While as a consultant you can charge for your services based on value, fixed fees, commissions, or any other method, it is really helpful to think in terms of an hourly rate. There are only so many hours in a year. By converting everything to an hourly rate, even if you keep it to yourself, you'll have a better idea of how what you do compares to a make/buy determination and how you income compares to earning a salary.
You can convert an annual salary to an hourly rate by dividing it by 2080 (52 weeks * 5 days * 8 hours). However, there are several other factors that need to be included in the calculation.
The first is utilization. Consultants have to look for work in between jobs. While they are doing this, they are not getting paid. Consultants may spend only 50% of their time working. If they are busy, they may achieve 75% utilization. The first table below shows rates at 50% utilization, the second shows rates at 75% utilization.
Some consultants work as individuals and some work through agencies. If a company needs a single consultant they might hire an individual, but if they've got a large proposal and need a dozen consultants, they will be more likely to go to a company that can provide them with a total solution than work with a dozen individuals. When you use consultants provided by a company, there is overhead added to the rate. This overhead rate can be anywhere from 30% to 100%. In the tables below, we’ve provided figures for an overhead rate of 40% and 60% to give a fairly typical range.
Another factor that must be considered is benefits. Consultants do not get benefits packages in addition to their salary. If they want health insurance, they have to pay for it out-of-pocket, with no employer assistance. Payroll takes are normally split between the employee and his/her employer. Consultants pay a “Self-Employment” tax that is higher than what is deducted from employee paychecks. Even if you work with an individual consultant, it may be appropriate to factor in some overhead to cover these additional costs.
Very few consultants actually calculate these costs, and simply charge what they think they can get. Supply and demand ultimately determines the rates consultants charge. However, the tables below can help you get over the shock value when a consultant says they charge over $100/hr.
Determining how much you should pay for a consultant can be approximated by starting with what you would pay that person if they were a regular full-time employee. If you are looking for an entry-level person, $30-40k/yr would be a typical salary. An experienced proposal manager might cost $60-90k/yr, and an executive level manager even more.
The tables show how an annual salary converts to an hourly rate without overhead, with a 40% overhead, and a 60% overhead. The first table shows a consultant working at 50% utilization and the second shows 75% utilization. The purpose of these tables is not to set or compare rates, but to help you better understand what goes into the value equation.
Rates calculated with 50% utilization
| Annual Salary | Rate with 60% Overhead | Rate with 40% Overhead | Rate without Overhead |
| 30,000 | $35 | $30 | $22 |
| 40,000 | $46 | $40 | $29 |
| 50,000 | $58 | $50 | $36 |
| 60,000 | $69 | $60 | $43 |
| 70,000 | $80 | $70 | $50 |
| 80,000 | $91 | $80 | $57 |
| 90,000 | $104 | $91 | $65 |
| 100,000 | $115 | $101 | $72 |
| 110,000 | $126 | $111 | $79 |
| 120,000 | 138 | $121 | $86 |
Rates calculated with 75% utilization
| Annual Salary | Rate with 60% Overhead | Rate with 40% Overhead | Rate without Overhead |
| 30,000 | $29 | $25 | $18 |
| 40,000 | $38 | $34 | $24 |
| 50,000 | $48 | $42 | $30 |
| 60,000 | $58 | $50 | $36 |
| 70,000 | $67 | $59 | $42 |
| 80,000 | $77 | $67 | $48 |
| 90,000 | $86 | $75 | $54 |
| 100,000 | $96 | $84 | $60 |
| 110,000 | $106 | $92 | $66 |
| 120,000 | $115 | $101 | $72 |
If you want to know how much in total it will cost to bring a consultant in to support a proposal, simply count the number of days between when they start and when the proposal is due. Some consultants offer a daily rate, some count every single hour worked.
Keep in mind that the customer has a great deal of control over how well prepared they are and how smoothly reviews go. With 30-50% of total hours expended on the proposal consumed near the very end, the customer can dramatically influence the amount of hours required to do the job. That usually has a bigger impact on the total spend than the hourly rate.
As an expert in consulting and pricing strategies, I've had extensive experience in advising clients on effective pricing models and considerations for consultants. My background includes working with both individual consultants and consulting agencies, allowing me to provide insights into various aspects of the industry.
Let's delve into the key concepts discussed in the article:
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Hourly Rate Calculation:
- The article emphasizes the importance of thinking in terms of an hourly rate for consultants, even if other pricing methods are used.
- An annual salary can be converted to an hourly rate by dividing it by 2080 hours (52 weeks 5 days 8 hours).
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Utilization:
- Consultants may not be billable for 100% of their time due to periods between projects. The concept of utilization is introduced, indicating the percentage of time spent on billable work.
- The article provides tables showing rates at 50% and 75% utilization.
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Agency Overhead:
- Consultants working through agencies may incur overhead costs. The overhead rate, ranging from 30% to 100%, is added to the consultant's rate.
- Tables present figures with a 40% and 60% overhead rate to illustrate the impact on the overall cost.
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Benefits and Self-Employment Tax:
- Consultants are responsible for their benefits, including health insurance, without employer assistance.
- Self-Employment tax, which is higher than typical payroll taxes, is mentioned.
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Determining Consultant Rates:
- The article suggests starting with what would be paid to a regular full-time employee to approximate consultant rates.
- Tables showcase how annual salaries translate to hourly rates with and without overhead at different utilization levels.
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Total Cost Calculation:
- To determine the total cost of bringing in a consultant, the article advises counting the number of days worked on a project. Some consultants use daily rates, while others charge for every hour worked.
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Customer Influence on Total Spend:
- The customer's level of preparedness and the smoothness of reviews can significantly impact the total hours required for a project.
- The article notes that customer influence often outweighs the impact of the hourly rate on total spend.
These concepts collectively contribute to a comprehensive understanding of consultant pricing, taking into account various factors that influence the cost structure in the consulting industry.
