Simple Guide to Establishing a Consulting Rate

Beginning consultants always ask me how to set their fee structure. Perhaps their biggest challenge is shifting their mindset about how one gets paid, and for what.

Employees get a salary and usually work whatever hours they need to get the job done. They don’t worry about time as long as their compensation is fair.

It’s far different when you are a consultant. Consultants get a fee, usually on a retainer or project basis, and sometimes with a daily or hourly rate. As a consultant, both your time and expertise are valuable resources, and a good fee structure strikes a balance between the two.

If you’re anything like me, you put in a lot of extra work on the job. And when you work at a job, you are recognized and often rewarded for going the extra mile. Going the extra mile in a consulting job is fine, except when it takes away from doing other work. Your time is limited and you need to make a certain amount of money to cover your costs and hopefully put some money away in savings.

Here are some ways to start thinking about your consulting fee structure:

1. What kind of services will you offer?

* You can offer a range of services, some more time intensive than others, yet all are valuable.

* How much time typically do you need to perform these services? I recommend multiplying that estimate by 2 to come up with a realistic number.

2. How many hours can you give each client a week or month?

* Your ideal number of clients will provide you with enough work to fill your schedule yet not overwhelm you.

* Consultants have multiple clients all the time; as long as you meet the client’s needs, they don’t care who else you work for (with some bizarre exceptions)

3. What’s the basis on which you want to get paid? Here are some options and what they mean.

* Monthly retainer, where over a year the client gets an average number of hours a month, with some months heavy and others lighter. This is best all around because you and they can count on regular income and expense, so it’s great for budgeting. Only caveat is you must produce enough outcomes for the client to be satisfied with this monthly outlay. This is a great method when you are involved in a lot of different projects or areas with a client, including “soft” projects like advising, coaching, and strategizing with a senior person.

* Project basis, where you get paid for producing a specific outcome over a period of time. Usually there are several payments, one upfront to get started, then one or more milestone payments tied to progress, and a final payment to be paid after satisfactory completion. This is the best method for facilitating an entire strategic plan (not simply advising), writing a funding proposal (or indeed any kind of writing where there will be edits), and delivering a specific product within a specific time frame.

* Daily or hourly rate, where you are paid for your work based on an estimated time involved. This kind of payment is best when you are doing something that is pretty straightforward and it is easy to give the client an accurate estimate of how much time is needed. Examples of such services are training, word processing, facilitating a retreat, advising on strategic planning, and one-on-one coaching.

4. How much income do you need to make? Your client fee needs to be sufficient to cover ALL your costs.

* How much client turnover do you expect? Meaning how long will clients sign up for to work with you? Some of your time has to be focused on marketing your services and getting new clients.

* How much time off during the year do you need, are you willing to give yourself? rule of thumb is to figure 40 weeks of the year working (sometimes people figure 32 or 36 weeks, depending on how constant the clients are)

* Shared among several clients, you can give each a relative bargain AND make what you want to make.

I use a very simple formula:

Take the sum I want to make per year before taxes, divided by 40 (or 36) weeks. To come up with an hourly fee, then I divide that number by 40 hours. For a daily fee, divide by 5.

For example, I want to make $100,000 gross (pre-taxes). I divide $100,000 by 40 weeks, and come up with $2500 a week. My daily rate is then $500, and my hourly rate is $62.50. I’d round that up to $65 or 75 an hour.

No client needs to know what you do for the others. If you want to offer a discount to a client, that’s your prerogative. As to what rate you quote a client, it depends on:

* how much you want to work for the particular client

* how much time you really have to do discounted work

* how much money you need to make within the time you have available for doing the work

* understanding the “opportunity cost” of taking on this work – clients you WON’T be able to take on because you are doing this work

* the boundaries you can put on the work, e.g. I can do one proposal for this price, period.

An effective way to handle pricing in the case of very cash-strapped clients is to say something like this:

I really want to work with you and I’m sensitive to your budget issues. My usual rate is $750 a day. I estimate that it will take me 5 full days of work to complete one proposal – including one round of revisions; identify 10 potential funding sources; and submit them. So that would be $3750. Because I really want to work with you, I want to know what you can afford right now. You can always pay me the rest later, but I do need something now.

In this scenario, you are promising a discount for a very specific set of deliverables: ONE proposal with one set of revisions, a set number of funding sources and submission.

Part of being in business as a consultant means managing ourselves as well as managing the client’s expectations. Those boundaries are essential when you are a consultant or you will find yourself overworked and underpaid.

Consulting is quite different from working for a salary, and it takes some shifts of attitude and consciousness. It especially takes new skills and knowledge of how to run a business. When building a business, it’s good to remember that there’s lots of trial and error involved for you to find your comfort zone in terms of fees, scope of work, and time it takes to complete a project.