Setting consulting fees and hourly rates for a new consultant can be a challenging process. If you set the hourly rate too high, you won’t get business, set the hourly rate to low and you’ll not make money.
There are several factors that determine the correct hourly rate for flat consulting fee. The most important is quite simply, how much do you need? There is a formula for setting this rate and you’ll be surprised how closely the result parallels what others charge.
X = hourly consulting rate
To find X
How do we find X?
First we need to define a few constants. We’ll start with our base rate which is Y.
A= is the salary you desire
B= the number of hours you can realistically bill in one year.
To define the base rate (Y) A/B
So for example if you desire a salary of $80,000 per year and you can bill 1500 hours as an IT consultant you are left e rate of $53 per hour. This is not your base rate, you still have one more calculation.
Next we have to add in the self employment tax. This is the tax for Social Security and Medicare for a self employed or small business owner. This rate is 15.3% Add this to the $53 (53 * .153)
Now we have a base hourly rate (Y) of $61.
At this point many independent consultants set their rate and hang up the shingle. This is why many of them are out of business within a year or two. You must consider all of the other things you’ll need that your employer paid on your behalf, and money to grow your business.
H = Health insurance costs
The first and most costly is health insurance. If you have a family of four you can count on at least $500 per month. Health insurance for self employed can be very expensive. Check with several brokers do get the best price and then divide the total yearly cost by the number of hours you will bill. Taking a rate of $500 per month, or $6,000 per year, at 1500 hours your rate will need to increase by $4 per hour to cover health insurance.
M= Marketing and sales costs
For an independent consultant your business is only as strong as your next engagement. We recommend a minimum of 5% of your first year estimated sales to keep the pump primed. $2.6 would be our hourly rate at this salary.
P= Professional fees.
This is the cost for your accountant, attorney fees, answering service, and any other monthly or quarterly fees you’ll need to pay throughout the course of the year. We’ll use a figure of $2400 for this example, so P= $1.6 ($2400/1500 hours)
The fudge factor is the small things that are going to come up from time to time. Stamps to mail out invoices, a one time cost for your accounting software (QuickBooks, or Microsoft money) and the dozens of other items that pop up from time to time. As your business grows the F factor will have other expenses like rent, and overhead for non-billing employees, extracted and divided by the number of employees and the number of hours worked. For now just use your best guess. If you need starting point $200 per month is not unreasonable. F=$1.6