How Do You Set Consulting Fees?

How Do You Set Consulting Fees?

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.

For further Information and resources about

consulting, visit:

http://www.yenommarketinginc.com/consulting.html

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