A recent newspaper report breathlessly reported that a Government agency had employed a consultant at $2,000 per day – twice the normal rate!
The source of this mythical “normal rate” was not stated. In fact $1,500 to $2,500 per day is probably the mid-range for consultants in New Zealand and $2,000 per day is less than half the rate of partner in a large firm. Overseas consulting firms consulting in New Zealand could charge 3-4 times as much.
It is time for a reality check – how should fees be set?
What should you be charging as a consultant?
Setting fees at the right level is a key part of being a management consultant. Set them too low and you risk working hard but not making money. Set them too high and you won’t win enough business to pay the bills. If you are semi-retired or consult occasionally as a lifestyle choice you can use high fees to help filter out unwanted assignments. If you have a mortgage and a family to feed (or expensive hobbies) you have a greater need to meet the market. Here are some steps to help figure out how to set your fees.
Step 1 – How much value do I provide to my client?
You can set whatever fees you like but the client pays those fees and they will equate what they pay with the value they receive. Put yourself in the client’s shoes and understand what they want and what they need. Plan to provide that advice with the honesty and clarity that supports decisive action. What is that worth to them? If you are good at what you do you will be able to see the value in your services from the client’s perspective. If you can’t do that then management consulting is probably the wrong business for you.
Step 2 – What is sustainable for me?
Management consulting seldom has you working 8:00 to 5:00 Monday to Friday on a predictable basis. It is usually a mix of periods of intensive work with long hours and quiet times. Quiet times need to be used productively in developing new opportunities, networking, skills development, business administration and unwinding. You need to recognise this in how you set fees. Here are four approaches to fee setting (all are GST exclusive examples):
- Apply the rule of thirds – 1/3 is your salary, 1/3 is expenses, 1/3 is unproductive time. In this case simple triple the salary you expect and divide it by the number of working days in the year to obtain a daily rate. E.g. if you want a salary of $120,000 then $360,000 is divided by the number of working days. 365 – 104 (weekends) – 20 (4 weeks annual leave) – 5 (1 weeks sick leave) – 5 (training days) = 231. If you plan to work 8 hours per day then that is 1,848 hours per year. Your charge out rate would be $1,558 per day or $194.80 per hour. You would round those figures to say $1560 per day or $195.00 per hour.
- Use a billable time and overheads model. Calculate how much of the theoretical time you can work is realistically able to be charged E.g. 20% on administration, 20% on identifying leads, marketing, writing proposals etc. and 10% on other non-billable things leaves 50% of your time as billable. Let’s say you have added up all your overheads – office expenses, depreciation, vehicle expenses, professional indemnity insurance etc. and that comes to $46,000 per year. Round it up to $50,000 for unforeseen items and inflation. You want a salary of $120,000. That means you need to bill $170,000 per annum. At a 50% billable target your charge out rate would be based on 1880 * 50% = 940 hours per annum. $170,000/940 = $180.85 per hour or $1,446.80 per day (Rounded to either $180 per hour or $1,500 per day probably).
- You may have very little in the way of overheads in your practice. You may work from home and have a regular client base from a previous employment relationship or a unique product offering that guarantees you repeat business. In that case you may want to set fees on a profit mark-up basis. This will be a reflection of what profit you wish to make and what the market will bear. Simply take the salary you desire. Add any known costs then add a profit percentage E.g. Salary of $120,000 + nominal annual costs of $20,000 = $140,000 + gross profit of 50% = $210,000. This would equate to a daily rate of $210,000/231 = $909.09 or an hourly rate of $113.63.
- A fourth option is to simply charge what everyone else charges. If you are a strategy consultant and similar consultants charge $2,000 per day then just charge $2,000 per day.
Step 3 – Should I charge on a time basis, project basis or value basis?
For simplicity all the examples above are based on a time basis of charging – billing hourly or daily rates. You don’t have to bill that way. Many consultants charge on a flat fee basis per assignment. Some charge on a contingency basis. Some charge on the basis of the value provided to the client. The more helpful articles discussing these aspects can be found on the IMC New Zealand LinkedIn group. Make sure you join the group to see future articles
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This article is by Phil Guerin, Immediate Past President, IMC New Zealand.
Andrew Marr is a current IMC New Zealand council member and treasurer.