How Much Should I Charge? 6

[RichGeoffroy]

The question always comes up, “How much do I charge for my services?” And the answer is, “It depends on a lot of factors.”

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 you’re 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, you’ll incur other expenses that “employees” don’t have.

First thing to keep in mind is that an employer’s 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 don’t, your consulting business will die when the short-term business ends --- you’ll have nothing in the pipeline to replace it.

Most consultants average between 1 and 4 days per week of billable time. For budgeting purposes, I’ve found that 2 days/week is a reasonable expectation. There will be periods of time when you’re 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 you’ll 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 “consulting on the side”, all have lower overhead and can offer a lower fee structure. It’s 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 you’re 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 “low ball”. Know where your bottom is and don’t go below it unless you are getting something in return. Remember, getting business is good for cash flow, but if you can’t make a profit out of it, you’re not going to be around for the long run.

Periodically, you’ll 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, you’ll 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. You’ve been given the basic information you need, but the fact of the matter is that whatever you charge, only YOU can make the decision.




Rich Geoffroy
Polymer Services Group
POLYSERV@aol.com

 

[zdas04]

I found that starting the calculations with a desired hourly rate was a truly self-fulfilling prophecy.

I approached the decision from a slightly different perspective. I looked at a reasonable after-tax annual income for my family. Then I looked at expected business expenses (insurance, rent, loan payments, utiliies, etc.). Add the two numbers together. Divide by 0.8 to get to a before-tax income.

Then divide your before-tax income needed by (2 days/week)*(10 hours/day)*(49 weeks/year) = 980 billable hours/year. This gives you the average hourly rate you need to charge. The 20% to taxes is a pretty good float account since if business expenses exceed expectations then you have a larger deduction and a reserve for the un-expected.

Some clients are going to be looking for discounts. I am always willing to trade hourly rate for comitted hours (i.e., for 300 hours paid in advance I'll discount my basic rate 10%, etc.), but I never allow clients to think of my hourly rate as negotiable - I always get something I really want for a discount and never give anyone a "price reduction". My feeling is that if you ever reduce your price you will have a difficult time getting it back to a living wage.

My business was in the black in the first quarter and has continued well above my expectations. It helps that I worked in this area for many years before "retiring" from a big company to start a tiny one. I already knew most of the players and had a long-standing reputation from being active in engineering societies, basin working groups, etc. I think to be successful as an Engineering Consultant you have to be the kind of person who is capable of writing articles for publication, willing to present material at engineering-society meetings, and to pitch in at trade shows. Contacts are key.


David Simpson, PE
MuleShoe Engineering

http://www.muleshoe-eng.com

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