How Do Consultants Establish Their Daily or Hourly Rate?

After nearly 25 years of selling consulting services, it surprises me to find so many clients that have no idea about whether or not they are paying appropriate fees.

The problem sometimes gets out of control when a client knows that they are making $70/hr in net salary while paying a consultant $200/hr. So the client always feels cheated.

I reality, this client may actually make more money than the consultant.

Here’s how consultant’s typically set their hourly rates. Artists and copywriters use a similar approach. In some cases, they simply charge what the market will bear. But they often under price their services due to a lack of understanding of how rates should be set.

If a consultant made $150,000/year on his last assignment, then he wants to at least break even when striking out on his own. In reality, anyone taking the leap to set up his or her own business should make more money.

One major feature to remember is that a $150,000 salary carries at least a 30% load on top of the $150,000 for benefits and other overhead costs. These include the employer’s portion of the social security tax, group insurance, paid holidays, vacations, computers, other business support expenses, retirement and/or tax sheltered savings accounts such as 401K’s with some employer matching and so forth. 

All of a sudden that $150,000 was really worth $195,000 (150,000 X 1.30).

But let’s assume that the consultant only needs to match the $150,000 in fees. What should his hourly rate be?

First of all, no consultant can sell, invoice his clients and implement projects 20 days each month. The best he can do if he is very successful is to invoice 10 days of his time each month. (See chart below)

Here’s how it works.

Assuming 10 days of billable time each month, the consultant needs the following rates for his services to make a gross base of $150,000 WITHOUT BENFITS or reimbursement of business expense overhead.

Monthly rate:        $150,000/12 months    = $12,500
Daily Rate:           $12,500/10 days          = $ 1,250
Hourly rate:          $1,250/8 hours            = $ 156/hour

At $156/hour, this successful consultant is really netting far less than he made as a full time employee.

To truly match his salary and benefits for a gross of $195,000/year, the rate would total the following.

Monthly rate:        $195,000/12 months    = $16,250
Daily Rate:           $16,250/10 days          = $ 1,625
Hourly rate:          $1,625/8 hours            = $ 203/hour

At $203/hour, this consultant cannot afford to bill less than 120 days of his time each year. Few independent consultants manage to bill this many days. 

The real challenge for any independent consultant is to figure out how to keep the work flowing on a regular basis so he will average that 10 days/month of billable time. He must also bill a fair hourly rate based on his skill and experience level.

Most capable consultants I know cannot project their income annually or even monthly. The peaks and valleys are deep and the hourly rate seems inadequate to make up for the valleys.

So what most of us in the consulting business end up doing is invoice by the project with guaranteed pricing hoping to keep our hours under control.

Have you sold your hourly rate using a different approach? If so, how do you calculate your rate? If you bought consulting services in the past, how did you evaluate the consultant’s worth?

Posted on February 29, 2008 and filed under Consulting, General.