The Components Of A Consulting Rate

A consultant is a person who provides expert advice professionally.  Consultants may charge by the project or by the hour or day.  Many struggle to establish a rate that provides the income they want, and covers their expenses.  It is important to ensure your consulting rate makes sense for the market.  Your market includes the type of work you are performing (technical/non-technical), your customer base, and how much your customer values experience vs performance.  You only price yourself higher than the market price range, if you are exceptional.  You might price yourself lower than the market price range if you are very new, but even then, it is best to be in the lower end of the market price range.  Being well below the market range, signals you have inferior performance, and you will often struggle to later increase your price.

If you are like me, you like to know the guts of your rate.  Knowing exactly what comprises a particular number provides both a feeling of reality for why you want a particular hourly rate, and a feeling of confidence to stand by your own number.  My strategy for knowing the guts of your consulting rate involves accounting for every detail of what you want to charge.

I read a few forums in which people said in comment sections they would like to make $100,000/year, and work 30 hours/week.  We will work with those numbers for the purpose of this example.

Step 1: Desired Gross Annual Pay: $100,000

Step 2: Desired Hours Annual: 1,500 (This number will be revised!)

Note: 1,500 is based on 30 hours each week for 50 weeks. There are 52 weeks a year, but most people are unable to work due to illness or other reason.

Step 3: Develop your Adjusted Gross Pay

Because there are additional costs for a consultant that a typically furnished by an employer, you will need to account for those costs, and then adjust your salary up.  If you simply divide your desired gross salary by your annual hours, your net income will be significantly lower than you might imagine.  After you account for additional costs, your adjusted gross pay will be roughly 30% higher than your desired gross pay.  You will need to account for annual business costs and annual non-business/living costs associated with a consultant.  If you are freelancing on the side, you may not care about this step, but ignore it at your peril.  Losing 30 cents on the dollar is no joke. 

Business Costs (Annual):  These are business costs that that an employer would often pay.  Most are fixed costs.                

• Office Space:  Will you use a home office, or rent space?
• Web Hosting:  You will likely want to develop some online presence, or at least establish a business email like Google business suite.
• Internet:  You most likely already pay for internet, but include it here anyway.
• Phone:  You need a phone, and most people will use a mobile plan.  Include half the cost of a new phone each year as well as the cost of your plan.
• Invoice/Accounting:  If you have a single customer, invoicing is easy to track with Excel.  More customers, and you may want to use Freshbooks, or Quickbooks.
• Laptop (every 2 years):  Assume you will get a new laptop every two years.  If you would spend $1,200 on a laptop, then you would count the annual cost at 50% ($600).       
• Promotion/Marketing:  Business cards and a brochure.
• Accountant/Tax help:  You may want to hire someone to help you with your business.
• Miscellaneous Software:  Adobe, Microsoft Office Suite are common, and your field of work might require more (Tableau Creator for Individuals is $840/year, for instance).
• Allowance Uncollected Payment:  Assume that some of your clients will be late on payment or fail to pay.  I assume .5% of revenue, because of my past experience with my client.  You may want to assume 3-5%. 
• Parking /Commuting:  How much are parking or other commuting costs?  I elected to pay for parking daily, instead of monthly, after comparing costs and used an average.

Non-Business/Living Costs (Annual):  These are costs often born by the employer through benefits, as well as the employer taxes.                         

• Healthcare:  Many employers provide some kind of a health insurance plan.  To offset the additional cost of being your own contractor, you can either include your estimated out of pocket costs for the year, the cost of premiums, your medical deductible, a combination or a percentage of the combination. 
• FICA: The Federal Insurance Contributions Act establishes a mandatory payroll deduction rate.  The rate varies, but you can generally assume 7.5% is born by the employer and 7.5% is born by the employee.  If you are a consultant, you pay both portions, 15% of your gross income.
• Retirement Savings:  Many employers provide a match.  In my case employers gave a 4-6% match.  You want to build 4-6% into your rate, so that you can at least account for what you might have received from an employer.  I assume a 4% match.

Annual Working Hours:                      

• Hours Year (40/week):  There are 52 weeks in a year, and even if you are working on the side, you should assume 40 hours/week: 2,080 hours.     
• Vacation (3-5/week):  Everyone should assume they need 2 weeks off due to illness or other required events.  I assume three weeks: 120 hours
• Federal Holidays (12 days):  Most people will not work Christmas Day, which is a Federal Holiday.  I assume 12 Federal Holidays, because that is consistent with the area where I work:  90 hours.           
• Non-Billable Hours (10%):  There are plenty of hours you will spend working on administrative items like taxes and marketing.  This can be 10-15%.  I assume 10% since I have an established client, and I already am proficient at aspects of my business.      

Step 4: Calculate Your Rate: $80/hour

If you follow the steps above, you will find the following outcome:

If you had simply divided your desired rate ($100,000) divided by your desired hours (1,500), you would have developed a rate of $67.  Big difference.

Good luck with establishing your rate!

Photo by Yaniv Knobel on Unsplash

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ADP has an excellent article on the details of the FICA for 2019: https://www.adp.com/resources/articles-and-insights/articles/e/eow-social-security-wage-base-for-2019-announced.aspx

The Social Security Administration fact sheet sets the self-employment tax rate at 15.3%:   https://www.ssa.gov/news/press/factsheets/colafacts2019.pdf