With the slowing economy and layoffs in the IT sector, many unemployed or underemployed IT professionals will be thinking of entering the consulting field. The question is – how do you set your fees?
I’ll explain one method of determining billable hours and fees.
Determining Workable Hours
First calculate your working hours in a year. You’ll need to decide how many weeks of vacation you’ll take and how many days/week you are willing to work.
As an example I’ll take 4 weeks of vacation per year and work 8 hours a day.
(52 weeks) – (4 weeks for vacation) = 48 weeks.
(48 weeks) x (40 hours/week) = 1920 hours / year.
Determining Billable Hours
In my example I’ll work 8 hours per day. But will I be able to charge the client a full 8 hours? How much of this is overhead? Travel time? Negotiating? A long-standing rule of thumb in any singular consulting practice is that you only end up charging 50% of your time to the client – the rest is spent on building your practice, finding new clients, learning, and administration.
Here is how a typical computer consultant’s time will break down:
-25% on administrative tasks, running errands (picking up parts, etc), paperwork, billing, etc.
-15% on marketing, networking, and pursuing clients.
-10% spent on learning or other activities.
-50% on client work.
(1920 hours / year) x (50% utilization) = 960 billable hours
Now that I’ve figured out the true billable hours of my practice, I’ll need to consider bad debt. Not all clients pay on time, some don’t pay at all. Over an indefinite period, expect about 4% of your clients to not pay the bill. This may be higher in murkier economic times, and may require a shorter grace period between when the work is completed and the bill is paid.
960 hours x 96% = approximately 922 hours
Determining Rate of Pay
I now have a solid figure of 922 billable and collectable hours per year. This is the number that will determine my income in a given year. It is possible to work backwards at this step from what I hope to make, or simply multiply 922 by the average rate of pay for a consultant in my industry.
Suppose I wish to make $100, 000/yr.
$100,000 (gross)/yr / 920 hours = $109/hr
The example above doesn’t take into account renting an office or the overhead of hiring an administrative assistant. It also doesn’t include office supplies, phone, internet, etc. Add up all the annual costs of the items below and divide by the number of billable hours to see the overhead. Add that onto your consulting fee.
Ex. Overhead: $15,000/yr / 920 hours = $16/hr in overhead costs
Resulting consulting fee: Desired income + overhead = $109 + $16 = $125 / hr
After taking into consideration my annual overhead costs and billable hours, I find that $125 / hr is sufficient to average $100 000 / yr before taxes. If you find that $125/hr is beyond what your current market can handle, ask yourself if you can make it work with whatever the average is. You’ll find, as in any situation, some overhead costs are unncessary, and perhaps your desired yearly income is not plausible. What I did not mention was when starting a consulting practice, take into consideration the possibility of months of little to no billable hours near the beginning.
Items that should be taken into consideration when determining a consulting rate are:
- Medical benefits, life insurance
- Office equipment (computers, printers, test equipment)
- Office facilities, mortgage or rent, property taxes
- Business vehicle, insurance and cost of operation
- Office utilities
- Office phone, cell phone, internet connection
- Office consumables (paper, printer toner, business cards, flyers)
- Subscriptions/training/professional conferences/professional associations
- Advertising and marketing costs
- Business licenses and permits
- Legal and accounting services