by Brad Bollenbach

Raining Money

It’s one of the most common questions a consulting newbie asks: How much should I charge?

I was a software consultant for three and a half years. First I was into Plone, then I worked on a big Zope 3 project, and more recently I’ve done some Rails stuff. I still do the odd gig here and there as I make the transition to running my own company.

If you’re currently looking for contract work, the rate you charge will be one of the most important decisions you make. The more you get paid, the more freedom you have to either work fewer hours now, or save up and run around the world later. Your hourly rate is also an important part of your self-marketing strategy.

Here are four simple tips for determining what your skills are worth:

1. You’re probably aiming too low.

Contrary to what you might think, selling yourself as an “affordable” consultant is not a good thing. The same client who turned you away at $50/hour may have hired you for $90/hour. If that seems strange, think of it this way: If you were going to pay someone by the hour to operate on your heart, would you go with the guy who charges $30/hour, or the guy who charges $300/hour?

Clients that look for really cheap consultants tend to be a pain in the ass when it comes time to collect, and they often squirm every time your estimate changes.

Don’t feel guilty about going for the gold. Take comfort in knowing that whatever someone is willing to pay you, they intend to make back at least tenfold. On my first contract, I asked for and got an hourly rate that was four times what I was making as an employee. Later, I even doubled that rate for some projects.

Also, don’t look at what other people are charging. First, they’re also probably aiming too low. Second, their skills and experience might be very different from your own.

2. Don’t do fixed-rate contracts.

(My experience is biased towards software consulting. This point won’t necessarily apply to all types of consulting work.)

Creative work is organic and somewhat unpredictable, which makes it a poor fit for fixed-rate contracts. In these types of projects, someone always gets burned: either the client gets shoddy work, or the consultant does a great job but ends up working for $5/hour.

The best way to balance the risks on both sides of the equation is to bill by the hour and give your client regular progress updates. If a task is taking longer than expected, let them know right away and offer options for how best to proceed. Rather than resisting the organic nature of creative work, learn to use it to your advantage.

If for some reason you must do a fixed-rate contract, think very, very long and hard about how many hours it will take you to complete the work, and multiply that by the figure you came up with in #1. Then triple it.

3. Keep it simple.

I’ve heard of some people billing by the hour for the analysis and design phase, then doing fixed-rate for the implementation. Others wonder if they should charge interest on late payments, or offer incentive packages for clients that offer you more work.

Keep it simple. Have one standard hourly rate, and increase it by 50-100% for really short-term work.

4. Use the Wisdom of Crowds (TM).

Your skills are worth no more and no less than what somebody is willing to pay for them. To figure out your true market value, send out 10 CVs every day, and test different rates. Do this every weekday for at least one month. If yours is the kind of work that can be done with just a laptop and a latte, there are probably plenty of online jobsites and company websites you can use for leads.

For example, it was only five or six months ago that I got into Ruby on Rails consulting. Having no professional experience with this specific framework, I knew it would be an uphill climb. But two weeks and 80 CVs later, I landed a contract working on a high-profile website with a team of Rails geeks distributed around the world. Over the next couple months more responses from my “shock and awe” campaign kept trickling in, even though I’d sent out no more CVs. I found another client at a rate that was even better than what I’d been working for in my area of expertise pre-Rails.

If you’re serious about getting paid what you’re worth, “shock and awe” should be your bread and butter tactic for finding work you enjoy at a rate you’re happy with.

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Comments
  1. John Shaver says:

    Brad,

    You couldn’t be more wrong about billable time. I know it has been quite some time since you wrote this article so I hope that you have made the move away from billable time and embraced fixed price contracts.

    The practice of billing for one’s time is unethical. Billing by the hour pits the consultant against the customer. Do you really want to be in an adversarial relationship with your customers?

    I have a favorite quote from Ed Kless at Sage Software: If you suck at what you do then bill for your time.

  2. Ed says:

    John,

    Sorry, but that is just ridiculous. I’ve been an IT Consultant for the last 12 years. Hourly billing is the single best way to get paid properly for my skills. Fixed rates are great in some longer term situations, but for short term work, hourly is the only way to go.

  3. Andrew says:

    I think that billing type really is determined by how many actors are involved. If you are working on your own or in a well-known team, then a fixed rate might work if everyone involved understands their strengths and how to get the job done quickly so that you maximize your per hour time.

    If, however, you’re working in a customer space and deal with people who enjoy wasting your time, then hourly is the way to go. This really boils down to how much control you have over your time and how much control your customer has over your time.

    Either way, I’m all for higher rates, as this will help drive the market up. :o)

  4. Carlo says:

    From experience at a previous employer, I could say that the company that used to do web development for us, would have promptly gone bankrupt if the had billed by the job or fixed rate.

    It was simply embarrassing to see our upper management changing their minds on a daily basis on what they wanted done or nitpicking on minute details that no one but them would notice, but would cause huge amounts of time to implement.

    Needless to say, their company made huge amounts of money on what could have been a simple project.

    On the other hand, it used to tick me that they often sent apprentice developers to do the work, taking an unreasonable amount of time as they were basically on the job training or reinventing the wheel and billing hourly for it.

    I guess it works both ways.

  5. Consultants should avoid hourly fees like the plague. They are generally a bad proposition for the client and consultant.

    However, I do recommend that consultants have a grasp of what they should be earning per hour and per day so that they can plan income targets and know how much and when they can start to outsource work or bring on other employees.

    I created an online consulting fees calculator to help with figuring that out here:

    http://www.consulting-business.com/consulting-fees-calculator.html

  6. David Schwartz says:

    Hourly rates are definitely the way to go in most cases.

    “The practice of billing for one’s time is unethical. Billing by the hour pits the consultant against the customer. Do you really want to be in an adversarial relationship with your customers?”

    Quite the opposite. Fixed prices create a more adversarial relationship. The customer will always argue that additional work was included in the original specification. And the contractor will have an incentive to do the quickest job that meets the precise terms of the specification, whether or not it will serve the customers needs.

    I think you’re erroneously assuming that the contractor’s sole incentive is to get as much money from the customer for as little cost as possible. In that case, the customer may need to insist on a fixed rate for a specific set of requirements to prevent the jerkwad contractor from ripping him off. However, then the customer assumes the full risk that the specifications won’t actually meet his needs and he’ll pay for something he can’t use.

    I counter, that if you suck at what you do, insist on a fixed price for meeting written specifications. Then you are entitled to your full payment even if your work is utterly useless crap.

  7. Phil Thompson says:

    In addition, billable time keeps you in constant feedback mode with the customer. As long as you are delivering, the customer will be happy to pay. Fixed price means big design up front. In over ten years of software development I’ve never worked with a customer who tells me exactly what they want up front and doesn’t want to change things half way through.

  8. Amber says:

    I’m completely new to software consulting and I’m in the process of negotiating a contract to overhaul an Access/VB database application and migrate it to a SQL Server / C# application.

    The application they have is a cess pool of poor, amateur database and software design so we’re just going to redesign the system from scratch (when I say “we” I mean “I”)

    I have no idea what to charge them… and this article along with its comments has only left me more confused about what I should do.

  9. Beth says:

    Can’t say I’m any the wiser. I’m a new consultant in the pharmaceutical industry. My more established competitors are charging ~£500 per hour so I tipped my hourly rate at £250 per hour. But it depends on the project. Hourly rate means I cannot charge for my travel expenses, for the hours I spend on a plane etc. But if I have a project to complete I can charge a project rate. Whereas, knowing my industry, there will be loads of changes requested to the project on an ongoing basis which will increase the number of hours worked so could end up earning about a fiver an hour. Not sure what to do.

  10. Venkatesh says:

    Wantto work in US as a s/w contractor. Can anyone refer a good software consultancy?

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