Calvinball in the U.S. Congress
What's in a Name Tag?

Establishing a Fair Consulting Rate

I've recently begun to explore the possibility of an exciting consulting engagement.  I haven't done any consulting work for over a decade; for my first engagement, which lasted over four years, I took over a project a friend had started, and simply charged the same rate he had been charging without thinking seriously about what was fair to me and my client.  This time, I wanted to be more principled in my approach, so I did some research. 

I found a great paper entitled "The Meter is Running: Setting Consulting Rates for Independence", by Christopher Juillet, that outlines a number of potential strategies, including "What I made as an employee", "The 'Rule of Thirds'" (3x salary), "The Rambo Rate" (what the market will bear) and "The Rational Rate".  This last strategy is one I find most appealing: take your target salary (which may be "what I made as an employee"), multiply it by 1.5 (to account for benefits and taxes that would be paid by an employer), add annual business expenses, and multiply the sum by a profit margin of between 15% and 40%, to compensate for the market risk of being an independent consultant.  Divide this final rate by the number of billable days in a year (e.g., 180, to allow time for weekends, holidays, vacation, sick days, administrative days and marketing days), and then divide that by 8 (assuming 8 hour days), and voila, you have an hourly billing rate.

I've run this strategy by several friends who are consulting, either part-time or full-time, and all agree that this is rational and justifiable.  The only issue that was raised was the 1.5 salary factor, as social salary taxes only apply to the first $87K of salary, and medical insurance costs do not vary with salary level.  After working out more detailed calculations to explore the true costs of benefits and taxes, I came up with a factor of 1.33.  I imagine this will go up once my COBRA coverage expires, and I may well be overlooking other expenses that should be included in this factor, but this is the level I feel I can justify at this point.

There are, of course, other factors to consider in establishing a rate, such as the length of the engagement (which may reduce the risk and the number of days one needs to spend on marketing), the strategic value of the engagement (e.g., whether it will lead to future business with this or other clients), the "wear-and-tear" costs (e.g., the frequency and duration of travel), and the ability of the client to pay (e.g., not-for-profit vs. for-profit, and organization size).

It was a time-consuming exercise to work out all these numbers, but very worthwhile, as I now feel more comfortable and confident in negotiating a fair rate.  I don't actually intend to do much consulting, per se, but rather am looking for new channels through which I can design and deploy technology to help people relate to each other in shared physical spaces.  If consulting helps open up some of these channels, then I'm all for it ... especially if it can be done at a rate that is fair to both this consultant and his client(s).

[Update: Paul Brown, in a comment on an entry on Consulting Rates in the Valley in William Grosso's old blog, posted a simpler formula, [hourly_rate] = [desired_salary] * 0.0012, which yields a result that is within a few dollars of the rate I settled on.]

comments powered by Disqus