by Stephen Pope
http://www.yenommarketinginc.com/consulting.html
© 2005
One of the most frequent questions I receive
from those who are trying to start or grow their own consulting
business is: "How and what do you charge clients for your
consulting services?"
The ways of billing clients are numerous. There
are hourly rates, by-the-job fixed rates, contingency or performance
arrangements, flat fee plus expenses, daily fee plus expenses,
and many other methods of charging for your consulting services.
Which one is best?
Let us consider some ways of billing for your
time.
1. Hourly or Daily Rate
Many consultants charge by the hour or day. To
establish an hourly or daily rate, they try to calculate the number
of billable hours in a year. Many hours will be spent marketing
and in administrative and other functions, so this time is not
chargeable to the client. As well, vacation time, holidays, sick
days, and so on, can not be directly billed to the client.
Consultants, like other businesses, must charge
enough to cover their overhead expenses and also earn a profit.
If a consultant wants to earn twenty-five dollars per hour of
working time, he (or she) might have to charge one hundred dollars
per hour to the client. This assumes one half billable hours and
fifty percent overhead and profit.
Your hourly or daily rate may be limited by what
your competition charges, especially if you have not positioned
yourself as different from them.
2. Fixed or Flat Rate
Some consultants charge by the job or a flat
rate. For example, a tax consultant might charge three hundred
dollars to prepare a tax return for you and your spouse, including
an unaudited income statement for your business from information
supplied by you. If the consultant takes only one hour to do this,
he grosses three hundred dollars per hour. If, though, the tax
consultant miscalculates the time required, he could take twenty
hours to complete the job and make only fifteen dollars per hour.
Of course, consultants can also make a profit
on the labour of their employees or subcontractors.
Many consultants claim to make more on a flat
rate than on a hourly basis. Advantages include being able to
give a quote to the client up front and less disputes on price
(as the total bill was agreed upon in advance).
To protect yourself on flat rate assignments,
always limit the scope of your engagement to something that you
can calculate easily.
For example, if you are asked to give a quote
for setting up a website for a business, you might break this
project into smaller assignments.
First, you could give a quote for preliminary
research and recommendations. Estimate the time required to meet
with the client, learn about his business and goals, develop strategies
and a budget, and prepare recommendations on how to proceed. Then,
give the client a quote (perhaps in the form of a one page letter
agreement or proposal). Upon acceptance of the offer by the client
in writing, you may proceed with this phase of the project.
Some consultants collect one-half of their fee
up front and half upon assignment completion for each phase of
the consulting project.
If the client doesn`t like your recommendations,
at least you get paid for the work you did. Perhaps you can charge
him to prepare alternative suggestions.
If your website project was not broken into smaller
steps or assignments, you could find that you spent way more time
on the project than anticipated.
Also, you might not find out until you present
your bill for the whole project that your client won`t pay, either
because he is not satisfied with the results or because he is
unable or unwilling to pay.
Breaking down a project into smaller assignments
helps you estimate more accurately and limits your financial exposure.
3. Contingency or Performance Arrangements
Sometimes clients will ask you to become their
partner. If you do, you are no longer an objective consultant.
What if your client asks you to do management
consulting for twenty-five percent of the net profits? Will there
even be any profit by the time he writes off his car, home office,
entertainment, travel, wages to self and family members, and other
expenses?
On the other hand, if you are a marketing consultant
that is absolutely certain that you can increase a client`s sales,
you may feel confident charging a fee based on the increased sales
volume of the client. Are you sure your client will co-operate
with you in the attaining of this goal?
Some consultants charge a flat rate plus a percentage
of ownership or profits for their services.
Fees based on contingency or performance arrangements
are risky. Most consultants are better off charging a fair price
for their services and leaving the risk of the client`s business
to the client.
4. Value Based Fees
Sometimes consultants can justify fees based
on their value to the client. For example, if you save a client
one million dollars in taxes, your fee may be higher than normal
to reflect the value of the services rendered.
You might pay an accountant or lawyer a fee of
fifteen hundred dollars based on time for certain tax related
services. What would you be willing to pay to legally save an
extra million dollars in taxes? Ten thousand dollars, one hundred
thousand dollars, or more?
Can you apply this information to your own consulting
practice? Is there some particularly valuable service that you
can render that would justify premium rates?
However and whatever you charge, be sure that
your fee is a good value for your client and also compensates
you fairly.
