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

    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?

    Let us consider some ways of billing for your

    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

    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:

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