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Fee Calculation Formula
THE CONSULTANT'S FEE CALCULATION FORMULA
by Kathy Burns
As mentioned in a previous article, there is a perfectly logical mathematical way to establish fees for your consulting practice. Here it is in a nutshell:
1. Start with your previous annual base salary from your corporate days.
For the purposes of this example, we'll use $75,000. If you're just entering this field, or you feel you were not paid properly in the corporate world, then choose a salary based on averages for the work you will be doing. Be sure to adjust up or down according to your skills and abilities.
2. Next figure out what your overhead expenses will be.
Overhead includes standard business expenses such as office rent, marketing, utilities, taxes, insurance, supplies, etc. We'll assume $40,000 for the purpose of this example.
Now, if you plan to work 5 days per week, 52 weeks per year, you would take the total of your cost + overhead and divide by 260 days:
$75,000 (Your cost sample) + $40,000 (Overhead cost sample) ---------- $115,000 (Total Cost) / 260 (Work Days) ---------- $442.31 (Daily Rate)
Now unfortunately, this would cover all costs but would not give you any room for making a profit. To correct that problem, choose a profit percentage, or markup. How much you choose to mark up your services is entirely up to you. The most common range is said to be 15% - 30% however I have seen markups as high as 50% - 80%. So choose what you are most comfortable with and use that -- you can always change it later. For our sample, we'll go with 30% profit markup on the existing daily rate.
Daily Rate: $442.31 (Figured above) Profit: $132.69 (30% of daily rate) --------------------- Adjusted daily rate: $575.00
Now believe it or not, we're not done yet! This daily rate factors in your profit, however it also assumes you will work every weekday of the entire year. This is unrealistic -- you will have slow times, you will want vacations and you may get sick. So you must factor these probabilities in as well. Here's how you do that:
We'll use basic estimates for this example, but you'll likely want to figure your own number of holiday and vacation days later.
Holidays - 12 Vacation - 10 Cushion Time - 10 (Emergencies and surprises) Administrative time - 1 day every other week (You have to take care of the paperwork, right?) Business Development - 30% of your time (You have to promote and market the business, right?) Downtime - 25% (You can adjust this as you become more established)
Now, using the above estimates, we're down to working a total of 106 days per year. This will of course increase as your business becomes established, however it is considered the "safe" way of estimating prices and costs during the first year at least.
So here is our new formula:
$75,000 (Your cost) + $40,000 (Overhead cost) ---------- $115,000 (Total Cost) / 106 (Realistic Work Days) ---------- $1084.91 (Daily Rate) + $325.47 (30% profit) ---------- $1410.38 (Profitable, logical and safe daily rate)
Seem high to you? :) Don't feel bad, many new consultants are amazed at the going rates.
Believe it or not though, the average daily rate for a consultant is anywhere from $1000 - $2000. Established consultants can get close to that per hour.
Many new consultants are uncomfortable with these fees though. If you are as well, then remember that the above numbers are for example purposes only. Change the base rate, change the profit margin percentage and lower your overhead costs -- these will all lower the daily rate to a level that you feel more comfortable with.
Keep in mind however: don't allow yourself to accept slave wages for specialized skills, expertise and services.
If you do, you will become very resentful of all the work you do for clients and burnout will be inevitable. If you're good at what you do, you should be paid well for it. Don't sell yourself short.
(C) 2001, Kathy Burns. All Rights Reserved.
Kathy Burns may be contacted at http://www.electronicperceptions.com freecontent@electronicperceptions.com. Click here to view more of their articles. Kathy is a professional commercial and technical writer specializing in IT topics. Find additional articles, reports and EBook from her at http://www.electronicperceptions.com
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