How much is charged by consulting firms?

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The Professional Services industry is very competitive, and the competition keeps increasing. Consequently, margins and cash-flow improvement must be a priority for any organization. Finding the right pricing strategy and focusing on the right metrics can help professional services firms stand out from the crowd and achieve a sustainable growth.

In this article, we only focus on consulting firms pricing.

In general, consulting firms invoice their clients using Average Daily Rates (ADR) or Hourly Bill Rates. For smaller firms, the Average Daily Rates is more commonly used when a project proposal is sent to a client. The purpose of setting ADR is to be transparent with the client about the work value of the consulting team working on the project.

There are 3 ways a consulting firm can charge the client for the work done:

  1. Project based fee: consultants have a specific project to realize and are paid a fixed fee for it, independently of the time spent on the project. In the client proposal, the consultants include the number of days that they estimate the project will take. The number of days is multiplied by each team member working on the project ADR. We will describe below how the ADR are set up.

Number of days (estimated) x Average Daily Rates = Project based fee

If the consultants manage to finalize the project in less days than it was estimated in the quote, the consulting firm will show a positive result. On the other hand, if the consultants take longer, it will be at loss for the consulting firm. Tracking how a project is progressing compared to the initial plan is therefore a best practice to make sure the projects remain profitable.

  • Time and materials fee: as opposed to a fixed fee, time and material billing means that consultants are invoicing on the actual time and expenses basis that the project required. This type of invoicing is typically used for seconded consultants working on long-term projects that may evolve. A lot of IT consultants are invoicing on a time and materials basis for instance.
  • Performance based rate: A portion or the entire project is invoiced based on the project results. For instance, in a cost-cutting projects, the success fee can be a percentage of the savings realized, or in the case of a product launch, it can be a percentage of the revenue generated by this product.

Keep in mind that these Average Daily Rates are:

  • invoiced for a client day, however consultants only charge between 50% and 80% of their actual time. Activities such as business development, proposals writing, or administrative tasks are deducted.
  • published rates (or list rates) and are different from realized rates: consulting firms often offer a discount on the overall fee, following a negotiation with the client. It is a common practice to agree on fee discounts, in order to penetrate a new market for instance, or maybe to start a project with a new client that could lead to future additional projects. Once the consultant has put a foot in the door, it will be much easier to sell additional projects and grow the business. The potential loss is considered as an investment that will be amortized over the next projects with this client (say a deployment that comes after a feasibility study for example). It is also a common practice to offer discounts to the biggest or most regular clients. Sometimes master contracts are even signed with the biggest clients.
  • including expenses (travels, external studies, etc.) if they are not invoiced to the client

Average Daily Rates in the consulting world

The consulting rates vary depending on the type of consulting services provided. Below are a few type of consulting categories, that charge from the highest fees (strategy) to the lowest (IT).

Strategy consulting: advise organizations on high-level decisions in an unbiased fashion, using deep industry knowledge to deliver the best results. It is a type of Management Consulting, which generally implies advising at the highest-level of a company.

Management consulting: is the practice of helping organizations to improve their performance, operating primarily through the analysis of existing organizational problems and the development of plans for improvement.

Financial Advisory consulting: the profiles of consultants active in this segment can differ greatly, from M&A and corporate finance advisors to risk management, tax, restructuring or real estate consultant.

Human Resource Consulting: HR consultants help clients with human capital questions within their organizations and / or with improving the performance of the HR department (organizational changes, change management, terms of employment, learning & development, talent management and retirement.)

IT consulting: technology consultants, also known as IT, ICT or digital consultants, focus on helping clients with the development and application of Information Technology (IT) within their organization.

See below some examples of consulting fees (per day):

CONSULTING AVERAGE DAILY RATES

Note : these figures are averages to provide a general idea. Depending on the firm, the type of project, the seniority of the consultants, they may significantly vary.

TECHNICAL DEVELOPERS AVERAGE DAILY RATES

As an independent consultant, how do you calculate your consulting rate?

If you decide to apply a Project based fee, you will need to calculate your hourly and/or daily charge rate. Here is a simple methodology to do so:

1. Calculate your hourly salary base

Set the hourly salary you would expect to make if you were working for another company. Add the benefits and taxes a company would pay for if you were an employee: consider your overall salary, the value of benefits, the number of annual working days and the number of hours worked per week.

Ex:         

Annual salary: $70 000                  Benefits (overall annual value): $20 000

Number of absence days / year (sick, vacations, training): 20

Hours worked per week: 42

Your hourly base salary is : $44.64 = {(70 000 + 20 000) / [(52 x 42) – (42/5 x 20)]}

2. Adjust it to take into account non-billable time and expenses

If you have to pay expenses and if you are independent and spend time prospecting on new clients, you need to take it into account in your hourly rate. It is common, for instance, to consider one-third of the rate is for the base salary, one-third for the expenses and one-third for the administrative and commercial work. You would therefore multiply by 3 your hourly base salary: $44.64 x 3 = $133.89  

3. Adjust it to a working day

In some cases, you will choose to charge by a full day or a half-day. You just need to multiply by the number of hours in a working day, let’s say 8 hours: $133.89 x 8 = $1071.12

I suggest approximating both for hourly rate and average daily rate to the closest $10: $1070 in this case.

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