What is scarier, being asked your bill rate by a potential customer, or being asked to speak in public? For many consultants, contractors, and freelancer, it is being asked what the bill rate is. I have seen it in consultants I have hired, and I have experienced it as a consultant myself. When that question comes, you want to be prepared, confident, and sound like you are worth every penny of it.

In this discussion, we are going to talk about the bill rate, or the hourly rate you charge for your services. I am not going to talk about how many hours it will take to complete an assignment. I assume that you are an expert in your discipline, and you can estimate how long a piece of work will take. But we also know that you will be wrong in your estimate. Hence tracking how long it takes to complete a project and each task within a project is necessary if you want a thriving, profitable consultancy with reasonable hours. And that is why you should use a time tracking software such as TimeCatchApp, which makes it easy to track how much you actually do spend so that you can make adjustments to your quotes for future projects.

I have run large consulting organizations, including for S&P 500 companies. I have set pricing for my business unit, negotiated rates with clients, and developed proposals for millions of dollars, and for thousands of dollars. I have run business units with less than 8 people, and business units with more than 1200 people. My goal here is to use my experience to improve your consulting practice.

You are running a business and you deserve to get rewarded for that

How big consultancies do it

The foundation is the cost of employment. The largest cost in any consulting business is labor, and this will be true of yours as well. “But, I am a solo consultant. I have no labor costs!” Au contraire, you need to be paid as well, so you need to include your labor costs. So what is the cost of labor? Cost of labor = salary + benefits + bonuses. Benefit include medical, dental, optical, retirement (401(k) or pension contributions by the organization), life insurance, car allowances, etc.

Salary and benefits

What is the salary? You know how much you were paid, so that is a pretty strong starting point. You may even use that as an ending point. If you do not know, you can use tools such as salary.com, pave.com, payscale.com, and others. There are a host of services that can help provide this information.

How much do the benefits cost? According to the US Department of Labor, for professionals benefits cost around 47.9% of base pay. We can round this to 50% for ease of calculations.

Example

According to the Labor report, average cost per hour for a “Management professional and related” is $51.26. Based on the averages, benefits cost 50% of base pay, so that would be $51.26 * 0.5 = $25.63. Add together and we have cost of employment $51.26 + $25.63 = $76.89. Feel free to round to $80 to make your life easier.

Office or software costs

Besides labor, you have other costs: Necessary software, IT costs such as computers (assume a viable life of 2 years for computers), rent for an actual office if you have one, etc. Add these in.

Billable utilization

You need to account for the fact that you will be generating your income on only a fraction of the time you are working. The proportion of time spent on billable projects is the billable utilization. In the large organizations, a billable utilization of around 80% is typical for most consultants. Line managers would have less utilization, say around 50%, while directors and up typically have close to 10% to 0%, depending on the organization.

If you are running a solo consultancy, then your utilization will be lower, because you are acting as a mixture of consultant, manager, and director/partner. You should target around 30% of your effort on marketing and business development, 10% on administrative tasks, and 10% on project management. So if you can get to 50% utilization you will be doing well.

At this point, the charge rate is now (cost of labor + office costs)/expected utilization rate.

Example continued

Continuing the example above. Let’s assume that our software costs are around $5000/year. Fortunately, your basic office stack–time tracking, invoicing, document storage–is free since you are using TimeCatchApp. But your analytical software, hoo boy! We will continue to assume 50% utilization. Since we have around 2000 hours per year of work time, but our available billable activities is only 2000 * 0.50 = 1000 hours, that $5000 software cost is $5 per hour. So our charge cost is now ($76.89 + $5)/0.5 = $163.78. Or if we used $80, we have ($80 + 5)/0.5 = $170.

Profit margin

The big boys add in nonbillable costs that need to be done, including QA department, business development, IT professionals, and so on. Additionally, they will also include a profit margin so that the shareholders can earn a return on their investment. You should do likewise. If you have administrative support, add the cost of that here; if you have business development support, add that too. Remember, you will pay for this even if you do not include it, so add it in. And then add in another 20% for profit. For many large organization, this adds another 50% to the costs. So now that $170 per hour is now $170 * 1.5 = $255 per hour. And the consultant takes home in cash $51.26 per hour.

Your consultancy

You should follow the lead of the large consultancies. Add in the costs so that your consultancy is profitable and you are working only reasonable hours. Should you include a profit margin for your efforts? Absolutely. Even if you are running a solo consultancy, you are running a business and you deserve to get rewarded for that. Remember, as a business owner you get paid only after everyone else does: Your software vendor, your telephone vendor, your business development lead.

Calculator

TimeCatchApp has a helpful calculator to perform these calculations for you. Go to the Calculators section and look for the Bill Rate calculator.