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Consultancy Formula for Fees

Consultancy Formula for Fees

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Published by Ken Marshall
A simple formula to help freelance consultants charge the most appropriate fee for their requirements.
A simple formula to help freelance consultants charge the most appropriate fee for their requirements.

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Published by: Ken Marshall on Jun 30, 2009
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09/03/2010

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Setting your Fees for Private Practice

Your fees must do four things: · · · They must provide you with a personal income appropriate to your skills, knowledge and experience. They must meet all the costs of running your business. They must provide a surplus, or profit, which will enable you to invest in your business and allow it to grow in size, services and quality; and to recompense you, the owner, for the risk that you are taking with your resources. They must enable you to compete effectively in your chosen market.

·

Let's start close to home with your personal income. Make a cool assessment of what your skills, knowledge and experience would bring you in the marketplace as an employee. Avoid any tendency to be modest. You are presumably good at what you do or you would not be offering yourself to clients. What is more, you have to build the client's confidence in using you and that means that you need to appear to be the kind of person who can command high earnings. Think for the moment only in terms of salary. Keep it simple. Let me assume that you are worth £50,000 a year for the sake of example. You would expect to be paid, if you were in employment, for working days, high days and holidays. That is, you would expect to be paid for 261 days each year. (You do not usually get paid for weekends and 365 less 104 Saturday and Sundays comes to 261). Divide £50,000 by 261 and you get £191.50 per day. That is your labour rate. Of course, you are probably worth a great deal more than £50,000 a year. I am just using simple figures for the sake of example. Step One Forecast the days you expect to be able to sell, on average, each month. Try not to be overly optimistic or you will fail to cover your costs fully. On the other hand, if you are unduly pessimistic will make your forecast a self-fulfilling prophecy by establishing an unrealistically high daily rate. My guesstimate of what you might reasonably aim for is 12 days each month. That is you will be billing clients for 12 days of the 20 that are available each month on average after fluctuations caused by holidays, variations in the business cycle and other activities that are not directly chargeable. Step Two List and cost all your monthly overheads.

Step Three Multiply each monthly cost by 12 and add these up to get an annual cost of being in business. Step Four Divide the annual overhead total cost by the number of days that you expect to invoice to customers. On the basis of my guess, 12 days a month for 12 months comes to 144. At this point you have established a daily overhead rate which you can add to your daily labour rate to give you a complete cost of being in business and of employing yourself. Before we go the last step, let us develop an example which will both clarify what we are doing and raise some important points about what to include. My example will be reasonably comprehensive. That is, it will be, in the words of the insurance industry, 'of wide scope'. Your categories and the figures which you put to each must be as specific and accurate as forecasting allows. As a total aside, my favourite definition of forecasting is one I heard from David Myddleton: 'Forecasting is the art of stating what would have happened if what did happen didn't happen.' Having got that off my chest, now for our example. Again, don't let the simple numbers sidetrack you - it's the principle which is important, and the principle is that the client pays for everything, but what they pay is fair and above board. OVERHEADS Item Secretary Office rent Telephone Postage Personnel benefits Equipment Stationery Marketing Personnel (5 days) Direct Practice management (5 days) Dues and subscriptions Automotive Insurance Accounting and legal Miscellaneous Monthly Cost £ 1,000 250 100 65 40 25 12 958 500 958 12 345 26 225 200 Annual Cost £ 12,000 a 3,000 b 1,200 780 480 c 300 144 11,496 d 6,000 11,496 144 4,140 312 2,700 2,400 e

Totals

4,716

56,592

Notes: a) If you charge any part of secretarial assistance directly to the client as an expense, you deduct that part from your overhead. The rule remains, 'the client always pays - but only once'. b) A proper, locally accurate office rent should be included even if you work from home. You may wish to compare your performance with others so you need to compare like with like, and you may need to rent an office one day. When you do, you do not want to have to put up your fees. Clients notice such things. c) You are entitled to whatever personnel benefits you would expect to enjoy if employed (health insurance and personal pension plans etc). d) In case you have been wondering, this is where you cover the difference between billing clients for 144 days and paying your wages for 261 days. The shortfall is 117 days – In round figures 10 days a month. The other five are charged under 'practice management'. e) I hate to see 'miscellaneous' in accounts, but it is useful for bringing together all the odds and ends and other things such as meals when traveling and travel costs that cannot be directly charged to the client as expenses. On completion of this exercise we have an annual overhead of £56,592 which we divide by the days we expect to invoice, 144. This gives us: Labour rate Overhead Total cost £191.50 £393.00 £584.50

We are almost there. All that remains is to add our profit margin, but how much? I can offer a rough guide based on experience. Most consultancies look to earn a profit of 15 to 25 per cent, and coincidentally or not, it seems to be closer to 15 per cent when interest rates are low, and nearer to 25 per cent when rates are high. (If you are borrowing in order to trade, you will not forget to add the monthly interest paid into your overheads, will you?) So let us go for the upper limit: Total cost of doing business Profit @ 25% Total £ £ £ 584.50 146.125 730.625

But £730.625 is an awkward figure to use. So we are likely to round up a little and end up with: Daily charge-out or fee rate of: £735.00 Assuming an 8 hour day giving an hourly fee rate of: £ 91.875 (Rounded up to £92.00)

And having worked it out properly we could, if we had to, justify it to the world as being the rate at which: · · · We are properly paid for our labour. Our expenses are met. Our investment is rewarded with a fair level of profit.

You may be asked on very rare occasions (it has yet to happen to me) to break your fee down into its components. If you are, the above will satisfy most clients, with this proviso. Government employees tend to have a low regard for what they see as 'high salaries'.

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