Calculate Consulting Fees - A how to guide
Calculate Consulting Fees
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.
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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
- Travel costs
- 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.
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Step 5: Calculate your personal expenses
Typical personal expenses are:
- Food, entertainment
- Retirement savings
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:
- 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:
- Expenses (business and personal)
- Wanted savings
- 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.
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