Consulting fees, consulting fees…How do you set consulting fees? Here’s a guide to setting consulting fee rates. (It’s also applicable to those wondering how to set consultancy fees — an independent consultant is still a consultancy and so is a freelancer!)
When you become a consultant, you’ll need to set consulting fees. Consultant pay and fees can be worked out in several ways. Here’s some information to help you figure out what clients should pay a consultant (some clients are still prone to consultant fee sticker shock, though). With this in mind, you can determine typical consultant rates — what companies pay consultants for their hours, days, projects and expert opinions. (This consultant fee guide has some interesting points for hiring a consultant for your business or non-profit and it covers what to pay a consultant, too.)
Consulting fee models
The main strategies for setting consulting fees include:
- Doubling/tripling your hourly wage
- Using a daily rate for consulting
- Setting consultant fees by the project
- Setting consulting fees based on performance
- Setting consultant fees strategically using real-life data
- Charging what everyone else charges
- Moving to Solution-based Fees
(Want even more info? Get 124 pages on setting consulting fees in my Consulting Fees: A Guide for Independent Consultants).
Main Strategies for Setting Fees
1. Double/triple your hourly wage as basis for consulting fees
To set fees, some consultants simply take the hourly wage (plus benefits) that they would earn when working for someone else and then double or triple it. If you’re doing this, you’ll probably find that tripling your hourly wage is the best move. Some consultants choose a triple rate because of what they call the rule of thirds — one third goes to your real wage, one third to expenses, and one third to administration, low utilization and bad debt. It’s pretty easy math, which is also a reason it’s popular.
Let’s say you make $60k a year plus benefits and you get four weeks of paid leave .
($60,000 salary + $15,000 benefits) / (48 weeks * 40 hours) =
= $75,000 / 1920 = $39.06
If you double this and round up to the nearest multiple of $5 or $10, your consulting rate should be about $80 an hour. ($39.06 x 2 = $78.12, rounded to $80.)
If you triple this, your consulting fee should be about $120 an hour. (Or $39.06 x 3 = $117.18, rounded to $120 per hour.)
I recommend rounding up to the nearest $5 or $10 multiple, because a $78/hr or $117 fee looks odd. And while that may work for certain big box discount stores, it’s probably not the approach that will work for independent consulting.
Of course, this assumes you use an hourly rate for your consulting services. Many people work out an hourly rate, but actually charge by the half-day, day, project or another arrangement.
2. Setting a daily rate for consulting (per diem rate for consulting)
To set a daily rate, simply multiply the hours you work in a day by the hourly rate from the above example.
8 hours * $80 hourly rate = $640 per day
3. Setting Consultant Fees by the Project
Some consultants set their rates by the project. They estimate the number of hours they expect to spend on a project, then multiply by their hourly rate.
However, some consultants set their project fees using the value the client derives from the consultant’s advice. There’s an old joke about physicist Niels Bohr that illustrate this principle.
A company’s machine breaks down. The company’s owner, an old school chum of Niels Bohr, calls in the physicist for help in fixing it.
Bohr examines the machine. He draws an X on the side and says, "Hit it right here with a hammer."
The company’s mechanic hits the machine with a hammer. It springs into action. The company’s owner thanks Niels Bohr profusely and sends him on his way.
A few days later, the owner receives an invoice from Bohr for $10,000. Shocked, the owner phones Bohr!
"Niels! What’s this $10,000 invoice? You were only here for 10 minutes! Send me a detailed invoice."
Bohr agrees to send the invoice. A few days later, the company’s owner opens a new invoice.
INVOICE
Drawing X on the side
of your machine $ 1
Knowing where to
put the X $ 9,999
———————————————
Total $10,000
Knowing the value of your work can go a long way in helping you establish your fees.
4. Setting consulting fees based on performance
Some clients offer consultants a share of future revenue, profits or commissions, pushing the consultant to a pay for performance model. Others offer the client a commission. Still others offer pay based on the results of the consultant’s work. Consulting fees based on performance pose several risks. For example, the company’s performance in other areas may affect the area in which you you are measured. It may take months or more to see the results of the work, meaning that the consultant will not see any revenue for a long period, effectively giving the company an interest-free loan. The company may not cooperate with you in implementing your full recommendations, compromising your ability to reach the potential you projected. Moreover, you may have a hard time checking to see whether the client has manipulated results. Can you be sure that your results are being reported accurately? Most importantly, you shift the focus from high quality planning to short-term gains. If you essentially become a partner by sharing in the client’s risk, you lose your objectivity. At the very least, seek a base rate plus performance pay or share of ownership. Sticking to contingency and performance-based fees opens a can of worms.
5. Setting consultant fees strategically using real-life data
This strategy involves several steps:
Setting a consulting fee based on working days
In this calculation, you base your charges on working days per year.
52 weeks in a year
Allow six weeks for vacation, stat holidays and sick time.
= 46 weeks
46 weeks x 40 hours = 1840 hours a year
Notice that this is a bit more precise than the estimate of hours we used earlier.
Determining your billable hours as part of your consulting rate
As noted above, you have 1840 working hours available each year. However, what percent of your time will be spent on work that brings in money, as opposed to work that helps you find clients but for which you aren’t actually paid?
100% possible hours
- 20% spent on administration, running errands, paperwork, etc
- 20% spent on marketing, networking events, website management, etc
- 10% spent on other non-billable work
————
50% spent actually working for pay
1840 hours x 50% utiliization rate = 920 billable hours
Notice that you might be working 40 hour weeks, but you’re not necessarily available for all that time. In the example above, it’s 920 hours.
Considering bad debt rate as part of your consulting fee
Despite your best intentions, not all your clients will pay you. Some will take weeks or months to pay, but a small percentage will never pay the bill. So consider this in setting your fees.
Collection rate: 97%
920 hours x 95% = 874 hours
Because I use contracts and am diligent about following up, my collection rate is almost 100%. However, the economy and how you set up your business may mean a less than perfect collection rate and it’s better to plan accordingly.
Rate of Pay as Basis for Consulting Fees
How much would you earn if you were paid a salary at a company?
$60,000 base salary + $15,000 in benefits = $75,000 salary
Salary / Billable Hours = Hourly Consulting Fee
$75,000 salary / 874 billable hours = $85.81
Overhead rates for consultants
If you’ve got the kind of consulting business that entails pure profit, you might not have to worry about overhead. But most consultants need to allow for:
- rent or mortgage interest
- utilities
- maintenance and upkeep
- property taxes
- Internet
- telephone
- cell phone
- office gadgets
- Internet connection
- laptop or desktop computer
- printer
- shipping and postage
- printer toner/ink
- home office supplies
- paper
- stationery
- business cards
- accounting (if you don’t do your own)
- legal services (in some cases)
- office furniture — desk, armoire, chair, shelves, bookcase, filing cabinet, lighting, etc.
- business licenses and permits
- insurance — health, life, disability, liability, etc
- car — insurance, maintenance, gas, lease
- advertising and marketing
- subscriptions
- professional associations
- meals and entertainment for professional purposes
- continuing education
- professional meetings, conferences and tradeshows
- cleaning supplies and cleaning services
- other
Divide the total cost of your overhead by your billable hours:
$5,000 overhead / 874 hours = $5.72
$5.72 overhead + $85.81 fee = $91.53 fee
Profit margin and consulting fees
As a consultant, you’re taking a risk and running a business. So it’s reasonable to expect a profit margin on your fees. Consultants usually mark up their fees by 10% to 33%.
$91.53 + 25% mark up = $114.41
Since consultants tend to round to the nearest $5, our example results in $115 per hour rate.
6. Charging what everyone else charges for consulting
This last tip may seem silly, but sometimes it really does make sense to charge what everyone else charges for consulting. It comes down to what the market will bear and what your competitors are doing. If you fall in line by charging the same as everyone else, you’re signalling that you’re a worthy (qualified) consultant who plays fairly. You’re also making sure you get the base line rate for consulting in your market.
7. Moving to Solution-based Fees
In the long term, it’s better to move to a model that represents the value you offer and that allows you to move beyond the limits of charging by the hour. My Consulting Fees guide goes into detail about the steps to moving to Solution-based Fees.
Final thoughts about setting fees
No matter what way you set your consulting fees, be sure to use a consulting contract and agreement for consulting services.
Coming up with your consulting fee for the first time may seem daunting. However, once you’ve found a strategy in which you really believe, you’ll be good to go. You may want to revisit your decision from time to time, taking into account your experience, client feedback and even your competitors’ activities.
Like this article? Get practical tips and 124 pages on making money as a consultant! Check out my Consulting Fees: A Guide for Independent Consultants.
Posts related to setting consulting fee rates
- Key to getting clear about consulting fees
- Billing travel time rates for consulting projects.
- Sample consulting invoice
- New business line of credit
- Finance for consultants
- Consulting Fees: A Guide for Independent Consultants
- Discover Your Inner Consultant
- Discover Your Inner Entrepreneur (for moms)
"Setting consulting fee rates" from Become a Consultant Blog at ConsultantJournal.com.
Loading ...
[...] Geschichte, Die video that can be useful once you gather this information. Consultant Journal has a thorough article on different ways to set your fees including (obviously) taking into account what other consultants [...]
I have 10 years as a municipal employee; 3 years in an entry level position and 7 years as a supervisor of a small unit. I also have approximately 7 years in Retail, again 4 years in an entry level position and 3 as a Asst Mgr. I also own and run my own fledgling website offering niche products such as comics and scifi books. I am considering whether or not to enter the consulting market, but I have no ide what to market my services as. My current thought is marketing myself as a Retail Management Consultant. I’d like your advice.
[...] the years, we’ve covered a wide variety of financial topics: consulting fees, second jobs, finance and more. In fact, our "Finance for Consultants FAQ" is a popular [...]
[...] consulting estimates are hard to come by. New consultants often have little experience with setting consulting fee rates or they aren’t sure what to include in a project estimate. Setting your rate and accurately [...]
Nice post. I agree that charging % from performance only is too risky, better charge hour plus % of sales
I am a Brand Strategy Consultant. I made different calculations and all point out that your recommendations are correct. However, the truth in our business is that you have to go by the project.
This is a very useful article. I am looking forward to reading your book.
Gunter Soydanbay
[...] as a consultant can mean the difference between just paying the bills and making an amazing living. Understanding consulting rates is [...]
Hi
I am a Health Information Professional and I run my own company. Right now I have an hourly rate of $55 that I charge. I’m being offered a job as an employee that would pay $34.57 per hour plus 4% vacation pay. Because my $55 per hour has to include paying my income tax etc., but the employment job wouldn’t how do I compare to see if the two rates are comparable?
Thanks.
Hi
I am a consultant and have a contract with a hospital. They are trying to make my position an employee position for much less pay.
When I asked them what was it about a contract versus employee they told me that by CRA rules they have to make me an employee. They also indicated that auditors told them they had to flip contracts to employees citing the same rules (but they weren’t specific about what those rules are).
I am a legally registered business and pay taxes and GST as any business would. I have an agreement that is signed yearly by all my clients. I have other clients and have had them for 7 years and this has never come up.
So is this true? I looked on the CRA website but couldn’t find reference to this – thanks.
Shelley
You need to look at the CRA’s guidelines that go over whether you’re an employee or a consultant. It should be easy to tell…it mostly has to do with the amount of control they have over where you do your work, how, what tools you use, etc.
Hi, I really appreciated your time in sharing this information. I think you have a great style of writing and I have bookmarked you to come back for your next articles. Great job, I enjoyed the read. Thanks ( :
Detox, Diet and live longer!
Shelly,
I have been consulting in BC healthcare for 3 years, and recently took a term employee position (for much lower pay) that in the past would have been a contracted position. But I know that my client has a strategic priority to convert as much consultant work to employees as possible and reduce their dependence on consultants. Their decision has nothing to do with CRA, and as far as I know CRA rules have not changed.
If a person is intending down the wrong road, he doesn’t will need motivation to speed him up. What he needs is education to turn him all around.
Great work! I also have my own weblog I just understand that its challenging to create quality content similar to this.
Most consultants complain that their biggest problem is setting fair and reasonable rates. This guide really includes everything a consultant needs to know for setting his rates. Thanks for the comprehensive article. For more info check out consulting jobs
I lost my consulting gig and now I have to go back and get my PMP to be competitive again. I need at least $50 an hour to make it worth it for me. Good article, lots of math lol
I must admit these articles, especially this one, are more than helpful! I am starting my own consulting business and thanks to the provided research, I will be able to get started even sooner. Thank you for the knowledgeable information!
Sincerely,
J. Robert Santos
[...] IT consulting rates may be part of doing your due diligence. If you’re looking for average IT consulting [...]
Bohr agrees to send the invoice. A few days later, the company’s owner opens a new invoice.
INVOICE
Drawing X on the side of your machine $ 1
Knowing where to put the X $ 9,999
———————————————————————————————–
Total $10,000
1X $9,999=$9,999 You’re fired!
I am starting an IT company in addition to my other business…. great information!
My recommendation is to charge 75% of mckinsey rates and your in at large cos.
[...] for your consulting fee formula The following consulting fee formula article can help you work through various models for setting fees. But, more than anything, [...]
I’m a consultant and will be conducting training for 6 days for 30 individuals. Do other consultants typically charge more per day for training? Also, if I am doing this training on behalf of another consulting firm and I’m creating material for them, what should I charge that firm for creating the material? A daily rate or a lump sum as they will now own it.
[...] Anyone ever play the role of a consultant- what's the pay? Consulting fee rates | Consultant fees [...]
Informational post on consulting fee rates. Keep up the good work.
It’s true that you take a risk for consulting fees.
For my business, I had several drivers. So I saved about 10k a year in car insurance policies just by using a website like Kanetix.ca – figure out how to cut your costs down.
Is this data still relevant? It’s more than 4 years old now… because I’ve noticed that it’s a lot less expensive nowadays, so I’m wondering if I should base myself on this.
Sure, it varies depending on your sector I suppose. Good article nevertheless!
Setting consulting fees has always been challenging. Thank you for the great tips.
Hi,
I want to apply for a consultancy job and the employee asking me to bring proposed lump sum consultancy fee. Is there any Consultancy fee format like CV format etc?
Don’t wanna feel embarrassed, please help me?
(do I need to write in a plain paper Consultancy fee ……..$)
Larry King once wisely proclaimed, “I remind myself every morning: Nothing I say this day will teach me anything. So if I’m going to learn, I must do it by listening.” That is totally how I feel. I am grateful to have learned something new today. – Tenis
Its true that setting fees for a consultant are never simple but they do not have to be overly complex either.
I my opinion one needs to decide what his/her time is worth compare it with current market rates and make a determination.
How long will it take to get the job done. Hourly or by the job you decide. each has its downsides and rewards.
Danika
I am looking for a qualified HIT Consultant who would like a rewarding and lucrative career with Succor Consulting Group.
wblanks@mysuccor.net
I don’t see any information about factoring in taxes. Fed, State, SS, Medicare etc.
John, that would depend on your business structure, your country, and so on.
1099 employee making approx $65 an hour. what is the average in SS, medicare (self-employment tax)? I am trying to determine what my take away pay per hour would be?
[...] hour project with your business has to pay for. Most “rule of thumb” experts would say consulting fee rates should double or in most cases triple the actual wage of the position being [...]
How much should a specialty consulting firm charge per hour?…
While I am very familiar with the consulting space, I am less knowledgeable about the wine consulting space. Reading between the lines on your comment (e.g., “if all they are doing”) and presuming that you do not have comparative market research in…
I am new consultant I find this consulting information very usefully. I have opted to use a daily rate to set consulting charges here in East Africa.
Thanking you
This was an incredible important information for me, thank you very much. I intend to be a member
Sergio – Southern Africa
I was looking for to become consultant and now i am calculating my Hourly rates thanks to consulting journal team, looking forward to have a global association and consultancy to become one
Thank you
With regards
Manash
[...] Consulting fee rates | Consultant fees May 26, 2006 … If you've got the kind of consulting business that entails …. Consulting fee formula models says: … [...]
opted to use a daily rate to set consulting charges here in East Africa.
Thanking you
the solutions based fee is a little trickier than one would think.
first, the expected ratio of win to lose and ability to handle drawdown or losses is critical. groups of consultants are really needed for solutions based consulting, for obvious reasons. working on a case for 2 years with a losing outcome is drastic.
second, you need a definitive way of determining results.
lawyers working per hour versus a cut on a win offers a good example. lawyers can spend two years and win huge on mega-millions class action suits, but can go bankrupt ignoring the daily grind of per hourly work. plus they benefit from a hard win/lose decision.
a marketing or management consultant can only offers per hour, in my opinion. it would be hard to suggest that a portion of increased revenue comes from the consultant and not a countless number of other factors.
i would like to hear some suggestions on the latter.
Ive discussed how key it is to understand both sides.
Thank you so very much for this great information on setting consulting fees. The decisions about developing a fee structure is very clear and your explanations help in understanding the logic behind those decisions.
Dear writer,
I am currently working on a project titled, ‘Value for volunteering’. This project primarily aims at highlighting the value created by the voluntary time contributed to our institution. This time-value will be translated to monetary terms. For this, we require to determine the consultant fees rates, if hypothetically, the person was to charge for the volunteered time.
I would like to reference yourself and the article in our final published report, but I need some clarification on the figures provided. To be precise, in strategy 5, I would like to know how you derived the overhead costs ($5,000 overhead). Could you please clarify this for me? I look forward to your response.
Kind regards,
Raj SR
Really appreciate this article. I’m not at all new to consulting but still battle with fees at times, especially when people try to barter. Recently though, I’ve decided to stick to my fees and, it’s worked. Therefore, our fees are also down to how we value our services and being prepared to stand our ground.
John, Self employment tax is 15%. That’s for SS, medicare, etc. NOT income taxes.
I have just been offered an opportunity to work by contract with a biotech consulting firm. This could generate a fair amount of business over the next few years, mostly in market research and analysis. I have no idea what to charge per hour. I am an MBA fresh out of school, but with a very competitive skill set. Any thoughts?
Guter Blog. Vielen Dank
The analysis on consultant fees is brief but detailed and to the point. Great material for upcoming consultants. Well done!