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Starting a Consulting Practice

How Much Should I Charge? by RichGeoffroy
Posted: 19 May 04 (Edited 27 Sep 04)

Rich Geoffroy
Polymer Services Group

The question always comes up, ôHow much do I charge for my services?ö   And the answer is, ôIt depends on a lot of factors.ö

As a typical rule of thumb, consulting rates are about 3 times your expected hourly salary rate [annual salary/(40 hours/week)/(52weeks/year)].  If youÆre new at consulting, you may find this rate high, but you first have to understand that you will not be working 40 hours a week on billable time; nor will you be working 52 weeks a year for clients.  Also, youÆll incur other expenses that ôemployeesö donÆt have.

First thing to keep in mind is that an employerÆs salary package includes more than just your annual salary.  Benefits and incentives account for an additional 25-50% of your salary.
Secondly, there is a lot of non-client (non-billable) time in consulting.  If you are working 32 hours/week for clients, that leaves you only a day a week to do any general overhead work (paying bills, sending out invoices, collecting past-due receivables, etc.).  That means you are not doing any marketing.  You must plan for 4-8 hours a week on marketing and sales.  If you donÆt, your consulting business will die when the short-term business ends --- youÆll have nothing in the pipeline to replace it.

Most consultants average between 1 and 4 days per week of billable time.  For budgeting purposes, IÆve found that 2 days/week is a reasonable expectation.  There will be periods of time when youÆre billing in excess of 2 days/week, but let me assure you, that those profitable periods will be followed by slow periods.

All that being said, the 3-times-hourly-salary rule is not a hard-and-fast rule --- just the norm. When trying to establish a business base, I have found it prudent to use a lower rate, maybe twice your expected hourly salary, so long as the client is willing to commit to a minimum of 2-3 days per week for 3-6 months.  Try not to commit to more than 3 days/week for any long period of time, or youÆll find yourself without a viable marketing plan.

There are always competitors out there that are willing to do the job for less.  College professors, retirees who want to remain active, as well as the moonlighter who is ôconsulting on the sideö, all have lower overhead and can offer a lower fee structure.  ItÆs up to you to sell yourself to your prospective client. Make sure that he/she understands that no matter what your rate is, that it is a bargain for what they will receive.

If youÆre on good terms with the prospect, you might even ask him what he thinks the job is worth --- but do your math first, so you can identify whether or not he/she is throwing you a ôlow ballö.  Know where your bottom is and donÆt go below it unless you are getting something in return.  Remember, getting business is good for cash flow, but if you canÆt make a profit out of it, youÆre not going to be around for the long run.

Periodically, youÆll have to raise your rates, or else your profitability will be gobbled up by inflation.  Keep track of what your competition is charging and stay competitive.

At these rates, it generally takes a successful consultant between 1 and 5 years (3 years on the average) to get back to the annual salary he/she was making prior to starting his practice.  Until that time, youÆll be living off your savings minus any cash flow developed from your business.

What you will ultimately charge for your services is a decision YOU will have to make.  YouÆve been given the basic information you need, but the fact of the matter is that whatever you charge, only YOU can make the decision.

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