There are two numbers you need to start with to determine your consulting fee. One is what you are now making–or have been making most recently, or what others are making–in the field you are targeting.
We are assuming your consulting will be in the field where you are now considered an expert. If you want to consult in a new field (perhaps as a way to learn that field), instead of your present base plus bonus, use the rate of those at your level in the new field. The second number to consider is what the market will bear.
Take your present base plus bonus. Let’s say it’s $50,000 a year. Add a factor for benefits, such as health insurance. Let’s say 20 percent (this includes health insurance, company-paid Social Security, and so on, but does not include paid time off). So that’s $50,000 X 1.20 = $60,000.
Divide that number by the number of hours the average person is available to work in a year. We’ll use 2000 hours, just to keep the calculation simple. (You may want to use 1600 hours, which allows for 10 holidays and 4 weeks of vacation and sick time.) $60,000 / 2000 = $30 per hour.
Your cost is $30 per hour–which is very different from what you will bill your customer. If you were to be able to bill 2000 hours a year at $30 per hour, you would stay even with what you are now making. However, not only are you unlikely to bill 2000 hours a year, you still have to buy your own health insurance, put money aside for your vacations, pay your own Social Security, arrange for your own training, subscriptions, memberships, and so on.
CALCULATING YOUR LOW BILLING RATE
To account for some of that expense, increase your cost rate by 20 percent–just so you will come out a little higher than your adjusted cost rate. This allows for benefits and also for paid time off. (See chart: Low Billing Rate) $30 x 1.20 = $36.00 per hour (Low Billing Rate)
You would try to bill at your Low Billing Rate if you are just starting out, or if you are on a long-term consulting assignment with a guaranteed significant number of hours per week.
A rule of thumb for short-term consulting fees is twice your cost.
CALCULATING YOUR AVERAGE BILLING RATE
If you need to have more than one customer, you probably won’t be able to bill 2000 hours a year because you will have to spend time marketing your services. Earlier you saw that a rule of thumb is to spend half your time marketing. So to keep even with what you made before, you would have to bill twice your cost rate. That’s $30 X 2 = $60 per hour. (See chart: Average Billing Rate)
You would try to charge the Average Billing Rate for your salary level if you are in a specialized field and in demand. You would also try this rate if you are a serious independent consultant and want to sell your consulting services long-term. You will need to make up for the time you spend marketing.
CALCULATING YOUR HIGH BILLING RATE
If you are well-established as a consulting firm with lots of overhead, such as office space and administrative support, two-times cost will probably not be enough to cover your overhead. The standard factor for this situation is three times cost. In addition, if you are seriously starting a consulting firm (rather than being an independent consultant representing only yourself), you would most likely charge the three-times rate for every billable member of your staff, or for each person you bring in to work on a project. More about that later.
Finally, if you are well-known in your field, you may also insist on three times your cost rate–or, lucky you, whatever the market will bear. $30 X 3 = $90 per hour. (See chart: High Billing Rate) Charge this rate if you are well-known in your field, or to cover your overhead if you have or are setting up a consulting firm. Overhead includes support staff who are not billable, rent, marketing, and so on.
Although the three-times rate is standard for organizations with overhead, companies use different numbers of hours as the base. That is, instead of using 2000, they may use 1600 or even as low as 1300 to 1400 hours. This increases the hourly rate. Or they may hike up the direct labor rates by including not only base plus bonus, but also all benefits, payroll taxes, estimated raises, car allowances, and so on. Then they come up with a rate card, which may contain inflated rates. When it comes time to negotiate, they may come down quite a bit from their rate card.
For example, one company’s “Rates to Use in Pricing Projects” are as follows:
Use a billing rate of $225/hr. or $1800/day for:
* Employees with salaries in the $65,000 to $80,000 range.
* Outside consultants who cost us more than $500 per day.
Use a billing rate of $190/hr. or $1500/day for:
* Employees with salaries in the $50,000 to $64,000 range.
* Anyone not on staff who costs us $300 to $500 per day.
Use a billing rate of $150/hr. or $1200/day for:
* Professional staff with salaries less than $50,000.
* Anyone not on staff who costs us $150 to $275 per day.
Use a billing rate of $50/hr. or $400/day for:
* Administrative support staff.
* All temps assigned to this project.
You too may want to create a rate card for your consulting firm. But be sure to be realistic about your worth in the market.