One of the questions we get asked a lot is what is the best way to charge my clients?
The key to higher profits and higher fees though can be simple - above all else make sure that you are always over-delivering in terms of value to your clients, this will help hugely in the future, it is very hard to charge £1000’s for just one day’s work when you have no track record of trust with your client, likewise always make sure you never undersell yourself!
· Over deliver – if you have agreed to deliver “X” actually deliver X+1 in terms of value
· Never undersell yourself – be confident but realistic. If you undersell yourself you will end up impacting your image and your client’s perception of your consultancy – both are bad for business
In terms of detail there are a number of ways to look at consultancy fees - here are a few pointers, ideally you need to understand:
· Your Billable Minimum
· The Type of Engagement
· The 5 Different Methods For Calculating Fees
Your 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 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.
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.
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 between 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 earnings target. Having an understanding of this figure will help you determine what fee structure you need. In this example you need to earn a minimum of £625 a day.
Peter Block has one of the best definitions of types of consultancy engagements (see below). What we have found though is that the different types of engagements also often drive different types of fees.
· This Consultant is more autonomous and project control sits firmly with the consultant. In effect the client has abdicated control 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 are but often they default 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.
· Focus your communication on the value of the benefit to the client.
· Where control sits firmly with the client. The client understands what needs to be done and wants the consultant (or expert) to do it.
· 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 a more competition) sits in this bracket.
· Make sure that you understand what the controlling party wants to achieve and what the drivers are behind this. Use this understanding to configure a bonus structure that you are confident you will hit (it’s a great motivator too)
· 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 there should be a lower day rate and higher performance based element to the fees.
· Focus discussions on a partnership approach - shared risk should also mean that you share in the rewards.
There are 5 different methods for calculating Consultancy Fees.
· Time based
· Fixed fee & Success based
· Contingency or Performance based
· Demand based
· 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 years of some consultants not meeting targets, more and more often fees are expected to be charged in direct proportional to the benefit 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 two of the above approaches will often work well to balance the risk to both the client and you the consultant.
When calculating your fees you need to ask yourself what is the level and therefore the cost of risk with this client. What is the potential upside and downside? Whatever you do make sure that you never accept extra risk for free. You need to think about the chance of delay, non implementation and perhaps even non payment and adjust your fees accordingly.
If you find yourself in a situation where you could earn £600 a day for 10 days as a temporary contractor or employee equivalent versus a fee of £12,000 but the fee being fully contingent or based on the success of the project then you should be very care when weighing up the contract. Initially this sounds like good news you would only be paid £6000 (£600 x 10) and £12,000 is twice as much, but:
· What is the % chance of delay, what if it takes you 20 or even 30 days instead of 10?
· What is the % chance of failure?
· What if you deliver only 75% - do you get 75% or 0%
· What if you deliver 150%? Do you get 150% (£18,000) or 100% (£12,000)
Risk is always present with a consultancy arrangement and in riskier situations you should look at ways to reduce your risk. This can include staged payments or payment by milestone achieved, most of all however, make sure your client has a very clear understanding of what they are paying for, what they are not paying for and what any extras will cost.
Guarantees can be very powerful when selling your consultancy services but equally they can be painful if handled badly. Try and always reduce risk but don’t leave yourself open to abuse. Using a guarantee can be a great way to reduce risk for your client and can help win a lot more business when used properly. When you think about it you want to make sure that your client feels as though they have received value for money and a guarantee can be a great way to do this.
It is important that your fees not all be paid at the conclusion of the project. Even if you are being paid a fixed fee, agree to get an advance of the fees (on account). This helps hugely from a cashflow point of view and again tests your client. If a client rejects this then you may want to consider rejecting your client! Payments can be made regularly or at the attainment of agreed milestones.
First of all it is worth noting that most consultants under-price themselves so if you haven’t tested a price increase then that is probably one of the best ways around to simply increase your fees. There is a lot of evidence that giving a small number of choices will help too.
· An expensive choice that is 150-200% high where you would normally charge but add in as much extra value as you can
· Your preferred fee (@110% of what you normally would charge)
· A fee that is 90% of what you would like to charge but delivers a lot less
The best way to increase your fees though is to simply to charge 10% less than you normally would then add in another 25-30% success or performance based fee. If you have a clear metric such as increased sales or reduced costs then a % performance based fee is a great way of sharing the benefit. Either way the better you are the better off the client will be and if you do this right you can increase your fees by 50 or even 100% and still see a smiling client.
Expenses are a normal cost but some consultants (and clients) get really hung up about charging expenses. Expenses can be a great way to test your client (i.e. make sure they pay you). Here is the best way to treat expenses in my view.
· Always charge for expenses but make sure your expenses policy is clearly stated in your T&C’s
· If the expense is unusual or large then make sure you get permission prior – it may be that your client has access to better rates than you
· Invoice expenses on a regular basis – the earlier you test your client the better
· Make sure the expenses are clearly summarised
· Never travel or stay at the most expensive places possible – as a general rule the level of accommodation and travel should be in line or slightly lower than what your main sponsor would use – if in doubt ask!
· Consider capping your expenses if the client is overly concerned or you live an unusual distance from your client (please note you should think twice before taking on clients based some distance away unless you can make good use of your travel time.
· Some consultants charge travel at 50% of the per hour rate which is effectively saying we will split the cost of travel 50:50. Personally I very rarely charge for time where the time travelled is less than 2 hours.
This is an example of a basic consultancy invoice template that you can use.
What they want and what you should always try to give them is value for money invested.
If you have a question about how best to calculate your fees send an email to me at email@example.com
Remember businesses and people often don’t buy on price, low fees give the impression of a poor 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 risks are too high
Address this and you will go a long way to improving both your fees and your profitability as a consultant.
Learn more about how to increase your fees through our online Fast Track your Consultancy course.
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