Figuring your charge-out rate

08/04/2013 Comments Off on Figuring your charge-out rate

What should you charge? That’s a hard question, and it comes up all the time. Every project is different, every consultant has strengths and weaknesses.

I’ve been thinking about the question because it’s time for my year-end accounting. Looking back over the year, I’m seeing where I’ve made money and lost money on projects. It reminds me of a woman I knew who had a printing and framing shop. One year, she lost her biggest customer — a big chunk of her revenue disappeared. She had to re-organise the shop and let someone go. The result? She actually made more profit. The ‘big client’ was costing her money.

Importantly, you can’t separate the charge-out rate from how you use your time. The total amount you get paid for a job is hours times your rate. How you divvy up between the two figures is somewhat notional. So, using time efficiently is key.

The first thing is to keep track of what you’re doing. It’s tempting to put in an hour or two at night or on the weekend, just to get something done, and not account for it. You may not be able to charge the client for the work, but make sure you aren’t lying to yourself about the time you’re putting in.

The second thing — once you actually track your time — is to examine your over-runs honestly. If you billed 100 hours but it took 150 hours to do the work, was it worth the extra time? There are always reasons to over-do work — it’s interesting, the client is important, it will lead to something else — but at least be clear why you are doing it.

Finally, see if there’s something you can change. Did you have to read every article on the topic from the last ten years? Did all the meetings have to be in person? There are probably ways you can work more efficiently and still produce a product that satisfies the client.

There are three tensions to consider with your charge-out rate:

  • cost-plus versus value pricing — it is common business advice, but true: find out what your product is worth and charge it. Cost-plus just looks at your costs and adds a margin. There are two issues with cost-plus: you probably don’t realise what your true costs are (see above) and you are leaving money on the table
  • charge-out rate versus productivity percentage — You could state a higher charge-out rate to your clients, and then bill for only a portion of the hours you work. Or you could lower your rate and bill more time. A high rate can be used as a signal of experience or quality, but you also don’t want to price yourself out of the market. The other consideration is how to vary your prices by client. I’m in favour of having different rates for different work. I’m not really selling my time, I’m selling my effort — some things simply require premium effort. Your ‘low-rent’ work might sell for only 70% of your premium work. Varying your rates also gives you a chance to show your best clients you are giving them a special deal.
  • project versus overhead work — when thinking about productivity percentages and over-runs, separate the truly project work from the development and marketing work. Development and marketing, alas, really are overheads for a consultant. You might be able to charge it to a client. If you can’t, though, don’t think of it as a loss but rather as necessary investment. So, have a sense of whether what you are doing is advancing the project or building your own capability, and then track it accordingly. However, you can’t make money just building your capability. At some point, you need to be doing chargeable work. How much? That really depends: 50% is probably a minimum, 75% is great, and 100% means you are kidding yourself or working long hours.

It’s a balance, and only you can figure out what the balance is for you — once you are honest about how you spend your time.

How much should you charge? The simple answer is: charge enough.

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