How much more should I charge as a consultant versus an employee?
When you leave your job as an employee, and hang out your shingle as a consultant, it’s pretty common to wonder what you should to charge to take home a similar amount.
After all, a girl’s got to eat.
You might remember that someone once told you that your fees as a consultant, coach or other service professional should be triple what your salary was at your last job to earn the same money.
This is because a rough way of working out the business model for a service-based business is one-third for wages (staff), one-third for costs and overheads (this would include professional development, computers, phones, internet, office space, networking, coffees), and one-third for profit to the owner.
So, someone who had a total salary or remuneration of $90,000 per year in their last job, would say “I need to bring in $270,000 in income in order to make the same money after tax”. You’d then break that down to $x per hour, and set that as your fees. You might expect to take home double what you used to take home as an employee (wages + profit).
If you are a woman in business for yourself with no other staff, you might think “Liberty bell! This is great – I’m going to double my take home pay!!”.
But this third / third / third model doesn’t typically work for women consultants or coaches.
Bear with me as we use this case study to explore the topic.
From Employee to Consultant – a mini case study
Emma was a perfectly happy employee, who work as the Senior HR Manager for a mid-large sized organisation. She smiled every day, despite the petty politics of corporate life. She had a salary of $120,000 including retirement savings (for example, superannuation in Australia or 401k in the US).
After being offered a redundancy on maternity leave, Emma finally stops smiling and says “Phuck that”.
She takes all of her corporate knowledge, training, wisdom and experience, explains to her family that she needs more flexibility than a corporate job can provide, and sets up a boutique HR consultancy.
As an employee on $120,000 total remuneration, Emma was being paid around $61/hour ($120,000 divided by 52 weeks in the year, divided by 37.5 hours per week). In reality, she probably worked longer hours, as corporates do like to take more than their pound of flesh. But as an employee on salary, Emma probably didn’t get overtime.
As a consultant who decides to triple her salary to take home similar money or even more, Emma decides that she’ll charge around $180/hour. As an HR consultant, this isn’t unreasonable. I’ve worked with HR consultants who charge out between $130/hour to $450/hour.
So from our earlier formula, if Emma triples her charge-out rate ($180/hour), she should double her salary and take home $240,000 as wages + profit.
Typically though, Emma doesn’t get to take home $240,000 per year before tax.
Her costs end up being lower than one-third of her income, but her take home income doesn’t double.
Emma Didn’t Get To Charge Out Every Hour
Emma might be charging triple her old salary now that she’s a consultant. But it’s unlikely she’s able to charge out anywhere near 37.5 hours per week.
Her first couple of months may be very lean. Even in the first couple of years, she may be closer to 10-18 billable hours per week. That’s somewhere between 1-3 days per week.
Emma quickly found that she had to put boundaries around work vs. family and friends time, and also allocate time to get out of the office for networking events and coffees with prospective clients. Getting proposals for new work over the line also took longer than expected. She found that it took around three weeks minimum from meeting a prospective new client, to being able to send them the first invoice, and it was generally more like six or eight weeks. There was also time spent on prospective client meetings and proposals that didn’t go anywhere.
Emma decided that she wanted to spend time on a newsletter, and building up a body of thought leadership to share with clients. This took close to another day/week.
For most women, they are surprised at how few billable hours they get when they first start out. There is a whole bunch of work around clients that doesn’t get billed. And if you work across multiple clients, there’s the whole stopping one train of thought and then starting another one.
Emma Had To Spend Some Money On Her Business But Not As Much As She Thought
In reality, most of the women I know start out working from home.
Whilst they might apportion some of their rent or mortgage to the business, reality is that they’re generally not paying more than they paid before. And whilst they might hire a bookkeeper or a designer for presentations, it’s not really like engaging a whole team to work with you full-time.
Emma Realised She Needed to Charge Differently
Emma found that she needed to more than triple her hourly fees in order to take home as much money, and still not feel that she was burning out. On doing the maths on the back of an envelope, she needed to make around five times the amount, just to bring in the same income after costs.
But when she went to prospective client meetings, and shared her hourly fee, she found that the clients baulked at hearing $300/hour.
Emma’s Solution to Hourly Fees
Emma decided to get some help with the way she presented her services. She actually found that it was easier to charge a fixed price for a fixed scope of work, ie, to package her services.
And so she started developing packages for each of the services she offered. She did keep hourly fees for things with a variable scope, eg, employee disputes, but everything else – fixed.
She found there was generally a scoping phase, followed by a strategy and / or implementation phase.
As she moved away from an hourly fee structure, Emma started to feel that she had more control over the work that she did, how much time she spent on which section. It was even better from an emotional point of view – she didn’t feel guilty about spending extra time on doing the work and having to charge the client.
Emma started to really smile again.
If this was useful, you’ll also like another guide I’ve written on “What to Charge As a Consultant Or Coach?” I hope you’ll find it valuable!