Question on fees…
As a follow up to an earlier post on LLCs, reader C asked about fees. Here is my response:
Thanks for the advice on LLCs…
Another quick question — how do you go about setting up your fees?
Glad my advice helped. Still remember the questions I had many years ago and how others helped me.
Ah, fees. The number two question I hear, after “How do I get clients?”
I plan to do some detailed posts on fees, but here are some quick comments:
– Three popular methods are hourly/daily, project based, or value based. Starting out, you’ll likely use a combination of hourly/daily and project based fees.
– You will need to establish an hourly rate for internal use. It is also helpful when someone just wants a few hours of your time. For longer term projects, you want to move into project based fees.
Most people want to know a project estimate, not your internal billing rate. Think like a remodeler — how much will it cost to redo my bathroom? Not, how much do you charge by the hour?
– Incidentally, value based fees are great if/when you can get them. I think they are better suited for management consultants, where you can charge based on anticipated ROI.
This is a bit harder for technical consultants, which is where you would seem to fit. In those cases, most people want a solution to a specific problem, and want an idea of the overall project cost.
– Back to the hourly rate. You fee should include your salary, overhead, and a profit.
For a very quick estimate, take your existing salary and multiply by 2. Then add a profit of 20% — after all, you are in business and entitled to a profit. These numbers are typical of many businesses today, and should put you in the ballpark.
As such, this is what it would cost a client if they hired you outright (except you get the profit…) These figures can be refined, of course, but are a good place to start.
So, if your salary is $100,000/year, figure $240,000. Divide that by 261 days, and you have a daily rate of $920/day or $115/hour. This is a MINIMUM — if you work for less than this, you might as well stay employed.
Even if you are part time, you should shoot for this as a minimum, as the market already shows you are worth this to an employer. You can use this rate to estimate project costs.
– Another method is to ask others in your business area. Most consultants will share that info if they don’t see you as a threat. You can also often get that info through professional organiztions.
Once you get a range, shoot for the 1/2 to upper 2/3 point when starting out. You want to be neither too cheap nor too expensive.
Whatever you do, do NOT lower your rates to buy business. A client that buys solely on cost is NOT a good client, and often more trouble than they are worth. (Incidentally, that is a little experience speaking there.)
– If you can charge more, then by all means do so. You do need to charge a premium for short term projects, as your down time and marketing costs are higher.
For example, we do a lot of short term (week or less) projects, so we charge about double what long term consulting or contract engineers charge.
We also charge a premium above that for training projects. Occasionally I’ll get a pushback, but I point out that we “hit the ground running.”
– If you are bidding projects, you need to spell out very specifically what IS covered and what IS NOT covered. You can always do extra work, but only for an extra fee.
Along that line, if someone wants to negotiate, NEVER reduce the fee without reducing the scope. Sometimes people are just fishing around (particularly if you are new,) so hold your ground.
If they do agree to a lower scope, that is fine — maybe they truly don’t have the funds to do everything they wanted to do in the first place.
Anyway, hope this helps. Looks like I have the makings of another blog post here 🙂
Thanks for the response and all the great information. I’ve got a lot to think about and get prepared.
My pleasure. Stick with it – I’m sure you will do well. — Daryl
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