Consulting Journal: Techniques

Techniques: Hourly rates

by David Blakey

How to calculate your hourly rate, how to express it to your prospects, and why you shouldn't discount.

[Monday 5 July 2004]

Many consultants seem to be embarrassed about their hourly rate. Instead of just saying My rate is $500 for half a day, they will add but that's negotiable.. Why should it be?

Deciding your rate

An easy way for any consultant to calculate their rate is as follows.

Step 1: Revenue

Add the annual costs of running your business to the annual amount that you personally wish to earn. That gives the total revenue needed. Let's say that it is $120,000.

Step 2: Availability

Then decide how many weeks each year you intend to be available for work. Take out all the public holidays and any vacations that you want to take. Allow for sickness. Consultants do not get paid when they are sick. You could aim for 48 weeks. It may be more realistic to aim for 40 weeks.

Step 3: Working hours

For any working week, calculate your working hours. Some consultants may aim for a 30 hour week, others for 40, and possibly more. Let's say that you aim for a 40 hour week.

Step 4: Utilization

For any working week, calculate your utilization. This is the percentage of your working week that will be billable work. We have assumed a 40 hour week. Now consider what percentage of those hours will be billable. Remember that you will have to exclude time for administraion (such as sending out bills), for compliance tasks (such as paying tasks), for education (which includes all your business-related reading and browsing), and for marketing, selling and prospecting (which includes all the time that you spend on writing proposals). You might think that 60% is reasonable.

Bear in mind that if your working week is inelastic, your utilization will be elastic. This means that if you aim to work only 40 hours per week, you can expect your utilization to grow or shrink, depending on the amount of work that you actually have. Similarly, if your utialization is inelastic, your working week will be elastic. If you set your utilization at 60% and then consistently do 40 hours of billable work each week, your working week may actually be 65 hours or more.

Some consultants with repeat business from several clients can aim for 80%, because they need to spend less time on prospecting. Let's say that you aim for 60% utilization.

Step 5: hourly rate

You can now calculate the hourly rate that you should charge.

$120,000 / 40 weeks per year / 40 hours per week / 60% utilization = $125 per hour.

Expressing your rate

If your rate is $125 per hour, consider whether you want to state that to your clients. In consulting, few tasks take only one hour. If you are running a one hour meeting, you need an hour of preparation before it, an hour of reporting and minuting after it, and an hour to define and agree your future actions as a result of it. A one hour meeting often involves four hours of consulting time.

I have found that any task usually takes four hours. Even if you do research on the Internet, you will need to record your sources, copy or print the web pages, and possibly write a summary of your findings. The incidental tasks increase an hour's research into a four hour task. In general, you can say that any task will take half a day.

I recall a project manager who had prepared a Gantt chart that showed people doing a one hour task, followed immediately by another one hour task, and so on, to fill an eight hour day. There was no turn-round between tasks and no down time. Your client's full time workers will probably actually only do five hours of productive work in an eight hour day. Allowing for turnround between tasks, that is possibly four one hour tasks per day. And they are not doing all the tasks that a consultant needs to do for quality assurance and reporting and tracking.

Instead of quoting a charge of $125 per hour, you might consider using $500 per half-day.

If a client asks you to research an area of best practice, to prepare a report and to present that report in a meeting, you can immediately quote a fee of $1,500. Three tasks - three half-days.

You must be practical. If part of your research involves two meetings of 30 minutes each with members of your client's staff, and if the second meeting can be immediately after the first, then you only need a single half-day for both.

This makes working with a client easier, too. You can arrive at the start of the morning and work until lunch-time: that's a half-day. You can arrive after lunch and work until the end of the afternoon: that's a half-day. You will obviously have worked for a half-day.

Stating your rate

You should be able to state what your rate is. And then shut up. If you are worth $500 per half-day, then just say My rate is $500 for a half-day.

There are several reasons why you should not even hint at the possibility of negotiating your price down.

Desperation

You can appear desperate for the business if you appear willing to negotiate. We all know situations in which a vendor was prepared to negotiate its price down and then attempted to retrieve its original margins by reducing quality.

I was once advising a large vendor in bidding for a large government contract. The vendor wanted to win the business by offering a 5% discount. I explained that, as their margins were 20%, and as their costs were fixed, they would be taking a cut of 25%. I shall return to this example shortly.

Precedent

Discounting your first assignment to win a new client can lead to discounting every subsequent assignment in order to keep the client.

Back to my example. When the government department sent us its standard contract, it stated that the vendor should state the costs, their margins and any discounts that they offered. But it also stated that these discounts would apply to any future work within the contract. The vendor would have to discount by 5% for the full term of the contract. For seven years, their margins would be down by 25%.

Priority

If you have discounted your rate for one client and then another client engages you at your full rate, you may be inclined to give the second client's work a higher priority than the first client's work. Given the choice of working at your full rate rather than the discounted rate, you would work at your full rate.

This is a strong argument against discounting. It is one that I have stated to clients when they have suggested a lower rate. I have told them that, if I accepted a lower rate, it would be on condition that their work would be a lower priority than any other work at my full rate.

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