Monday, January 2, 2012

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?

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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

How Do You Set Consulting Fees?

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