Calculate Consulting Fees - A how to guide

Calculate Consulting Fees

Introduction

I frequently get questions how to calculate consulting fees so i decided to write a step-by-step guide to describe how to do it.

Here's my quick, easy and foolproof 7 step method to calculate consulting fees for independent consultants that are based on real data to avoid guesswork as much as possible. It's by no means the only way to calculate your consulting fees but it's a good start.

P.S Why don't you go over to consultingvideos.com and get free videos, excel sheets and manuals how to calculate consulting fees?

Step 1: Calculate your working hours per year

Let's make the following assumptions:

  • There are 52 weeks per year (fairly safe assumption)
  • You take 5 weeks' vacation
  • You take 7 days off for national holidays
  • You take 5 days off for sick leave
  • A normal workweek is 40 hours

Work hours per year are now: (52-5) x 40 - 7x8 - 5x8 = 1,784 hours per year based on the assumptions we just made.

Step 2: Estimate your billable hours

Not all of the 1,784 hours are billable because you need to spend time on administration, marketing and other non-billable work you can not include in your consulting fees.

Let us for simplicity assume you spend:

  • 30% of your time on marketing, networking and seminars etc.
  • 20% of your time on book keeping and other administrative work

Based on this assumption are now only 50% of the 1,784 hours billable so now only 1,784 x 0.5 = 892 billable hours remain.

Step 3: Estimate your collection rate

Not all your clients will pay your invoices for financial and other reasons so you have to take this somewhat nasty reality into account when you calculate your consulting fees.

Let's assume that 5% of your bills don't get paid. Your billable hours are now reduced to 892 x 0.95 = 847 hours per year.

Step 4: Calculate your business expenses

Typical business expenses are:

  • Phone (fixed and mobile)
  • Office rent
  • Stationary
  • Travel costs
  • Computers
  • Insurances
  • Legal services
  • Meetings and conferences
  • Continued training and education

This list is by no means complete but should give you a good idea of the business expenses you need to estimate when you calculate your consulting fees.

Let's in this case assume your business expenses is $23,000 per year.

Hey Consultant!

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Step 5: Calculate your personal expenses

Typical personal expenses are:

  • Food, entertainment
  • Housing
  • Retirement savings
  • Vacation

Retirement savings is not really a cost but it's still money you need to put aside so i have included it under personal expenses.

Let's assume your personal expenses add up to $45,000 per year.

Step 6: Estimate your wanted savings

Now you have to estimate your wanted savings per year. This is how much you want to put aside for large future investments on top of your retirement savings:

  • House
  • New car
  • Longer vacations
  • Education for your children
  • Contingency money on the bank


In this example we assume you want to put aside $20,000 per year.

Step 7: Put all the numbers together

This is the last and final step when you calculate your consulting fees so all we have to do now is to put all the numbers together.

Your total expenses are:

  • Personal expenses = $23,000
  • Business expenses = $45,000
  • Total expenses = $68,000.

Your billable hours are 847 hours as we calculated in step 3 and your wanted savings are $20,000 as estimated in step 5.

The consulting fees can be calculated based on the following formula: (total expenses + wanted profit) / billable hours.

Based on our assumptions we get a consulting fee of ($68,000 + $20,000) / 847 = $103 / hour. You can round up your consulting fees to $105 / hour.

Consulting fees as a function of billable hours

The three main drivers for your consulting fees are:

  1. Expenses (business and personal)
  2. Wanted savings
  3. Billable hours

Let's take a look at how the consulting fees change as a function of your billable hours.


The hourly rates increases quite dramatically as a function of billable hours, especially when the billable hours falls below 60%. So to keep a reasonable hourly rate you probably should target at least 50-60% billable hours.

However, it's not good if the billable hours are too high either because while you might make a lot of money in the short term your business will most likely suffer in the long term as you will not have enough time to spend on networking and other marketing activities.

Fixed price or cost based consulting fees

Although we just calculated an hourly rate as our consulting fees i normally recommend you work on a fixed price contract whenever possible. The hourly rates you just calculated is however very useful when you calculate your fixed price so it's very important to have a good grasp of the hourly rates.

>> Click here for free information about starting a small consulting business.

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Comments 24 comments

FEDERICO PEREZ 8 years ago

I liked your approach, although very much focused on the american way of doing business. However, I can easily adapt much of the concepts to mexican reality. Great contribution!


Caitlin 8 years ago

This is a great guide, but I don't see where taxes are factored in.


betherickson profile image

betherickson 8 years ago from Minnesota

Hi! Great hub. Very informative and well-written. :)


Ryan 8 years ago

Though this provides a great guide to figuring out how much you need to get charge in order to get the net income you'd like, it's different than charging what you're worth. I think a big portion of how much you can charge is based on how much value you provide to the client, not how much money you need. Generally, I use the formula that the total amount I estimate I'll get paid for a project will produce 10x that much in profits (not revenue, but income) for the client. Though it's tough to figure out exactly how much they'll make from my work, it's a good guide that lets me break my work down into a reasonable hourly rate.

I just think it's dangerous thinking that you can change a customer more because you'd like to have a more expensive lifestyle or because you'd like more savings. Charge them what you're worth, if you want to charge more, learn some additional skills that make you worth more.


nrjberg profile image

nrjberg 8 years ago Author

Ryan, thanks for a good and insightful comment.

I agree to a large extent to your comment but i think you need to do BOTH hourly based and value based calculations.

Ideally, i'd like to charge my client based on the value i bring to the table. But what if that value is not enough to support my wanted lifestyle? What if i can't pay for my childrens education or mortgage for the house?

If the value i bring bring to the client doesn't support my supported lifestyle, i know i have to either improve my value or do something else that can support my wanted lifestyle (or change my goals).

So i always like to charge my clients based on the value i bring with me for the client (and position it as an INVESTMENT) but i always cross check if it actually support my wanted lifestyle, if it doesn't i know i have to do something about it.


Frank.KIMIA 7 years ago

Very good artilce.


Gary 6 years ago

This is the article that just keeps on giving! Thanks for the insight!!! I'm working through this right now.


Dr.Tarek 6 years ago

I'm a new consultant working in the field of Logistics,I like this approach of calculation in which will be a base in my future career.

Thanks

Dr.Tarek


Dr. Gracer Yung 6 years ago

I plan to start my Educational Consulting Services. Your information is very helpful for my future consulting business.

Thanks.


bizchickblogs profile image

bizchickblogs 6 years ago from Tucson

I've visited this hub before after finding it through Google, and came back to it because it's really, really good. I am getting ready to turn my freelancing into a full-fledged consulting practice (which hopefully will become an agency) and this is very helpful to me. Even as a freelancer, this is very handy.

Much appreciated. I'm going to go look at that "starting a small consulting business" link now!

Cheers,

Tia


Nderim - Kosovo 5 years ago

Very good calculation. It is very usable and real.

Greatings


teresa 4 years ago

you're missing employer payroll taxes, benefits (health, dental, vision, disability and potentially retirement matching that you'd get from an employer), and profits to your business for growth.


jen58 4 years ago

who the hell takes 5 weeks of vacation/year? nobody i know


V.S. Vergara 4 years ago

Very informative and helpful for people just starting a consulting business!! Very well written! Thanks.


Victor 4 years ago

This is good article.

However, how do you charge outright fees for writing and producing:

- Business Plan

- Market Plan

- Feasibility Study for Oil Refinery

- Blueprint

- Company Brochure

- Company Profile

victor

victorayika@msn.com


halimah panjaitan 4 years ago

Thanks for this guide, I just will start become a chocolate consultant. The approach is helpful for me to determine my cost.


Abdel, Montreal 4 years ago

There are times where you just feel the need to say “THANKS” for what you get from an article.

Three years later it's still useful. Great article and good feedback.

Thanks a lot.


NSAKEMEI GILBERT 4 years ago

nice hub, it gives a clear meaning to calculation and a visibly view of all calculation prob,Thanks


Andrei 4 years ago

Great stuff I am just starting out as electronic/embedded systems consultant and I find his very helpful although I might have to cut down the charges because in the country that Iam living in at the moment no one would accept those kind of charges


nrjberg profile image

nrjberg 4 years ago Author

@Andrei, Thanks for your comments. Consulting fees varies greatly between countries and the examples above are just that - examples. They should be adjusted according to your local situation.

I'm happy that you found the article helpful.


mhaydock profile image

mhaydock 3 years ago from Illinois

I'm looking to apply for a job as a trainer/presenter for an educational resources company. I have significant experience as a presenter/trainer, but have never done it on a freelance basis. I have done freelance writing, but that doesn't involve travel and all the other stuff. I low-ball myself to gigs (as writers often have to do) as I am still new to freelance writing and have to pay my dues so to speak. But I have no clue even where to begin charging for an appropriate fee because this is a much bigger deal. Your formula is pretty detailed. I have to submit a flat rate fee requirement. Help!


nrjberg profile image

nrjberg 3 years ago Author

Low-balling your way in is rarely a good strategy. It may be OK in some cases to break in to new business and you see an upside later on but don't get yourself known as the "cheap guy".

Try to distinguish yourself from the competition by providing something unique others won't provide. If you do/present yourself like everyone else does it will be a matter of price and the cheapest will win.

I can't give you a specific suggestion because I have too little information about the work you're bidding on. But, if you're completely clueless you can try to find out what a regular employee would get in salary for the same job and multiply it with ~2.5.

I have another hub for value based fees, also take a look at that to get some ideas.


Norman 3 years ago

How to calculate Mobilization charge


Andrew 2 years ago

This article completely neglects to take into account TAXES!!!!!!

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