Becoming a Consultant Draft – Rates and Pricing

This is part of my writing in public project for my new book – Becoming a Consultant. As such, this is a draft version of what will become the final book so although the ideas here are close to finished, there may be typos, mistakes, wild exaggeration or enormous factual errors. Please accept my apologies in advance.

A big part of the writing in public project is to make sure that you get the book that you need so if you see something that doesn’t make sense, or think there’s something missing that would help, please let me know in the comments below.


Of all the decisions you make in your consulting business, this is the most important and the one that’s easiest to get wrong. Setting your rates at the right level isn’t just about making a profit: it also sends a signal about the type of firm you are, the kinds of clients you want to work with, and where you stand in relation to other firms. It’s also easy to get wrong by underestimating the costs of running a business or overestimating the number of days or hours you’ll be billing clients. Calculating the proper rates for your needs is the part I’m going to focus on in this chapter because getting your rate calculations wrong will wreck your business, and it’s a little more complicated than it might seem at first.

Note that any numbers I use here are just examples for illustration, and I am not suggesting that these are the rates you should be using. Nor am I giving any financial or tax advice here; again, these are illustrative examples. Please get a tax or business professional to help you work out the exact numbers for your business.

Why a consulting year is only three or four months long

Before you calculate your rates, we need to clarify a few things about the reality of being an independent consultant.

  • You won’t be on a paid engagement every day.
  • Winning work takes a lot of time.
  • Even projects you win require un-billable admin time to get off the ground (e.g., calls or writing proposals) and to wrap up.
  • What you charge is not what you are going to take home.

These factors mean that what you charge for each day of work has to make up for all the other days you don’t work, plus cover expenses, taxes, health insurance, and additional costs.

So a $1,000 day-rate does not equate to an annual income of $365,000, far from it. But it’s an easy mistake to make, and even though you can always change your rates, getting off to a lousy start financially will sour the experience of running your own firm and may make it untenable.

So let’s start by thinking about the number of days you are likely to work annually. (FN – When I say ‘workdays,’ I mean days you’re billing clients.) This will fluctuate, but we can use the following numbers for our rate calculations.

  • Annual workdays = 260 (52 weeks times 5)
  • Target number of consulting days
  • High = 130 (50%)
  • Low = 85 (33%)

Right away, these numbers will seem extremely low: only three to four months of work per year? You know you can work way more than that, so you’ll be tempted to increase the numbers for your calculations. But before you do, let’s keep a few things in mind. 

First, we’re talking about solutions-based consulting, not just hours-for-dollars contracting. We’re aiming for distinct, high-value engagements to solve clients’ problems, not looking to clock into someone else’s office every day. The downside of this approach is that we probably won’t have steady, continual work, and things will ebb and flow.

Second, recall that I said that there’s a lot of time required to win and administer the work. So for every workday, at least part of a day or more will go into winning and managing that work.

Third, shorter engagements often require more time to win and administer than more extended contracts. This means that ‘only’ working 33% of the time will still feel pretty busy. For example:

  • Monday – prep for Tuesday’s engagement and business development
  • Tuesday – client engagement (all day)
  • Wednesday – wrap up Tuesday’s engagement, prep for Thursday’s engagement (and more business development)
  • Thursday – client engagement (half day), wrap up and admin in the afternoon
  • Friday – business admin, prep for the upcoming week, and, surprise: business development

So even a low engagement rate of a day and a half of work in a week – 1/3 of the time – makes for a busy week. (Time to cancel your plans to play golf twice a week.) (FN – I deliberately didn’t put Saturday and Sunday down as workdays. In reality, as a solo consultant, you’ll also be working over the weekends when you start, but it’s too easy to get into the groove of the seven-day workweek, which is unhealthy over the long term. So work weekends when you have to but don’t plan your budget on a seven-day workweek.)

Hopefully, this has given you a better idea of the ratio of work time to billable time, and why if you did ‘only’ work for clients four months of the year, you’d be pretty busy. 

So these 50% and 33% utilization rates aren’t uncommon nor particularly low, and we should use these when we plan our rates. That way, we’re building our calculations on realistic numbers, which means we have to also think about the costs of running a business and the’ T’ word: taxes.

Costs and Taxes

Becoming an independent consultant means saying goodbye to lots of things you’ll have taken for granted at your firm: a desk, a good broadband connection, stationery, coffee, the magical cookies and baked goods that appear in the break room sometimes. Even if you’ve been working remotely, there’s someone you can call to fix your janky laptop. Of course, you’re not really saying goodbye to these things: you’re just saying goodbye to someone else footing the bill for everything you need to do your job.

The good news is that unless you’re in a specialized industry that requires costly tools, software, or licenses, most things are relatively small monthly costs. It’s just that there are a lot of these, and they add up, so we need to make sure that whatever we charge clients also covers the costs we’ll incur running the business.

Then there are things like E&I insurance, (FN errors and omissions), health insurance, and other protections that you want to have in place.

Finally, there are taxes and deductions you’ll have seen on your payslip but taken the calculations for granted. Paying taxes quarterly feels different from having these subtracted at source, and there may be additional business taxes that you, as the employee, weren’t even aware of. 

How to calculate your rates

To recap: your rates need to bring in enough to generate the take-home income you need after covering all your expenses while only being able to bill 33 – 50% of your available time.

So we can calculate your day rates (we’ll work out two rates) as follows:

  • Start with your desired take-home pay – this will be your target net income
  • Now add a % for taxes and other obligations (social security, for example)
  • Then add your business expenses 
  • The final number is your target gross income
  • Divide your target gross income by 130 and 85 for your day rates.

These two numbers tell you what your day rate needs to be to make your target income, based upon the upper and lower range of days you’re likely to be engaged.

Here are a couple of examples of what these calculations would look like. Again, these are just examples and not business advice.

Bruno

Bruno is an interior design consultant and lives in an expensive city, so he needs a higher net income. Taxes in hir state are high, and he uses several contractors for some of the graphics work he needs, which drives his expenses up.

  • Target net income – $175,000
  • Taxes (35%) – $94,230
  • Expenses annual – $48,000
  • Target gross income – $317,230
  • 85-day rate – $3,732
  • 130-day rate – $2,441
  • (365 comparison – $869)

Note – I’ve added a 365 comparison for each, showing the gross target divided by 365 to show how big the difference can be between what people think they need to charge (their target divided by one year) versus what they actually need to charge.

Jenny

Jenny is a management consultant who lives in a small affordable city in a low-tax state. She has low overheads.

  • Target net income – $125,000
  • Taxes (25%) – $41,666
  • Expenses annual – $18,000
  • Target gross income – $184,666
  • 85-day rate – $1,421
  • 130-day rate – $1,026
  • (365 comparison – $505)

The point here isn’t to compare Bruno and Jenny or to use these as examples of what you should charge: your industries, location, and experience will all play a part in the final rate. However, hopefully, these two examples show you how much greater your rates need to be than simply dividing what you want to take home by 365. These examples also illustrate the significant deductions you have to account for so your gross revenue will be sufficiently high to ensure you bring home the salary you need.

So remember, work out your gross target income, then calculate your rates, assuming you’ll be lucky to work even 50% of the available days. That will get you a range of rates that will allow you to generate enough money to live on. Otherwise, you might get a few months into the year before you realize you’re making too little and will struggle to pay the bills.

Reviewing your rates

Keep in mind that things change: your family might get bigger, taxes go up, and overheads expand as your business grows. So you need to review your rates at least annually. You might be able to keep these the same for several years but always check your math, so you aren’t short-changing yourself.

How to use the two sets of rates

You might be wondering how you use these low and high numbers when you’re preparing a quote. After all, you won’t know the number of days you’ve worked until the end of the year, so how will you know which rate to use?

The way I go about this is to think of the two rates as a ‘normal’ rate and a ‘project’ rate. 

  • My normal rate is whatever number I get when I calculate my 85-day number. That’s a higher amount, and the one that I use for work that’s not likely to be several consecutive days over a more extended period of time. 
  • When I get a piece of work that’s longer and involves multiple consecutive days, I consider that a project and apply the project rate. Anything that will run for ten days or more in a single month would probably be a project, although this isn’t hard and fast. The key tests are 1) that the scope of work has to be clear and 2) the scope is not liable to change for the work period, and 3) that the work will occur in a compact time frame. This concentration of effort is what allows you to offer what is essentially a discounted rate because you don’t have to turn the work on and off. That’s tiring and inefficient and can eat up a lot of time.

Sometimes clients will commit to a project to get the lower rate but then start changing the scope and timings, so the work gets spread out, meaning that the project criteria no longer apply. Unfortunately, they will have had you lock in the project rate in the agreement, so you can find yourself stuck in these circumstances. The way to counter that is to quote your normal rate for all work but note that the project rate will apply if the work schedule meets the necessary conditions at the end of the billing period. That way, the project rate is applied retrospectively but only when the conditions are met. 

Over time, you’ll find exceptions to these rules: long-term clients where you can roll in with little prep and pick up where you left off last time might qualify for project rates. You’ll maybe want to offer a lower rate to small businesses, not-for-profits, or passion projects. Other companies might get charged a premium because they want you to start work ASAP, and it’s Friday. The rates you charge will fluctuate over time and are somewhat situation dependent. 

But whatever you’re doing, you’ll have a base set of rates to refer back to, which you know will ensure you can cover your overheads, pay taxes and still bring home enough to pay the mortgage and put food on the table.

The Golden Rule

No matter the circumstance, never work for less than your lower (130-day) rate. 

This is nothing more than simple math: assuming you haven’t been too greedy, you’ve calculated the rates you need to charge to bring home enough for the mortgage, food, fixing the car, and the occasional meal out or vacation. If you charge less than your rates, the only place this will hurt is at home (the IRS won’t give you a break on your taxes because you offered someone a discount and your internet connection costs the same). So please don’t go under your lower rate. If someone can’t afford it, you have to move on politely. They can find someone else who can serve them, or there might be an alternate solution that will work for their circumstances: you’re just not going to be part of that solution. (FN – This doesn’t prevent you from helping charities or volunteering your time, but these are separate from your paid engagements. Just don’t try to bend the rules of the financial universe and hope that you’ll somehow make ends meet by charging too little.) 

Rates versus pricing

Remember that we’re talking about calculating your base rates here – what you need to charge to make ends meet. Other factors will come into play when you send out a quote. 

Some industries are used to paying a premium, and bigger city rates might be higher than work in rural settings. There are ideas around value-based pricing where you change what you think the client is willing and able to pay. Some people will recommend that you keep doubling your prices until people stop buying. 

You’ll learn which might apply in your sector, location, and at that moment in time, as you start bidding for work. 

However, I recommend that you calculate the base rate that will work for you and start there. You can always change your rates over time, but you need to test the water first. Your base rates will let you do that, secure in the knowledge that these are needs-based, not made-up numbers that may or may not help you run a successful business.

Two other pricing structures

Day rates aren’t the only way to price your services: hourly rates and fixed pricing are all options. However, keep in mind that no matter what the option you choose, the basic math applies, and you still need to make sure you’re going to it your gross target.

Hourly rates

Most of my work has been based on day rates, as I usually end up at a client’s facility or in their office doing my work there. That lends itself to a day, rather than hourly, rate, which is what I stick to as much as possible. (FN – I am also lazy and find tracking my time by the hour a real drag.)

However, if you need hourly rates, you need to do something more than divide your day-rate by eight because hourly work brings in some additional inefficiency.

First, hourly increments increase the amount of dead time between billable periods. You could try having back-to-back calls with clients, but you don’t have any processing or prep time between calls, making you less effective. Therefore, you probably need to add in an additional margin of ~20% to make up for that lost time. So Bruno might establish an hourly rate of $560 for initial consultations before starting a project using his day rate. (FN – $3,732 divided by 8 plus 20%)

Second, you need to be very disciplined with yourself and your client about specifying what’s billable and what’s not. So if you need 30 minutes to read some materials before a call, make sure they agree that that’s billable time. You also need to be disciplined and not over-pad your time by rounding things up unnecessarily.

Third, you’ll probably need to agree on hourly time caps by week or month for the project. A big concern with hourly billing is that the hours can get out of control and wreck the client’s budget. Agreeing to these caps means you need to be careful with your time estimations, so you’ve quoted a reasonable amount of time for the task. If you’ve gotten this wrong and agreed to do something in 35 hours, but it takes you 45, you may have to write off those extra 10 hours.  

Fixed pricing

These work well for projects that are structured and follow a fixed template. For example, if you have a training offering as part of your repertoire, this can be a fixed price offering in most situations. You can price things up separately if the client wants something different from the standard package but otherwise have a fixed price for a clear set of services. Jenny might use fixed fees for some of the training packages she offers to clients once she’s determined their needs.

Be careful of fixed pricing where you get a sense that the client might want to customize what should be a standard offering. Price the package at its equivalent day or hourly rate if you think they will start asking for adjustments once you start. That way, if you need to spend more time adjusting the package, you have a mechanism to bill them for that time. Otherwise, you’re providing customized services at a discounted rate.

Finally, even if you don’t necessarily show the client the breakdown of prices, you should always have a planning guide for what each element requires time-wise and, therefore, what it should cost. That allows you to plan engagements more effectively and price things more accurately.

You’re worth it

When you calculate your rates, there’s a chance you’ll feel a little queasy at the idea of charging people thousands of dollars per day for your work. This will be even worse if you’re working with friends and former colleagues. Imposter syndrome will kick in, and, in some cases, people might even criticize what you charge.

Don’t worry, that’s perfectly normal.

It takes a bit of getting used to, but these feelings, and complaints about your rates, are part and parcel of doing business as an independent consultant and, in fact, of any business. The difference is that unlike where you worked before, when there was a sales team who had to have these awkward discussions, now you’re doing it.

But remember: you’re an expert in your field, and you can solve their problem in a fraction of the time they’d take to do it themselves. So the value you bring is many times more than your day rate: you provide incredible value for money. 

If that doesn’t work for them – and to be fair, there will be situations where an organization simply doesn’t have the money for a consultant – then it wasn’t meant to be. Shake hands, thank them for their time, wish them good luck, and head off to the next engagement.

But whatever you do, don’t let them talk you into cutting your rates (and don’t talk yourself into a discount either) just because someone says you’re too expensive. Don’t forget: you’ve based your rates on what you need to charge, not a made-up number.

And always remember that you’re worth it.

A big part of the writing in public project is to make sure that you get the book that you need so if you see something that doesn’t make sense, or think there’s something missing that would help, please let me know in the comments below.

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