How to Calculate the Right Consultancy Fees

In my business I speak to a lot of consultants – some new and some that have been around more than a few years. One of the questions we get asked a lot though is how much should my consultancy fees be and how should I charge? There are a number of ways to look at this and here are a few pointers, ideally you need to understand:

· Your Billable Minimum
· The Type Of Consultancy Engagement
· The 5 Different Methods For Calculating Fees

YOUR BILLABLE MINIMUM

Step 1. What are your costs?

Your consultancy fees have to cover your operating costs (in this instance I’m talking about the general business expenses excluding your salary) plus an income for you. All Consultancy businesses should know how much and what types of costs are likely to be incurred within a year. For a consultant, office and non expense related travel costs are usually the highest and can easily be 10-30% of income.

Step 2. What revenue do you need to generate?

This cost together with your earning expectations make up your forecast revenue. Say for example this is £120,000, £20,000 costs and £100,000 income.

Step 3. How much time do you have spare after admin?

It may be that you are spending 16 hours a week on non-billable or administrative work. This will give you 3-4 days per week to earn depending on how many hours you work. This translates to 144 to 192 billable days per annum (assuming 48 weeks worked a year). If we assume 192 days this means that on average you need to earn £625 per day to hit your target. If you only work 144 days then this rises to £833 per day on average to hit your revenue and earning target. Understanding your average earnings per day target can significantly help you to determine the correct fee structure for the project. In this example you need to earn a minimum of £625 a day.

THE TYPE OF ENGAGEMENT

Peter Block has one of the best definitions of the three different types of consultancy engagements (see below). What we have found though is that the different types of engagements often drive different types of consultancy fees.

The “Expert” Consultant

· The Consultant is more autonomous and control sits firmly with the consultant. In effect the client has handed over control of the project to the consultant.
· There is a problem and the consultant provides the solution. My suggestion is that payment here should be on a fixed fee plus performance based basis however often this defaults back to day rate due to competition. The more specialised the area and the higher the value added, the more you can charge.
· A good example of an expert consultant is a Specialised Trainer or Specialist IT Consultant.

The “Pair of Hands” Consultant

· Where control sits firmly with the client. The client understands what needs to be done and wants the consultant (or expert) to do it.
· Consultancy Fees here are almost always day rate or even charged per hour but can include performance bonuses. These consultants often supplement the client’s staffing requirements as required.
· Many generic IT Consultants and Interim Management Roles (where there is more competition) sit in this bracket.

The “Collaborative” Consultant

· Where there is an interdependent relationship and control of the project is shared. Management works hand in hand with the consultant.
· Because the success of the project is deeply linked to the client’s ability to contribute and influence the project, risks and benefits should also be shared. This means that a lower day rate may be more appropriate with higher performance based element to the consultancy fees.

5 DIFFERENT METHODS FOR CALCULATING FEES

There are 5 different methods for calculating Consultancy Fees.
1. Time based
2. Fixed fee & Success based
3. Contingency or Performance based
4. Demand based
5. Mix of the above

1. Time based

· This puts the risk squarely on the client, great for the consultant not so great for the client, in fact the worse you do the more you get paid!
· Most suitable for a “Pair of Hands” consultancy projects

2.Fixed Fees & Success Based

· Fixed fees are generally used where the value added is high but equally the risk to both parties may be high
· A fixed fee will often be negotiated as part of a tender
· Success based fixed fee – as above but is only paid out if agreed metrics are met, high risk for the consultant and so needs a higher fee to compensate for this.

3. Contingency or Performance Based

· Two decades ago it was mainly tariff analysts that used these types of fees. After some years of certain consultants not meeting targets, more and more often fees are expected to be charged in direct proportion to the benefits achieved.

4. Demand Based

· Demand based fees are the easiest to calculate – they are either based on a multiplier of what it would cost the client to pay a salary (anywhere from 150-300%).
· Or they are based on what the competition are charging.

5.A Mix Of All Of The Above

· The reality is a mix of any two of the above approaches will often work well to balance the risk to both the client and you the consultant.

Remember businesses and people often don’t buy on price alone, low fees give the impression of a junior consultant, if a potential client says that your fees are too high what they are really saying is:
· I don’t see the benefits
· I don’t see the value
· The risk is too high

Address this and you will go a long way to improving both your fees and your profitability as a consultant.