How much do consulting firms charge?

The professional services sector is highly competitive, and competition is growing all the time. Consequently, improving margins and cash flow must be a priority for any organization. Finding the right pricing strategy and focusing on the right metrics can help professional services companies stand out from the competition and achieve sustainable growth.

In this article, we focus solely on the fees charged by consulting firms.

In general, consulting companies invoice their clients using average daily rates (ADR) or hourly billing rates. For smaller companies, average daily rates are more commonly used when a project proposal is sent to a customer. The purpose of the ADR parameter is to be transparent with the customer about the added value of the consulting team working on the project.

A consulting firm can charge the customer for 3 tasks:

1. Project-based fees: Consultants are given a specific project to complete and are paid a fixed fee, regardless of the time spent on the project. In the customer's proposal, consultants indicate the number of days they estimate they will need for the project. The number of days is multiplied by each team member working on the ADR project. We describe below how ADRs are set up.Number of days (estimated) x Average daily rate = Project-based fee.If the consultants manage to finalize the project in fewer days than quoted, the consulting company will show a positive result. On the other hand, if the consultants take longer, it will be at a loss for the consulting firm. Tracking a project's progress against the initial plan is therefore a good practice to ensure that projects remain profitable.
2. Time and materials charges: as opposed to fixed charges, time and materials billing means that consultants charge on the basis of the actual time and expenses required by the project. This type of billing is generally used for seconded consultants working on long-term projects that are likely to change over time. Many IT consultants, for example, bill on a time-and-materials basis.
3. Performance-based rate: part or all of the project is invoiced on the basis of project results. For example, in a cost reduction project, the success fee may be a percentage of the savings achieved, or in the case of a product launch, it may be a percentage of the revenues generated by the product.

See below for some examples of consultation fees (per day):

CONSULT AVERAGE DAILY RATES

Note: these figures are averages, to give a general idea. Depending on the company, the type of project and the seniority of the consultants, they may vary considerably.

TECHNICAL DEVELOPERS AVERAGE DAILY RATES

Define the hourly wage you would expect if you worked for another company. Add up the benefits and taxes a company would pay if you were employed: take into account your overall salary, the value of benefits, the number of days you work per year and the number of hours you work per week.

Ex:

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

Number of days absent / year (illness, vacation, training): 20

Hours worked per week: 42

Votre salaire horaire de base est de: 44,64 $ = {(70 000 + 20 000) / [(52 x 42) – (42/5 x 20)]}

Adjust for time and non-billable expenses

If you have expenses, and if you're self-employed and spend time prospecting for new customers, you need to factor these into your hourly rate. For example, it's common to consider that one third of the rate corresponds to the base salary, one third to expenses and one third to administrative and commercial tasks. So multiply your basic hourly wage by 3: $44.64 x 3 = $133.89.

Set it to a working day

In some cases, you may choose to bill for a full day or a half-day. Simply multiply by the number of hours in a workday, i.e. 8 hours: $133.89 x 8 = $1071.12

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

Sources:

https://www.forbes.com/2006/11/06/bostonconsulting-marsh-mckinsey-ent-fin-cx_mc_1106pricing.html#9b61ef067812
http://consultantjournal.com/blog/setting-consulting-fee-rates
https://www.consultingsuccess.com/2017-consulting-fees-study
https://www.wavestone.com/app/uploads/2016/07/SOLUCOM_SFAF_RA201314_04062014_VF-Web.pdf[