yes, most of us here in the US might actually work far more than that in many years). That means whatever your minimal rate is, you should be at least comfortable at 1000x that rate (i.e. 1000hrs of billable time).

My suggestion for a starting point would be to broadly estimate your costs on a month basis. For most people their mortgage/rent is the largest cost, often followed by food. I live in San Francisco, one of the more expensive cities in the US to live in so some of my costs are fairly high, though on the other hand I don’t own a car which saves me a great deal of money each month.

Don’t forget to include yearly costs that you don’t incur every month – for many consultants this probably includes various tools (new computer, printer, etc), travel that is not expensed, conferences & trade shows, business cards, your website, an accountant to file your business taxes, general liability insurance, health insurance, travel expenses (so maintaince on your car if you own one). For your own sanity you should include also some personal vacations, new clothes, gifts for friends, donations to charities your support, funding your annual IRA account etc.

And round up here – build in a cushion to your personal budgeting so you can afford to spend money to save time (I drop off my laundry at the cleaners on my corner and pick it up – my building doesn’t have a laundry machine so my alternative is walking down to a laundromat where my costs would only be slightly lower – but I would have to spend many hours washing, drying and folding my laundry – time far better spent on my business). You should be comfortable taking a taxi when you need to, or buying the flight whose times work best not which is the absolute cheapest (but causes you to waste many hours on layovers, get up/leave at crazy hours etc)

So from these budget exercises come up with a rough target for each month. Then factor in the fact that as a consultant you have to pay taxes – figure that assuming that about 40% of your gross will be taxes is relatively safe (in the US you will have income taxes, state and sometimes city income taxes, the employee AND employer portions of Social Security (that’s 15% right there – though it does cap out eventually – I think just before $100k currently but check with a professional for the current caps), and a variety of other taxes.

What does this mean? If your gross income for the month was $10,000 – assume your net would be around $6000.

Using that as a working number (and for quite a few people you probably can live very well and save money on net income of $6k each month), $10k per month gross gives a yearly target of $120,000, using our 1000 hours estimate that implies a rate of at least $120 per hour.

In turn that implies a rate for a day of consulting of I’d suggest at least $1000

and probably for a multiple day engagement involving preparation (calls and/or in person, a talk or presentation, and some follow up consulting/further meeting) a rate of around $5000

I would actually suggest adjusting these numbers upwards a bit however to factor in our original starting point – following up from an initial request to “bend your ear”.

I would probably reply to that with something like:

My rate for an hour phone consultation is $250, for a full day in person consulting engagement is $2000 plus expenses, and I will do an onsite workshop for $7500 plus expenses.

And then if pressed would explain that the workshop would include phone and/or in person preparations, the actual full or half-day onsite workshop, and a follow up. I would not – however – commit to a written report or the like – rather I would tailor the specific deliverables more closely to the actual goals of the engagement. So I might, for example, offer a workshop and then follow up with the attendees in a few weeks to review their progress and offer suggestions.

Keep in mind also that every client comes with certain hassles – you have to bill them, wait for payment, deposit that payment etc – and often fill our various company’s paperwork, follow up about your bills etc. Not for every client but slow or late payments will happen.

Realize that while the numbers I am playing around with in this post may for many seem high, in point of fact for many consultants they are not high at all – and like lawyers, consultants are frequently valued by the rates they charge. If your lawyer charges you $50/hr you assume they went to community college and may have taken many, many attempts to barely pass the bar – in contrast you assume that the partner at a firm who bills at a rate of $500/hr is significantly better skilled and experienced than the $50/hr lawyer.

This may or may not be the case – but the point here is that the perception of value is in large part created by the price assigned to a person’s time and the advice they are giving you.

So value yourself highly – and price yourself accordingly.

(it should go somewhat without saying, but I will spell it out here nonetheless, that I am assuming here that you really do have a lot of value and expertise to offer someone in the field in which you are consulting. That even in just an hour or two of your time you will be able to help someone – and that given a few days of your time and attention you will be able to create value for your clients far in excess of what you bill. Value can be created directly – helping suggest ways to save money or grow sales and value can be created indirectly by accelerating a process, by helping someone avoid wasting time & money on paths that would not be successful or which would not meet the corporate goals etc)

My own other rule of thumb is that it is rarely worth the effort to enter into a consulting engagement if my invoice won’t be five figures. That said, I could see doing some types of smaller engagements and I would suggest them as ways to work with new customers and build up new opportunities.

One further note about expenses. Expenses as a consultant are somewhat different than expenses as an employee. People’s practices and expectations around this vary – but here is my own personal rule of thumb and how I would feel most comfortable. Ideally, build the expected expenses into the quote and don’t file detailed expenses to the client – so for example if my rate for a workshop was $7500 and to fulfill that workshop I expected to incur expenses of $500 for printing materials for the workshop and $2000 for my flight, taxis, rental car and a couple of nights in a hotel, I would probably just invoice the client for $10k and make it simple.

On the other hand there are times when that will not work – a client might require you to use their travel agents and book at their corporate rate at a nearby hotel. In some of these cases that may also mean the client is going to directly cover the hotel & flight costs (which is then very easy) but if not keep accurate records and invoice accordingly.

What you should not do – and I mean this very seriously is any of the padding or other games so many people do with corporate expense reports. Nor would I suggest abusing the client’s trust with how you incur the expenses. Speaking as someone who has covered expenses for others, I have had people who booked flights at the very last minute, on major airlines, at very costly rate codes (to maximize frequent flyer miles I suspect) meaning that I incurred a $1500 expense for a flight which more typically would have been $500 or usually much less. That left a bit of a sour taste in my mouth as it was unexpected.

Likewise I would usually suggest using a simple and relatively low per diem rate for meals etc rather than lots of breakdowns of specific costs for your breakfasts etc while traveling. And again, best case you don’t have to detail these expenses at all but factor them directly into your rates and quotes to the client.

Above all else, value yourself and the value you will provide – and price accordingly. You do not, really, want to get into nitty gritty discussions about whether you spent too much on a lunch, rather you want to focus on the millions you are helping your clients make – rendering the mere “thousands” you are billing them a bargain.

And I am, somewhat, being serious here – ideally as a consultant you should be helping create a lot of value – and in how you are billing for that value creation sharing in that value to some degree, while also helping create an ongoing engagement, relationship and referrals for further work.

It is hard – a successful consultant must both be able to do great work (usually in a short, time compressed manner) and also sell new development while also reengaging with existing and past customers. Plus, for most independent consultants figure out all the details of billing, tax filing, insurance etc that come with running a small business.

And keep in mind, money can and will solve many of those smaller problems – accountants can be hired as can personal assistants.

Hope this is helpful. And, if you are interested in hiring me, lets talk – and no, these are not precisely my rates.

2 Responses to “Setting your rate – advice for consultants”

  1. Shannon, I respectfully disagree with the way you arrive at your rate.

    Your rate should reflect the value you provide the client, and has nothing to do with your living costs. Sure you need to know what _minimum_ you need to earn to maintain yourself (or maybe downgrade if it’s too high). BUT your client isn’t concerned with what amount keeps you in the style of life you live. Equally your cost of living could be very small compared to your value.

    I derive my rates based on the following evaluations:

    1) Cost of employing someone to do the same job, both in terms of the salary and the cost-of-business the employer faces (or saves with consultant – things like employer’s tax, HR, accountancy, certain equipment provided to employees but not contractor, pension, etc). I then add 50%-100% on to account for the value of having someone they can bring in and out accordingly plus weighting for the unknowns you face of being a consultant rather than an on-going employee

    2) What other consultants charge in the area. You should have mentors who do similar work to you, and so find out what they charge. If you don’t have mentors, find some (!) and in the meantime ask friends – either those who have worked as consultants in that field and in that area – or have used consultants

    3) I look at the value I can bring to that company. Is there some specific skill or domain experience I bring to that particular client that they will get additional value from. For example, I am a technology consultant but I have significant experience working for media companies. If a media company wishes to hire me, I charge more than a telco, for example. I also look at whether they are a start-up or a large company. I tend to charge large companies more because they can afford it and also because there is a certain overhead that comes from working with big companies that can get messy.

  2. Ben,

    You raise great points – and some which are an ongoing issue to evaluate in setting a rate. I’d say I agree with your points BUT with a few caveats – they hold, for the most part, for consulting which is a long term, ongoing affair (i.e. a client who engages you for a significant period of time usually for a fairly large & important project). There your rate absolutely should reflect the value you are brining and be factored at least in part from what their cost of hiring someone full time might have been.

    What I was more focused on in my post was very short term projects – i.e. “what would you charge me for an hour phone consultation” or “how much to run a one day event for us” type of engagements.

    Absolutely the value you bring is key. I would, however, argue that what other people charge is only as relevant as they are offering a comparable service to what you are doing – and even there rates likely should vary (and to a degree reflect a bit of your perceived value) i.e. just because “most” consultants charge say $150/hr doesn’t mean you can’t or shouldn’t charge much more – especially if, as you note, you bring unique value.

    And I would also emphasize that my discussion was in part based on myself, I’m not primarily looking for consulting work – so I would almost certainly turn down a consulting project in which I was easily comparable to a full time employee – but I would take occasional short term engagements – but my rates will likely reflect that.

    Thanks for adding to the discussion! (oh and Happy New Year)

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