Calculating Your Minimum Hourly Bill Rate for Consultants
Calculating Your Minimum Hourly Bill Rate for Consultants
Whether you’re new to the consulting field or a seasoned veteran, it’s a good idea to sit down and calculate your minimum hourly billing rate periodically. If you’re just starting out, you’ll need to know what your minimum hourly bill rate is, because it will serve as a basis for determining project fees. If you’ve been a consultant for a while, it’s still wise to re-calculate your minimum hourly rate at least annually to adjust for inflation and any marketplace or business changes that may have occurred.
It’s important to create a fee schedule of some sort from which to work from, and by doing so you are essentially creating a business plan. As a consultant, you may work on different types of projects that may be billed at different rates, so you’ll want to outline how your fees will be structured from the start, so that your rates will be consistent and competitive.
In order to set fees, you must first calculate how much money you need to make or want to make in order to have a basis from which to start setting your rates. This process is a lot more complex than simply coming up with an annual salary that sounds adequate, dividing by 52 (weeks per year) and then again by 40 (hours per week).
The following variables should be taken into consideration when determining your minimum hourly rate:
Determine your overhead costs. As a business owner, you will now have many expenses that are necessary to maintain your business, including any employee payroll and benefits, business insurance like E&O and General Liability coverage, office supplies, rent or lease of office space, equipment, mileage for business purposes, and any number of other expenses related to running your business.
Consider your personal expenses. When determining your minimum hourly rate, your personal expenses should be taken into consideration, because you want to be sure that your income covers all your expenses, both personal and business. If you are a company of one, then this means your personal finance budget needs to figure into your plan. Personal expenses may include mortgage or rent payments, car payments, utility bills, groceries, or child care costs. Be sure to calculate entertainment into this number. Does your family go out to dinner regularly, attend shows or participate in other activities that cost money? It’s advised to speak with an accountant or financial advisor for help in determining your personal and business overhead. They can conduct a complete financial analysis that will give you the most accurate picture of your budget and expenses, taking all the variables into consideration, such as your tax filing status, the state in which you reside, and your tax bracket.
You’ll also want to account for savings. Being in business for yourself means you need to stay financially secure whether business is great, or business is slow. Make sure that you have several months worth of income set aside to sustain you if you are unable to work for a short amount of time or if your business experiences a weak quarter. If you will have a need for a new vehicle or new home in the coming years, it’s advisable to start saving now, and by coming up with a savings plan, you’ll be in a better position to make the purchases you want or need to make in the future. You may also need to save for your children’s education or vacations, and please don’t forget to have a solid retirement savings plan. Speak with your accountant or financial advisor regarding your options, which can include SEPs, IRAs, 401(k)s, or other options. Finally, make sure you are setting aside money to invest back in the business, whether for tools and technology, ongoing education and training, marketing, or expanding your capacity by hiring others.
Calculate your number of working hours per year. Be realistic when calculating your number of working hours per year. You’ll want time to recharge your batteries, and you’ll want time to spend vacationing and with family. Be honest with yourself when figuring the number of hours you plan to work per week; if you use a 60-hour workweek in your calculations, you’ll need to put in 60 hours every single week in order to make the money you need to survive. Being as accurate as possible with these numbers will allow you to set rates that will result in a comfortable level of income from a comfortable level of work.
Your number of billable hours per year will be less than your number of working hours per year. Take into consideration that your total working hours is not equal to your total billable hours. On average, consultants spend only about 50% of their working hours doing billable work for their clients. A portion of the remaining time is spent on a combination of marketing, networking, and continuing education, and the rest is spent on administrative duties. There are ways to increase the percentage of your working hours that you spend on billable work, including outsourcing some of your administrative tasks to a third-party organization, such as a Portable Employer of Record.
Develop a plan for accounting for non-paying clients. Unfortunately, not all clients will pay you timely, and some clients won’t ever pay you at all. Count on 5-10% of your gross billings being unpaid when setting your rates, and when you run into these unfortunate situations, it won’t end up being a financial crisis.
Use the above factors to calculate your minimum hourly rate. Your minimum hourly rate is equal to your total costs divided by your billable hours per year. Take your working hours per year, subtract the hours that you will spend on non-billable tasks, and then use 90-95% of that figure as your total billable working hours. Then add together your overhead, personal expenses, and savings, and divide this number by your total billable working hours. This is your minimum hourly rate.
Be Competitive. Make sure that your rates are realistic and aligned with what your clients will be willing to pay. It’s one thing to decide how much you want to get paid, and another thing entirely to make sure that the services you are providing are worth your bill rate. Make sure you compare apples to apples when benchmarking your rates against other service providers operating in the same field, and remember that if you are charging more, you will be expected to deliver above average value and service. This ties in with your overall business plan as a consultant. But how can you know what the going rate is? Secret shop your competitors (ask for proposals), evaluate what you’ve been paid in the past, be sensitive to client feedback during negotiations, network with peers in the same industry, and use job boards, work exchanges, and salary websites to benchmark your rates with similar firms in the same geographic location.
Deal with Reality. You may learn in this process that your desired bill rate is competitive for your industry, or you may find that the going rate is vastly lower than what you need for your business to thrive. Whatever the result of your calculations, this is not the time to stick your head in the sand. Make sure your business model is really feasible, and before you get in over your head, seek the right expertise to help you evaluate, and perhaps revise, your business plan. Rates are climbing in some industries, and falling in others. Think about ways to diversify your offerings to manage risk, grow into more profitable areas, and otherwise shore up your business against the pressures of globalization and recession.
Use a value-based pricing strategy when quoting projects. Your minimum hourly rate is your starting point that you will use to determine project costs, but you should always use value-based pricing in proposals and when speaking with clients. Assuming you can offer above average service and talent to your clients, value-based pricing model will allow you to earn more profits, build your clientele, and increase your perceived value as a consultant in your buyers’ minds.