Bill Rate Calculation Strategies for Independent Consultants

Consulting Bill Rate Strategies
Figuring Out What To Charge

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Consulting Bill Rate Strategies
Figuring Out What To Charge

March 31, 2009

Gene Zaino
President and CEO
gene@mbopartners.com

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Our Mission

“To make it easy for independent consultants
and their clients to work together”

“If you’re thinking about going out on your
own, the MBO way is the way to go; just let
them handle everything and it will make it
easier for you and your client.”
Dawn Alexander, Communications Attorney

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Overview
The Importance of Pricing
 Bill Rate Basics
 Terms to Understand

Cost Based
 How Low Can You Go
 Planning for Profit
 Caveats
 The Calculator
Your Strategy
Market Based
 When to Review
 Defining What You Do
 Putting it Together
 Sources of Data
 Tips for Tough Times
 Pros and Cons
 Marketing Your Services
 Ensuring Client ROI
Value Based
 Overview of Value Pricing
 Methods to Explore
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The Importance of Pricing
Terms to Understand Admin
15%
 Standard Avail Hours
 Billable Hours
Training,
 Utilization 8%
 Realization
 Minimum Bill Rate
Marketing,
 Salary Multiplier 12%
Actual
 Target Profit Rate Work
65%
“How Do You Spend Time.” Adapted from Consulting Magazine

Bill Rate Basics
 Bill rates versus pay rates
What’s in a Bill rate? (taxes, overhead, etc)

 Rules of Thumb to convert salary to bill rate (.1% and the rule of 3rds)
 Contractor versus Consultant: Who am I?

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Cost Based Rates

The most common method
Determine the cost to recover
Hours you can actually bill
How low can you go – finding bottom
Planning for profit

Caveats to cost based rates
 Does not consider value (undercharging)
 Does not consider competitive landscape
 Might be inflated (overcharging)

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MBO Cost Based Rate Calculator

Contact your MBO Partners representative, or email Steve at
sarhancet@mbopartners.com to access our new cost based rate calculator.

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Cost Based: Things To Remember
Know your floor, to the penny
 Always recalculate your survival rate if anything changes
You won’t be working 40 billable hours every week
 Utilization rate of 80% is optimistic – reality may be 65%
 There are ways to reduce non-billable hours: find them.
You need to make your pay, but also the overhead
 Professional fees (legal, etc)
 Communication and computer equipment fees
Worker’s comp and business insurances: GL & E&O

 Marketing costs
 Travel and entertainment
 Licensing, tuition, seminars, conferences, educational materials
 Healthcare, retirement, and other benefits you set up
 Taxes, and lots of them (include self-employment taxes)

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Market Based Rates
Market rates are based on supply and demand
 Must have common definition to identify the work
 Must have current reliable rate data

Defining what you do
 Skills-based rates (experience, industry, region, title)
 Package deals (website build, logo development, training session)

Getting good rate data
 Competitive research
 GSA rate cards
 Payscale.com
 RealRates.com
 http://www.hotgigs.com/rates/
 www.salary.com (must convert to bill rate)

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Market Based Rates
Pros of market rates
 Price aligned with what the market says
 You are within industry expectations
 Easier selling process than other methods

Cons of market rates
 Defined yourself as a commodity
 Positioned more as a contractor and not a consultant
 If you provide strategy and value, you’re undercharging

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Value Based Rates
Value pricing overview
 Least used, most difficult
 Very specific to engagement, client, your contribution
 Not definable by market rates
 Price based on value created: ROI to client
 Appropriate for consultants, not contractors
 Consulting firms charge salary multiplier of 3-4x usually

Bottom line is value to client
 The only way to sell this model
 Earn strategic positioning

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Value Pricing Methods
Fixed Price
 Agree with client on price for approved deliverable
 High risk, high reward
 You MUST be experienced in delivering similar projects, and
 You MUST be highly confident in predicting your effort
 Not appropriate for small or low-end projects
 Get partial payment up front

Contingency Fee
 True VC style arrangement where you earn a piece of the success
 High risk, high return
Easy to sell – gets you in the door

 You MUST be confident in your success
Caveat: client may not be motivated if no “skin in the game”


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Value Pricing Methods
Retainer Fee
 Based on a budgeted amount
 Requires “strings,” trust, and periodic review of profitability
 Easier to sell since clients can budget

Hybrid or Blended Rates
 Combination of any of the above plus min hourly or retainer
 Easy to sell with low entry cost for client
 Reduces risk for consultant with a minimum fee or commitment

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Your Strategy
Review your rates at least annually
 All aspects of your operating strategy
 Changes in overhead
 Economic changes
 Inflation (or deflation)
 Local market conditions
 Competitor rates
Niche specialization – de-commoditize

 New expertise and certifications

Put the pieces together
 Calculate your cost, market, and value rate ranges
 Get real about what’s required to succeed
 Get ready to be agile

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Marketing and Client ROI
Am I consulting or contracting?
 Position in the marketplace
 If you don’t like it, change it
Marketing and business development
 Does my reputation support these rates?
 Make sure references affirm the “value” you put in your rate

Am I prepared to sell my rate?
 Articulate value and ROI to client
 Know the competitive landscape
Am I building strong client relationships?
 You need to provide long term client satisfaction
 Usually built on results, integrity and trust

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Tips For Tough Times
Be prepared to cut costs
 Survival rate: exactly how low you can go
 Then go lower by reducing your overhead
 Working smarter AND harder than your competition
Price aggressively
 Don’t be afraid to discount to win a new relationship
 Make it clear the discount is initial project only – don’t get
locked in the basement
Try fixed price to reduce client risk
 But you’d better be good
 Remember to get something up front
Knowledge is power
 Know your clients’ situation: do your homework
 Pay attention to their issues

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Tips For Tough Times
Be extra vigilant with cash flow
 Bill frequently, collect diligently
 Spend cash wisely

Opportunities for small businesses
 Federal programs that support small
businesses

Focus on existing relationships
 Easier to sell new services to current clients
 Harder to sell new services to new clients

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Questions
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ask questions
Raise your hand and we can open a voice line

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Next Steps
Get bottom line estimates
 MBO Partners cash estimator
 Access our new cost-based calculator

If already working through MBO
 Call your Business Manager to get new
estimates

For all others, contact us
 Through the website
www.mbopartners.com
 Call 1-800-220-0469
 Email Steve Arhancet:
sarhancet@mbopartners.com

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MBO Partners
13454 Sunrise Valley Drive, Suite 550
Herndon, Virginia 20171

1-800-220-0469
www.mbopartners.com


Bill Rate Calculation Strategies for Independent Consultants

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