There seems to be a lot of uncertainty among consultants of my acquaintance on how to set billing rates. I’ve seen several different magic formulas, but they all seem to arrive at roughly the same place. Personally, I find it easiest to relate my consulting rate to a salary equivalent for a full-time employee (FTE).
Suppose you wanted to earn the equivalent of $10,000 salary, plus the benefits a FTE would normally accrue. As I mentioned back in Part 1 of this series, this “loaded salary” figure including benefits costs can be 50-100% greater than the base pay. So to earn the equivalent of a FTE’s $10K, you’d have to bill $15-20K.
Now you need to factor in how many hours you expect to work per year. FTEs might put in 2000 hours/year, but consultants lose hours because they have to spend time looking for jobs and doing non-paying tasks to keep their business going (taxes, paying bills, invoicing and collections, etc). Plus you’ll probably want some time off at some point. Frankly, it’s a great year if you can work 1500 billable hours. For a lot of consultants who are just starting out 1200 billable hours/year is a more realistic target.
Putting those numbers together means that you need to bill $10-15/hour to make the annual equivalent of $10K in loaded salary. I suggest you be conservative and shoot for the high end of that range. Based on this hourly number, there are a couple of approaches you can take to set your final billing rate.
One common approach used by many folks who are just starting out as consultants is to simply set your billing rate to be equivalent to what you’re earning as a FTE. For example, if your current job pays $100K/year, you would set your billing rate to $150/hour.
Another approach would be to go to a job search site like Dice or Monster and see what salaries are being offered for jobs in your field, and then apply our hourly metric to that. One advantage to these sites is that you can home in on jobs by geographic location– rates can and do vary from place to place. For example, looking at job postings in the DC area for Senior Forensic Examiners, I’m seeing salaries in the $150-200K range. So equivalent hourly billing rates would be $225-$300/hour, which is pretty much in line with what firms seem to be charging. Of course you would have to be qualified for such a position to command that billing rate.
Beyond that, your own experiences lining up work should help you calibrate your billing rate. If you name your billing rate to a new client and they accept it immediately without flinching, then you just “left money on the table”. Name a higher billing rate next time. If you have more work coming in than you can handle, increase your billing rate until the incoming workload drops to a manageable level. If on the other hand you’re having trouble finding jobs, reduce your billing rate to make your services more attractive.
And that’s really all there is to it. Setting your billing rate doesn’t have to be a deeply mysterious, arcane process– simple arithmetic will suffice. The reason consultants are often unwilling to discuss billing rates is because they want to avoid allegations of price-fixing, which can carry substantial penalties. Personally, I never discuss billing rates with anybody other than my clients and would urge you to follow the same policy.