Finding Your Hourly Rate for Consulting

When you begin exploring consulting, whether on the side or as a second career, we generally attempt to answer two questions. The first is fairly obvious, “How much should you get paid as a consultant?”. This pushes us toward a lot of questions around how that individual views their business of consulting. The second question I recommend would-be consultants answer is, “What will taking consulting jobs change about my vision for the next stage of life?”. I have found that we can frame both these questions a bit better when we begin by determining what hourly rate you can expect to target in your initial consulting jobs.

How New Consultants Can Set Their Rate

    The most natural place to begin is reflecting on your last full-time job. Whether it was a similar consulting role, a full-time role in the same field, or a full-time role in a different field this baseline should be helpful in understand the rate your skillset may demand in the market. Generally, for a full-time role you can divide your annual salary buy total hours worked to arrive at your (gross) hourly rate. So then a 40-hour/week position making $80,000 per year would be $80,000/2080=$38.46/hr. If you receive additional regular pay in the form of bonuses, commissions or incentives you could review your statements or tax return from your last year employed to factor those in accurately as well especially if you will be consulting for positions that likely carry the same incentives (IE a former salesperson now consulting to improve the performance of salespeople). Naturally your former employer may have paid you a variety of benefits that were not in the form of cash as well as incurring numerous expenses keeping you on their full-time payroll, making this hourly rate a fantastic starting point, but not quite the entire picture.

How to Calculate Your Consulting Rate

    One common theme of conversations with prospective consultants is that, whether reluctantly, purposefully, or “accidentally”, when you begin consulting independently you are indeed starting a business. Taking this stance is a helpful reminder that along with the ability to deduct expenses (love that), increasing your income (love that) saving extra for retirement (love that too) comes the responsibility to charge the rate required to run your consulting business. This means taking into account the non-cash benefits that are not being paid to you, the premium you command through your expertise and that your business requires to be successful, and the cost savings that businesses have by adding an outside consultant rather than an in-house employee. There are some things you won’t know early on and, as any good business would, you will take your product (you) to market and respond to the feedback you receive on the price-point and overall value of your product. With this in mind we can feel more confident laying out a formula for your starting consulting rate that looks something like this:

CONSULTING RATE = PREVIOUS SALARIED RATE + SELF-EMPLOYMENT PREMIUM

    Put differently, your hourly consulting rate is likely based on the rate you commanded as an employee plus a premium that stems from your status a as an expert and business owner. I’d suggest breaking down this “Self-Employment Premium” further as follows:

SE PREMIUM = SE TAXES + EXPENSES (OPERATIONAL + HEALTHCARE + RETIREMENT CONTRIBUTIONS) + EXPERTISE PREMIUM

    In total, it’s very likely that your hourly consulting rate could easily double your hourly rate for full-time employment and stretch higher based on industry and expertise. You have a great deal of control over how these numbers work out based on your confidence in your model and abilities. Until someone bids on your services you may not even feel confident in charging the market rate that similar consultants are charging for your services. For those feeling shy about entering the playing field and over charging my suggestion would be to start at the low end of the market rate for your service in your industry and be prepared to increase prices as your level of confidence rises. It’s also true that, regardless of the price that your customers will be willing to pay, there will inevitably be projects that you (should) refuse to take on because they will be at odds with your vision for the next stage of your life and career.

When to Turn a Consulting Job Down

    I often tell clients that my primary role at certain points in our relationship will be to help them build safeguards around the vision they’ve cast. This can be an enormous challenge in the face of life transitions and at times where clarity may be lacking. It’s made additionally difficult when the immediate decision is whether or not accept a new consulting project that promises to pay well. This is where quality conversations and vision planning become extremely important in the financial planning process and it’s exactly why I’m so passionate about making sure those conversations happen. I recommend having a clear description of the kind of work you are looking to take on, how much you plan to take on, and what your rate should be for that work. While I can support pivoting directions, if any of these factors are off in a proposed project it should be a red flag to pause for further consideration else you risk sacrificing your real goals for an additional paycheck. Living your life is the goal, the money you earn is a tool to build it and getting those components backwards is both easy and dangerous.

    As you start your consulting business and begin to add clients you’ll likely go through many iterations and updates to your models, fees, and focuses. My goal for clients is that these transitions can be exciting ones that slow down momentum as little as possible. If you are interested in learning more about how your money can help you reach your goals and how to use your consulting business to help you get there, I’d love to schedule a free introduction call. You can use this link or reach out to me directly at ZAshburn@ReachStrategicWealth.com.

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