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When Should Consultants Be Paid?
How Much of a Consulting Fee Can Be Collected Upfront?
For any professional consultant, getting paid for your work is an inescapable key to financial success. One practical solution is to request up to 100 percent of your consulting fee upfront. As noted by engineering consultant Nathan Sokal, “No worthy client will object to reasonable advance payment arrangements. The more strongly a potential client objects to your reasonable attempts to ensure payment, the more suspicious you should be of his or her real intentions.”
In today's competitive work environment, however, consultants must be prepared for a dizzying array of demands by potential consulting clients. Delayed timing of payments is a common request, but that does not make it a reasonable demand. Advance payment of at least a portion of anticipated consulting expenses is both appropriate and prudent for all parties concerned.
In my opinion, the key is that a consultant is paid to provide advice, and their fee is directly related to the importance of the topic. Those new to consultancy will frequently fall into the trap of giving their advice and intellectual property away during the initial meeting and discovery sessions. This obviously must be avoided if the consultant intends to stay in business!
— James Yuille
Everything Is Negotiable
While it is not unusual for some consultants to invoice for their services after work is completed, collecting consulting fees upfront is a prudent strategy for avoiding payment risks. For example, turnaround management consultants need to assess the likelihood of a client going out of business when determining acceptable payment terms. Nevertheless, the final terms of any consulting relationship are typically subject to negotiation — but consultants should be prepared to ask for upfront payment of their fees to avoid awkward payment issues at a later point.
Ten Practical Rules for Business Negotiations
Seek Multiple Sources of Advice About Guidelines for Consulting Fees
If you are new to the consulting business, it is always hard to make initial decisions regarding critical issues such as consulting fees. You should get advice from multiple sources such as friends and business colleagues. But the final choices are your responsibility. Whatever you do, be fully prepared to navigate murky waters during the early days as a consultant — especially when it comes to getting paid.
As observed by Jane Ranshaw, "One reason for so many different rates charged by consultants is that, even in a Wikipedia world, we operate in a world of imperfect knowledge. The first step in achieving better fees is to understand the difference between working as a temp and running a business. When consultants realize that their positions are as valid as those of the clients they serve, they will be able to set fees and estimate time for projects that let both of them achieve your goals.”
Some clients offer consultants a share of future revenue, profits or commissions, pushing the consultant to a pay for performance model. Others offer the client a commission. Still others offer pay based on the results of the consultant’s work. Consulting fees based on performance pose several risks.— Andrea Coutu
Government Clients for Consulting Firms
Consulting firms value working with local, state and federal governments because of fewer payment risks. If your consulting firm plans to do business with government clients, you should review the agency’s billing procedures prior to finalizing a contract. Government agencies will often be willing to pay for a portion of specified materials and other projected expenses in advance — full payment in advance is rare when your consulting firm is doing “government work.”
Too many consultants fall in love with their own methodology. Success in this business comes from marketing, not from the depth of consulting expertise. I know that this is heresy to many of you, but all the nonrainmaking consulting gurus are working for somebody else and merely earning a paycheck.— Alan Weiss
Consulting in an Internet World
Establishing your standards for consulting fees is only one of several critical tasks as a new consultant. Plan on pursuing a balanced approach when seeking prudent advice for starting a successful consulting practice. You must be prepared for "hitting the ground running" in this ultra-competitive field. Pay close attention to suggestions about avoiding a series of "normal mistakes" for a new consultant. Many examples are avoidable mistakes if you take the time to review and apply the lessons learned by other consultants who learned the hard way.
But what about consulting via the Internet? By multiple accounts, about a third of the U.S. workforce is made up of freelancers — and much of this activity within the “freelance economy” involves the Internet in one way or another.
In a business world increasingly dominated by e-commerce and the Internet, it should not be surprising that freelancing sites such as Upwork (formerly oDesk-Elance) have provided practical solutions to the eternal questions of how and when consultants should be paid. For example, the common-sense approach used on Upwork is to require a business or individual hiring a consultant to "fund escrow" prior to beginning a consulting engagement. This involves the consulting client depositing funds into an escrow arrangement (managed by Upwork) and then releasing funds to the consultant after work is completed and approved by the client. For lengthy projects, it is not unusual to have several milestones that are paid individually upon completion.
While far from a "perfect" solution, this approach to paying consultants is apparently "workable" based on the number of independent consultants currently working on Upwork and other freelancing sites that use variations of escrow funding. For the record, I actively use Upwork as well as several other online sites in my roles as both business consultant and business writer. The primary cost of doing business on freelancing sites is the portion of consulting fees that are deducted before freelancers are paid — for example, Upwork currently charges 5 to 20 percent (depending on total client revenues).
Consulting freelancers can avoid the costs of freelancing websites by setting up their own websites and payment processing arrangements. Multiple payment processors such as Square and PayPal provide solid capabilities to invoice clients using their services. However, these payment websites do charge a fee for processing credit card payments.
Of course, working for online clients does not eliminate the practical need for consultants to negotiate payment timing and other terms. While many governing aspects of website operators such as Upwork are fixed and not subject to negotiation, numerous consulting specifics are still negotiable — including the timing of consulting payments.
Training to Become a More Effective Consultant
"If you think it's expensive to hire a professional to do the job, wait until you hire an amateur." (Red Adair)
© 2014 Stephen Bush