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How to Set Professional Fees for Consultants, Coaches and Therapists

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Setting appropriate fees helps your business grow

Setting fees is one of the hardest things to do for independent professionals such as consultants, coaches and therapists.

People think consultants (and other self-employed professionals) make exorbitant hourly rates, when in fact they are often just making the equivalent on an hourly basis as any typical employed professional.

As someone who has been an independent coach and consultant for the past 20 years, I get tired of envious people making little digs about my rates. These people don’t have a clue about what’s involved in setting fees, and why consulting fees are necessarily higher than employee hourly rates.

So how do you set professional fees?

A good way to start is to multiply by 2.5 the hourly rate that you would earn at a job doing similar work. So if you are a human resources consultant and you know that similar work pays $40 an hour plus benefits (benefits are usually at least 20% on top of an hourly wage) then your calculation would be:

If an employee costs:

$40 + 20% for benefits = $48 an hour

Then the consultant should charge:

$48 x 2.5 = $120 an hour

This calculation is just a rough starting point. You would also take into consideration factors such as competition, reputation, specialized skills, supply, demand, and the economy.

Why do you multiply by 2.5?

In consulting the rule of thumb is that you will spend about 40% of your time in  unbillable activities such as writing proposals, marketing, administration, travel, and office administration. You also need to budget in about 20% of your fee for overhead costs associated with rent, equipment, insurance, professional development, sick days and holidays.

That leaves the remaining 40% for billable activities, which are activities that you can actually charge the client for. This formula is sometimes referred to as the 60/40 rule.

In a 40 hour work week, a consultant will typically bill about 16 hours (40% of 40 hours) to clients. That’s why consultants, coaches and therapists  need to build in overhead to the hourly charge-out rate.

Let’s look at an example

A consultant — let’s call her Elizabeth — charges $150 an hour.  Presuming she works a standard 40 hour work week, the 60/40 rule tells us that she charges clients for 16 hours and makes $2400 (even though she worked 40 hours overall in her business). Do the math and we find that she is actually earning $60 an hour.

Elizabeth’s husband — let’s call him Ray — is employed at a university doing work very similar to what Elizabeth does in her private consulting business. Ray makes $50 an hour, which on the surface seems a lot less than Elizabeth’s hourly rate of $150.  But keep in mind that Ray gets paid for every hour he works, so $50 x 40 hours a week = $2000. This is less than Elizabeth’s $2400 a week, but add Ray’s medical benefits and paid holidays and it comes out about even.

Tired of the comments?

The next time someone ribs you about making the “big bucks”, tell them about the 60/40 rule. Or do as I do.  Smile and say, “You could do it too! All you have to do is give up your benefits, paid holidays and regular pay cheque – and take the leap.”  That usually makes the point.

Comments on this entry are closed.

  • Michelle October 31, 2010, 6:53 pm

    Hi Barbra,

    Thanks for pointing out all the little details that go into the day that are not billable activities. It helps to set a justifiable and realistic rate for our services.

    Many people don’t even think of all they do behind the scenes, and so are somewhat flustered or apologetic when someone remarks on our “high” fees not realizing all the items they receive as benefits but that we self-employed folks have to cover for ourselves.

    Michelle

  • Barbra October 31, 2010, 7:07 pm

    Glad to hear you found the article helpful, Michelle!

  • Sue Johnston February 2, 2011, 9:42 pm

    Hi Barbra –
    Thanks for a good formula and a valid explanation. I’ve found it difficult to put a numeric value on my work. So I clung to the rate the agency charged me out at, years ago. Turns out, it’s pretty close to your formula.
    I still price by the project, rather than the hour for some work. (And I invariably underestimate how long it will take and so, underprice.)
    Sue

  • Julia Stewart February 2, 2011, 10:29 pm

    Awesome Barbra! I’m going to pass this on to my coaching students, who are nervous about charging what they are worth!

  • Michael Zipursky August 8, 2011, 6:57 pm

    Barbara – great article. I just finished creating a free online consulting fees calculator. Thought I’d share and if anyone has feedback on it do let me know:

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

  • Barbra August 11, 2011, 2:34 am

    Michael – I took a look at your free online consulting fees calculator and think it’s great!

  • satyanchamarthi September 21, 2011, 11:19 am

    WHAT A WONDERFUL STUDY

  • Erin Feldman October 4, 2011, 11:29 pm

    I love the illustration of Elizabeth and Ray. I feel better about some of the prices I’m considering when I remember the 60/40 rule. Thank you for writing this article, Barbra.

  • Michael Richardson January 17, 2012, 2:34 pm

    This a useful number, but it fails to capture the entire conversation.
    If you just are acting as a contract employee, then it might be appropriate.

    However, many consultants are hired to advise: what is critical is that the person (the manager) doing the hiring pays enough for the consultant that they do the homework they have been asked to do (before the engagement), and that they take the recommendations seriously afterwards.

    The bigger the organization, the more price tolerance they have, and the higher the fee has to be in order to be effective. This is not about gouging the customer: this is about making them understand that they are not hiring a contractor.

  • Andrew February 27, 2013, 6:07 pm

    40% for billable activities seems very low to me, and to all the other consultants I know. We normally budget for 150 billable days a year i.e. about 60%.

    Also, what about a profit margin? There’s considerable risk in starting and running your own business and that’s got be worth something.

  • Andrew March 4, 2013, 7:28 pm

    Actually, on looking at the calculation a second time, there appears to be something adrift with the math – possibly a typo though. It says that 40% of time is unbillable, and 40% is billable. That adds up to 80%. So what happened to the remaining 20%?

  • Sarah September 9, 2013, 1:01 am

    Hi,

    Since this article was posted in what seems to have been 2010, can you tell me if you would change your calculation in anyway?

    Thanks!
    Sarah

  • Barbra Sundquist September 12, 2013, 7:29 pm

    Hi Sarah,

    The information holds true today. Thanks for asking.