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What to charge when launching a Consulting Practice

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Article Overview: If you are thinking of making the move to an independent consultant or service provider what is the most important factor in establishing your fees? Overheads, experience, complexity of the assignment? Not in the end. You might get all of these figures spot on. You might even position yourself well in regard to your competition; yet you might be leaving out the most important factor. You may overlook - how much you need to make and how much you feel you are worth.

What to charge when launching a Consulting Practice

After more than ten years of asking people what they believe is the key factor that goes into setting one’s fees. I’m certain that most of us look at the equation backward.
I’ve heard such considerations as: experience, complexity of the assignment, billable hours, reputation, time/length of the engagement, competitors’ price, covering the cost of overheads and expenses and what the market will bear. Valid considerations all, however, I believe, the key factor in determining what your fee will be has to be: how much you need and then how much you want.
Rather than starting out looking at marketing expenses, overheads and all of that – start at the other end and work backward. Start by looking at what you desire. At the end of the day if your practice doesn’t produce enough income to provide for what you absolutely need to cover your personal expenses (mortgage/rent, car payments, food, clothes etc.), then you may have created work for yourself but you haven’t created a profitable business. The first step in the process of setting professional fees is to examine your personal budget.
Yet our goal is rarely to get by – we aspire to greater things. So it is only a matter of what we need, it is also a matter of what we want. Once we’ve come up with a figure, we need to benchmark this figure against others to ensure we aren’t living in the land where the pie is in the sky.
Here’s a rule of thumb (for independent stand alone consultants, who are not changing fields – but remaining with what has been the central focus of their career to date) if your last salaried position paid you $70,000 don’t set your sights at a figure that is triple that amount. (You may need to bill triple that – but you aren’t likely going to reach 200 thou plus. Why? Because there is a reason why someone was paying you in the 70’s for the work you did. If you were underpaid in a particular position – look at the industry average for such work.) Can you make more than $70,000 as an independent? If you have subjective specific expertise and a good marketing/business plan – then absolutely. Can you triple it? In time perhaps – if you start a business with associates and support staff. But as a stand-alone accounting for billable hours, I don’t think so. Could you double it – if you’re really good – I bet you could.
But you’re not going to double it in the first year are you? We need to build a business plan with a cash flow analysis that indicates initial expenses, projected billings (posted as cash in the month you expect to be paid) and determine how long it will be before we can draw any income out of the endeavor. Here’s one of the great start-up quandaries – what do we live on while we’re building the business. The old expression is “it takes money to make money”, and that is the case here as well. We need some reserves to live off of while we market and launch.
Once you set your fee, you have to live with it for a number of years. As a new consultant with a fresh roster of clients, you can’t go back to them in year two and propose a rate increase. I suppose you could propose it, but my observation is during the early years we are still invested in building a long term relationship with the client and we don’t want to jeopardize it over a 4 to 8 % rate increase. That will have to wait. So when you’re establishing your initial rate, remember, you are establishing it for the next several years.
If we start with the end in mind, and factor in vacation time, statutory holidays, downtime and the time required to administrate and market the business, we will determine how many billable hours we have to sell. Following this we must look at overheads and expenses from insurance to rent, from paper clips to computers – at the details of what it cost to operate. Don’t do your final calculations until you’ve added a line for profit. After all, you are building a business, not creating a job for yourself.
In the end, add your total expenses and the profit line to the income you wish to draw and divide this amount by your available billable hours and you’ll have your hourly rate (easily translated to a daily rate and applicable to determining project costs.) Now you want to know if this is in line with what the competition charges, and/or what the market will bear. If your calculations indicate that you are too expensive you need to adjust your sights, if your calculations indicate you are on the lower end of the scale ensure you are not so low that people with question your abilities. In the consulting field under-pricing is as dangerous as over-pricing.
By starting with the end in mind you have greater certainty that you’ll have the money required to pay your mortgage, make your car payments and be able to put food on the table. Copyright 2006 Essential Communications Ltd.

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