People think consultants (and other self-employed professionals) make exorbitant hourly rates, when in fact they are often just making the equivalent on an hourly basis as any typical employed professional.
As someone who has been an independent coach and consultant for the past 20 years, I get tired of envious people making little digs about my rates. These people don’t have a clue about what’s involved in setting fees, and why consulting fees are necessarily higher than employee hourly rates.
How do you set professional fees?
A good way to start is to multiply by 2.5 the hourly rate that you would earn at a job doing similar work. So if you are a human resources consultant and you know that similar work pays $40 an hour plus benefits (benefits are usually at least 20% on top of an hourly wage) then your calculation would be:
If an employee costs:
$40 + 20% for benefits = $48 an hour
Then the consultant should charge:
$48 x 2.5 = $120 an hour
This calculation is just a rough starting point. You would also take into consideration factors such as competition, reputation, specialized skills, supply, demand, and the economy.
Why do you multiply by 2.5?
In consulting the rule of thumb is that you will spend about 40% of your time in unbillable activities such as writing proposals, marketing, administration, travel, and office administration. You also need to budget in about 20% of your fee for overhead costs associated with rent, equipment, insurance, professional development, sick days and holidays.
That leaves the remaining 40% for billable activities, which are activities that you can actually charge the client for. This formula is sometimes referred to as the 60/40 rule.
In a 40 hour work week, a consultant will typically bill about 16 hours (40% of 40 hours) to clients. That’s why consultants, coaches and therapists need to build in overhead to the hourly charge-out rate.
Let’s look at an example
A consultant — let’s call her Elizabeth — charges $150 an hour. Presuming she works a standard 40 hour work week, the 60/40 rule tells us that she charges clients for 16 hours and makes $2400 (even though she worked 40 hours overall in her business). Do the math and we find that she is actually earning $60 an hour.
Elizabeth’s husband — let’s call him Ray — is employed at a university doing work very similar to what Elizabeth does in her private consulting business. Ray makes $50 an hour, which on the surface seems a lot less than Elizabeth’s hourly rate of $150. But keep in mind that Ray gets paid for every hour he works, so $50 x 40 hours a week = $2000. This is less than Elizabeth’s $2400 a week, but add Ray’s medical benefits and paid holidays and it comes out about even.
Tired of the comments?
The next time someone ribs you about making the “big bucks”, tell them about the 60/40 rule. Or do as I do. Smile and say, “You could do it too! All you have to do is give up your benefits, paid holidays and regular pay cheque – and take the leap.” That usually makes the point.