Starting A Consulting Business
"Setting The Fee"
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I. CALCULATIONS (PARAMETERS)
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A. WORKING HOURS (DAYS) AVAILABLE / YEAR
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Example: |
52 Weeks X 40 hours = 2080 hours/year
(No allowance for holidays, vacations, sick time, etc.)
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Example: |
2080 Hours = 260 working days/year
8 Hours/day
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Example: |
Adjustment:
2080 hours
- 80 hours (2 weeks vacation)
- 40 hours (1 week sick time)
- 72 hours (9 holidays)
1888 working hours available/year
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Example: |
1888 working hours available/year = 236 working days/year
8 hours/day
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B. UTILIZATION RATE
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Utilization Rate = |
Billable Hours
Working hours available
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Example: |
1132 billable hours * = 60%
1888 working hours available
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* (See calculations for billing hours available on page 2)
C. BAD DEBT RATE
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Collection Rate = |
Total fees collected
Total fees billed
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Bad Debt Rate = |
100 - Collection rate
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Example: |
$105,000 Fees collected = 98%
$107,540 Fees billed
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Bad Debt Rate = |
100 - 98% = 2%
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D. ACTUAL BILLING DAYS (HOURS) AVAILABLE
Working hours available:
Adjustment (hol., vac., etc)
Total working hours available
Administrative work, development
approx 20% of work time
Marketing, education, etc.
approx 20% of work time
Other calculations (travel, etc)
would be placed here |
2080
- 192
1888 (236 days)
- 378 hours (47.2 days)
- 378 hours (47.2 days)
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_____________________________________________ |
Total billable hours available
Total billable days available
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1132 hours
141.5 days
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E. LABOR RATE
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Labor Rate = |
Annual salary
Billable days available
$39,550. * = $279.51 / day
141.5 days
$279.51/day = $34.94 / hour
8 hours/day
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* $35,000 annual salary + 4,550 (approx 13% payroll taxes) = $39,550.
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II. OVERHEAD EXPENSE
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Although there exist many methods to calculate a firm's overhead expense, it is advisable to develop
projected budgets for these expenses first, then determine what percentage of your billable hours
they will comprise.
Certain assumptions have been made in the following calculations. Specifically, the salary for consultant
labor (and applicable payroll taxes) are not considered part of the overhead expenses, whereas consultant
benefits have been included in the overhead expenses. Salaries for support personnel have not been
identified or included in any of the categories, but if these expenses are applicable, only the portion which
is directly related to services performed for clients (direct labor) should be billed directly to the client in a
billable hour fashion. The remaining portion of such support personnel expense should be calculated into
the overhead expenses.
If these expenses are to be re-defined or apportioned differently, it is imperative that the basic calculations
which were used to determine hourly billing rates be adjusted accordingly.
There are some consultants who prefer to create a relationship between overhead expenses and labor rates.
In some instances the overhead expense ratio to labor rate is as much as 150%.
SAMPLE PROJECTED OVERHEAD EXPENSES
Rent
Utilities
Telephone
Pager
Cellular telephone
Online computer service (Internet)
Postage
Equipment
Furntiture
Stationery
Printing / supplies
Answering service
Typing / secretarial service
Legal / Accounting
Business Licenses / Permits
Insurance:
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Health
Life
Disability
Liability, etc.
Auto
Work. Comp (2%)
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Advertising
Dues / Subscriptions
Reference material
Travel
Entertainment
Professional Mtg./Conv./Trade
Education
Auto (TBA)
Equipment Lease
Supplies
Maint./Cleaning
Misc.
TOTAL: |
MONTHLY
500.00
150.00
300.00
11.33
40.00
30.00
96.00
150.00
150.00
50.00
50.00
100.00
100.00
160.00
25.00
400.00
100.00
85.00
50.00
120.00
66.00
200.00
60.00
50.00
100.00
200.00
200.00
100.00
120.00
125.00
50.00
75.00
100.00
4113.33
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ANNUAL
6,000.00
1,800.00
3,600.00
136.00
480.00
360.00
1,152.00
1,800.00
1,800.00
600.00
600.00
1,200.00
1,200.00
1,920.00
300.00
4,800.00
1,200.00
1,020.00
600.00
1,440.00
792.00
2,400.00
720.00
600.00
1,200.00
2,400.00
2,400.00
1,200.00
1,440.00
1,500.00
600.00
900.00
1,200.00
49,360.00
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A. OVERHEAD RATE
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Overhead Rate = |
Annual overhead
Billable days available
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$49,360.00 = |
$348.83 / day
141.5 days
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$348.83 day = |
$ 43.60 / hour
8 hour day
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B. OVERHEAD VS LABOR
Overhead rate as a % of Labor rate =
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Overhead rate
Labor rate
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$348.83 Overhead/day =
$279.51 Labor/day |
125%
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$43.60 Overhead/hour =
$34.94 Labor/hour |
125%
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III. PROFIT MARGIN
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Profit margin should be calculated as a percentage of the sum of the labor and overhead rates. If there are
other rates utilized in the calculation of the fees to be charged to the client, these should also be included in
the sum prior to calculating a profit margin. It is recommended that you at least attempt to attain a profit margin
of approximately 20%.
A. CALCULATIONS:
Labor rate/hour
Overhead rate/hour
Total expenses
+ Profit Margin (20%)
Base billing rate/hour
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$34.94
43.60
78.54
15.71
94.25
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Round up 94.25 to 95.00
This adjusts the profit margin from 15.71 to 16.46 (21%)
Billing rate/hour:
Billing rate/day:
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$95.00
$760.00
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IV. INCOME VS EXPENSES: (BILLING RATES)
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A. CALCULATIONS:
Income:
Expenses: |
1 Billable hour
Total Income:
Labor
Overhead
Total expenses:
PROFIT MARGIN
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95.00
34.94
43.60
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95.00
78.54
16.46
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100%
37%
46%
83%
17% |
Note the difference between profit margin mark-up and profit margins as a portion of revenues.
B. ANNUAL BASIS
Income:
Expenses: |
1132 Billable hours
Total Income:
Labor
Overhead
Total expenses:
PROFIT MARGIN
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107,540.00
39,550.00
49,360.00
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107,540.00
88,910.00
18,630.00
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100%
37%
46%
83%
17% |
C. MARGINS
Assuming that you meet budget and collect 100% of billable hours, the profit margin available of $18,630.
leaves the following margins:
$18,630.00
$95.00/hour
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= 196 hour margin/year
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196 hours
47.2 weeks of work
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= 4 hours/week margin
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The above examples are simplistic in nature to provide you with a basic method of fee calculation. If you are starting
up a consulting business, you might find yourself spending more time marketing, than billing to clients. If you are changing
the direction of your consulting business, you might find yourself performing more research and education than billing to
your clients. Anything which reduces the total billable hours available significantly impacts the profitability of your business.
Anything which increases fixed or direct expenses significantly impacts the profitability of your business. You must be aware
of the relationship of all of these issues.
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