When you start work as an independent consultant, you may feel a little overawed and wonder how to determine your consultancy fee and create a fee structure for your business.
Below, we review what influences consultancy fees, how to determine yours, and how to take payments once you’ve started working with clients.
What are consultancy fees?
Consulting fees should be based on the value of your work. A number of factors influence that, including the scope of your work, your experience, and the competitive landscape.
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The type of consulting work you specialize in will affect your consulting fees, and there are two general buckets you can fall into:
- Strategy consultants concentrate on business aims and strategies surrounding growth and focus their work on outperforming competitors.
- Management consultants work to improve business strategies and concentrate on focus areas such as HR, IT, or health care.
How much experience you have in your industry influences how much you can charge. Conduct research to ensure you aren’t overvaluing or undervaluing your experience. Different industries have different rates for projects, so your area of expertise and the project scope will influence your pricing model and consultant arrangement.
The competitive landscape and your physical location are the final components that will influence your consulting fees. While you don’t need to mirror competitor pricing, knowing how much others are charging can help you remain competitive. Your general location will also play a part in your pricing — consultants living in coastal or urban cities can often charge higher consulting fees.
What kind of fee structure should I use?
Consultants typically select pricing models or fee structures to charge for what they do for transparency. There are a few different structures that most consultants use:
- An hourly rate: In this time-based arrangement, you bill by how many hours were worked.
- A project-based rate: Before the project begins, you agree to a fixed rate with your client determined by the project.
- A combination fee: You set a fixed rate agreed with the client determined by the project, plus how many hours were worked on the project.
- A performance-based rate: The client is charged according to the results or performance of the work.
While you may want to use the same fee structure across all clients, you don’t have to. The goals of fee structures are to make sure that you are compensated fairly for your work and that your clients feel comfortable paying you for that work, so it’s okay to adjust structures based on the client or the project. Just ensure you are clear about your fees before beginning work.
How do I determine my consultancy fees?
There are a lot of things to keep in mind when you create your consulting rate. It can be tricky to balance all the factors we’ve outlined above, but there are a few steps you can follow to ensure an optimal pricing structure for you and your client.
Determine your hourly rate based on your experience and industry standards. When you’re just starting a consultancy business, knowing how to determine your rate can be difficult. However, to help with this, it’s advisable to split your previous salary into 52 (working weeks of the year) and then divide this by the 40 hours you work each week. Once you’ve done this, you’ll have the hourly rate you previously made. Then do your research and look at competitor prices to see how you stack up. You usually don’t want to surpass 25-30 percent.
Estimate how much time will be spent on the project.
Think about how long you will take over a project and ensure you calculate hours for all phases. This will include researching, interviewing, and some client analysis. On top of this, you’ll need to account for drafts, edits, and the creation of reports.
Factor in additional consulting costs.
On top of what you will charge for your time, you’ll want to factor in additional costs that may arise while working for your client. If you are spending any money on materials or transport for the project, you’ll want to include those in your fees. Think through logistical costs, the cost of business disruptions, and other hidden costs that might pop up along the way.
Decide on a pricing model.
After estimating the time you’ll spend and any additional costs, you need to decide how to translate that into a pricing model. Will you charge by the hour, per project, by performance, or will it be a combination? Make sure you make this decision based on the proposed project, how your client works, and the structure you think will get you fair compensation.
Another way to consider charging your client is to propose a retainer. A retainer is a fee paid in advance to secure or keep services whenever they’re required. Retainers are often used with attorneys because their services are needed on an ongoing basis. Depending on what kind of projects a management consultant is asked to work on, a retainer may be appropriate.
Once you’ve put together consulting fees for one client, you should be able to easily adapt the fee and fee structure for new clients.
How do I take my client payments?
Once you’ve figured out what to charge for your consulting services, you should think about how you’ll take payments.
A contract allows consultants to adopt a professional face, set expectations with their clients, and get paid. In a contract, you can lay out the scope of your work and describe payment details, so all parties are satisfied throughout a particular job. You can write a contract on your own or use templates and once you’ve prepared a customized template, you can attach it to an invoice and send it off to your client for review.
Invoices are a popular payment option many consulting businesses use to charge their clients, and it can help you get paid faster for your services. With online invoicing software, you can send invoices via email and clients can pay via card online. Then you can track all of your invoices and payments through that software.
Hopefully, now you’ll feel less worried about determining how much to charge your clients in consultancy fees. Getting the balance between providing value for money and not selling yourself short are essential in the world of consultancy.