Thursday, May 8, 2014

How to price your services - thanks to "Ask Annie"

Ask Annie


Hanging up your shingle? How to price your services

May 8, 201412:06 PM ET

The fees consultants charge vary widely, depending on expertise, demand, and other factors. But don't forget to budget for time off.

FORTUNE -- Dear Annie: A friend sent me yourcolumn about how to make sure you get paid if you're freelance, and I'm holding on to it just in case that becomes an issue. But I'm not quite at that stage yet. Right now, I have a full-time job but, after several years moving around among a few different employers, I've built a reputation as a troubleshooter in a highly specialized area of IT, to the point where people at other companies now are calling me to see if I would do projects for them on the side. So I'm thinking about going out on my own as a consultant. The thing is, I have no idea how or what to charge for my services. By the hour, by the day, or per project? And how do consultants decide how much to charge (per hour, for example)? — Antsy in Austin

Dear A.A.: It's no wonder you're in the dark about this since "the variety is endless," says Kate Wendleton. As head of national career-counseling network the Five O'Clock Club, Wendleton has both hired her share of consultants and freelancers over the years and coached people who have put out their own shingles. "There are almost infinite variations on fee structures," she notes.

For instance, in some fields, companies pay a "success fee" (where, "if the project works, you get a big payday -- but if it doesn't, you don't," Wendleton says), or a modified version, like a success fee with a guaranteed minimum you earn regardless of the outcome. "If you're working with a startup, you might agree to be paid in stock," says Wendleton. "Other common arrangements are retainer, commission, percent of sales, per head if you're running seminars, or, of course, per hour or per day -- or some combination of the above."

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As complicated as that sounds, two basic factors will determine how you price your services. The first is what the market will bear, especially when you're just starting out. To avoid either underpricing yourself or charging more than clients are willing to pay, "find out what the standard fees are in your industry, at your level of expertise," Wendleton suggests.

If you don't know any IT consultants well enough to inquire about this, you might ask around at your own company, and maybe even in the places where you've worked before. You could also ask people on LinkedIn for a general range of IT consulting fees and how they're typically structured. In particular, Wendleton advises, find out from managers in your field who routinely hire consultants what, and how, they typically pay them.

The second thing you need to figure out is your own overhead, or how much you'd need to earn as a consultant in order to cover your costs. Wendleton lays out the math like this: Take your current salary plus bonus, which we'll say just for the sake of this example is $50,000 per year, and add about 20% for the health insurance and payroll taxes your employer now pays. Then take that $60,000 and divide it by the number of hours you can reasonably expect to work in a year. To figure in 10 days off, including holidays, and four weeks of vacation and sick time annually, Wendleton recommends using 1,600 hours as your guideline.

Next, divide $60,000 by 1,600, and you arrive at an hourly figure of $37.50. That's your overhead, which Wendleton notes is what it will take just to stay even with what you're now making. But you're not finished yet. Not only is it possible you won't work every one of those 1,600 hours, but you still have to run your own office, buy your own health insurance, pay 100% of your Social Security, put money aside for vacations, fund your own retirement plan, and cover any other costs your employer now bears.

That's why, Wendleton says, "the rule of thumb for short-term consulting fees is, your hourly rate should be twice your cost" -- in the example we're using, two times $37.50, or $75.00. Once you've arrived at your hourly rate, you can use it as a benchmark to set your fees. Let's say, for instance, that a prospective client has a project you think will take 120 hours to complete. Your fee for that project, at $75.00 per hour, would be $9,000.

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"Remember that someone will be deciding whether or not you're worth it, and there is a lot of flexibility," Wendleton says. "If lots of other people can do what you do for less, hiring managers will just pick someone else. On the other hand, if your skills are unique and in demand, especially if you're a known expert in something, clients will often pay more than the going rate."

Sometimes much more: Wendleton knows a couple of solo consultants who each have two big clients, work for each company two days a week, and bill each one a flat $100,000 a year. Both consultants "had paid their dues in their respective fields and are worth every dime," she adds. "If you can get to that point in your own career, it's not a bad way to make a living."

Talkback: If you've worked as an independent consultant, how did you determine what fees to charge clients? Leave a comment below.

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