For independent consultants, decisions about how to set fees and what methods to use for fee quotes are critical elements of their practice and its success.
This guide shares some best practices for setting consulting fee structures, along with examples and resources.
Two decisions for setting fees
This approach was developed by David A. Fields, an international consulting expert and author who outlines the method in his book, The Irresistible Consultant’s Guide to Winning Clients: Six Steps to Unlimited Clients and Financial Freedom.
Fields says that consultants need to make two decisions when setting their fee structure:
Decision 1: On what factor will you base your fees?
- Cost-based pricing: Time and materials.
- Value-based pricing: Based on the economic value you deliver.
Decision 2: When will your fees be determined?
- Up-front: Fee determined before the project starts.
- At the end: Final fee determined when the project has concluded.
These two decisions result in four basic fee structures below, and two hybrid models as illustrated in a Fee Quadrant chart, below.
The four basic fee structures
There are four basic fee structures, plus three additional options. Each has its own factors to take into consideration.
Fee structure 1: Variable T&M cost-based fees
- The most simple method and traditionally the most common method consultants use to set fees (lower right-hand quadrant).
- Uses actual costs and time that are paid at the end of the project.
- For example, you estimate a project will take six months and quote a fee of $25,000 per month. If the project is in fact completed in the six months estimated, you still charge $150,000. However, if it ends up taking eight months, you charge $200,000,
- However, if you finish the project in record time — say four months — the client only pays $100,000. They get a great price and you are paid less — even if the project brings the same amount of value.
In effect, you are penalized for being more efficient. Therefore, this method is often better when the project might be fluid.
Fee structure 2: Fixed T&M cost-based fees
With this structure (lower left-hand quadrant), you estimate your costs to complete the project and quote a fixed fee up-front.
- Using this method, you scope out how much time the work will take, apply your hourly or daily rate, and price it accordingly.
- This fee structure is often easier to negotiate and more straightforward. If you finish the project in less time or your costs are less than you estimated, you’re ahead.
- You also don’t have to be as concerned with defining the exact scope, and it’s easy to get started.
- For example, you estimate the project will take you six months and cost you $20,000 per month. Your proposal to the client is for a fee of $150,000 (or $25,000 per month, bringing you $30,000 in net fees).
Fee structure 3: Fixed value-based fees
These are fixed fees based on the value of your work (upper left-hand quadrant).
- First, you must get in alignment up front with your client on calculating the expected value — and what percentage of that value that would be a reasonable fee.
- It can take a lot of time and effort to determine in advance exactly what you’ll be doing, and what the scope is going to be. Sometimes the scope is not that clear, and you may not be compensated for figuring this out. You need to agree with the client what is in scope and out of scope.
- This fee is fixed regardless of the duration of the project or the time and materials required to deliver.
- An advantage of fixed value-based fees is that they are divorced from the time spent on the project. Your fee is based on the value you are bringing to the client, not the number of hours it takes you to complete the work.
- You have to actually deliver the value, and may have issues with scope creep.
- If the project ends up taking longer than you expected and built into your fee, you end up making less per hour — particularly if the scope of work is not absolutely defined, or the client adds expectations.
- If something unexpected comes up or the client asks you to change course, you need to renegotiate the fee structure — which may not be the most positive process for the relationship.
- For example, your proposal to the client is for $100,000 — an up-front, fixed fee — that you have determined based on the $1 million in value your services will bring to the client.
“Using a fixed fee makes a lot of sense if the scope of the project can be clearly defined, where you know just what the deliverable is going to look like and the project can be bounded in time and space and scope,” says Umbrex Managing Partner Will Bachman.
An example might be commercial due diligence of a target for a private equity firm. Let’s say you know that it’s going to take you three weeks and will involve interviewing 40 experts and conducting a B2B survey. You’ve done 20 of these before; you have the work plan, and you have a ghost of the deliverable.
“An advantage of fixed fees for the client is that they don’t need to worry about the price once you’ve agreed on it,” Bachman says. “If you’re efficient and get done quickly, that’s good for you and good for the client. They get the results earlier, the client still gets the value.”
If you have a clearly defined project that will be under your control, and you can accurately scope it, fixed-fee can be a good way to go.
Fee structure 4: Success value-based fees
This structure is a value-based fee to be determined at the end of the project — otherwise known as a “success fee” (upper right-hand quadrant).
- You need to be clear with the client about what metrics will determine your success fee and how that will be valued.
- A success fee can have the potential to be more profitable, but it also involves more variables and can potentially be contentious if you don’t set the parameters up front.
- If your work does not result in the expected value, you end up with a lower fee.
- On the pro side, if the value ends up being higher, your fee is higher as well.
- With this structure, the consultant’s interests are aligned with the clients all the way through the project — a value proposition to point out to the client.
- For example, the project generates $1 million of value for the client. Assuming a fair cost for the project would be 10%, the client will pay $100,000 at the end of the project to get $1 million in value.
Procurement projects are often success-fee based because they are easier to measure. A strategy project, on the other hand, is much more difficult to measure for a success fee, and therefore tend to work better with fixed fees.
Hybrid fee structure A: Variable T&M with a cap
This fee structure is something that many clients feel will be advantageous to them, Fields says.
Fields says this thinking is flawed, however, and this is the worst fee structure for both the consultant and the client.
- For example, the client agrees to pay $25,000 per month, but the total cost is capped at $150,000. For the client, this seems to be the best of both worlds — they guarantee the value of the work without having an open-ended cost question.
- For the consultant, if they finish the work in record time they collect lower fees based on the time it took — and, if the project takes longer, they still make no more than the cap of $150,000.
- While the client might think this is great, the reality is that successful projects are about the outcome. The consultant needs to spend the amount of time and effort necessary to make that happen.
- You can’t do that if you aren’t paid the amount necessary for you to do an excellent job. Helping the client understand this is an important aspect of fee discussions that revolve around capped price.
Hybrid fee structure B: Fixed value-based fees with a bonus
Another hybrid alternative is to offer a fixed, value-based fee that include a success fee based on actual results.
- The client only pays the bonus if the project is successful, and their gain is much greater.
- You also earn a higher margin for your proven value.
- For example, you and the client agree on a goal of a 20% increase in productivity. Your fixed fee based on value is $150,000 — with a bonus of $50,000 built in if you hit or exceed that goal.
Special case fee structure: The retainer
There is one other type of fee structure that some independent consultants might engage in on special cases — a retainer fee.
- Retainers are typically used for ongoing, advisory relationships.
- Typically, these do not entail a single deliverable or scope of work, but rather a long-term project or partnership.
- Retainers are often structured as a “use it or lose it” monthly fixed fee basis that grants the client a certain amount of your time or access to you. This could be open-ended or for a fixed time frame duration (six months, etc.).
Consider all the factors
When setting your fees, consider these factors:
- Location: Do you need to be on-site all the time, or a certain number of days per week, or is the entire project remote?
- Travel: Will you be required to travel or take overnight trips for the project?
- Schedule: Make sure you know the typical number of hours the client expects you to build into your daily rate.
- Duration: A longer project may give you higher utilization, and some people are willing to discount for this.
- Publication: Will you be able to publish a case study for the project?
- Ongoing work: If you expect this client can give you more work, you may consider a slightly lower fee.
- Relationships: Can the client bring you valued introductions or referrals?
- Capability building: Do you expect to learn new capabilities of value on the project?
Resource:
- Episode 174 of the Unleashed podcast: Will Bachman on Setting Fees, largely based on Fields’ book.
Benchmarks
Connecting with your peers to find out some benchmark rates is extremely helpful. You want to know what clients are paying for someone who has a similar background to you, and does similar types of work, Bachman says.
If you haven’t or can’t do that, he suggests a simple rule-of-thumb:
Take the annual cash compensation you would expect to be earning if you had a full-time job. Take that salary and double it, then divide that by 250 to get a very rough daily rate.
If you would expect to be earning $250,000 per year in a job, then you would double that to $500,000 and divide it by 250 — coming out to a $2,000 per day rate.
“If you hit 50% utilization, you’ll obviously earn that same salary,” Bachman says, adding that this formula is just a starting point.
“Your last job probably had benefits that were worth about 30% of your cash compensation — health care, retirement contributions, insurance, perhaps some days off. So to really be even with your salary, you need to do better than 50% utilization.”
Resource:
- If you aren’t sure what would be a typical annual salary for someone with your experience, check out the annual compensation report produced by the executive search firm Charles Aris.
Choosing an hourly, daily, weekly, or monthly rate
In addition to the actual method of fee to apply, consultants also must decide whether to charge an hourly or daily rate — and sometimes, even a weekly or monthly rate, depending on the project and client.
Hourly rates
Going with an hourly rate is generally best for a light-touch, limited time commitment.
For example, if you have a project that will only require a few hours each week for a short period of time — or perhaps an ongoing project that will only involve a few hours per week or month.
Daily rates
For projects that will consume the bulk of your time for a period of several weeks or more, Bachman typically recommends using a daily rate. The decision also depends on the expectations of the industry and focus area that you’re working in.
If you have the choice and it’s a longer-term project, a daily or even weekly rate might be the best choice. This offers several advantages:
- You don’t have to track all your hours.
- You don’t have to quantify what hours constitute work. Time sitting at your desk dedicated to that project isn’t the sole measure of production or results. We spend a lot of time doing supportive work that’s hard to track hourly; things like answering emails or administrative and managerial tasks.
- Consultants are always thinking and problem-solving. Bachman says he often gets his best ideas when he’s out for a run or in the shower. Do you charge for that time, if you’re billing hourly?
One thing to do up front is to set some mutual expectations on what a daily rate means in terms of time commitment.
Does the client expect you are going to arrive at six in the morning and work until 11pm? Or is it more of a regular corporate schedule of eight to ten hours?
Weekly rates
For projects that are very lengthy and on which you will spend a lot of your time, a weekly rate might be the easiest for both consultant and client — if several parameters and conditions are considered and agreed upon ahead of time.
For example, what happens if:
- You schedule a vacation during the project.
- There are recognized holidays.
- You are sick or need to take personal days off.
Set these agreements up front with the client, and decide if these factors will be built into your weekly rate or if these blocks of time off will be prorated from your rate.
If it seems as if these factors will come up frequently during the project, or it’s hard to come to an agreement about how to handle them, it may be easier to just stick with a daily rate.
Monthly rates
If the project is very lengthy — say six months or longer — consider a monthly rate.
Monthly (or weekly) rates also make more sense when you’re working with a team and not just independently.
This offers several advantages:
- Easier billing
- Easier tracking
There are also potential disadvantages, or at least things to keep in mind:
- How you will handle taking time off and holidays.
- Whether you will work on other projects or how to handle other projects that may come up.
Discuss these factors with the client so that expectations are set at the beginning.
Bachman has some advice if there’s any confusion about handling these considerations in monthly or weekly billing.
“I usually suggest that you still invoice on a daily rate basis, to account for some months when you might have vacation days or take some personal days off, or have some other commitment,” he says
Projects may also end in the middle of the month, or span federal holidays. When a client asks for a monthly rate, Bachman generally says, “Sure, it’ll be roughly XYZ, which equals 21 times the daily rate, and we will invoice you for the actual days worked at the daily rate.”
Resource:
- Umbrex has created a Daily Rate Calculator that you can use to calculate your daily rate based on annual salary and other compensation/benefits. You can download the Excel file, or use the calculator in Google Sheets (click File and Make a Copy).
Client budget and expectations
No matter which fee structure you choose, shape your proposal around the client’s budget.
Getting a sense of the budget the client has in mind is Fields’ number-one pricing tip. Finding out the budget is something that can be covered in your initial Context Discussion (see our resource on How to Write a Consulting Proposal).
That budget doesn’t necessarily set the ceiling for your quote — the client might not reveal the upper limit of their budget. However, it will put you in the ballpark.
If they don’t have a firm budget or are vague about disclosing it, Fields suggests asking this question:
“What number would give you a heart attack?”
That figure can give you an upper boundary — a general rule-of-thumb is to divide that number in half, and that’s probably pretty close to what their budget is.
Field’s second tip on pricing is to trust your gut. If you have a strong feeling for the upper limit of a client’s budget, don’t submit a proposal that’s way higher. Listen to what your instincts tell you when it comes to pricing — but don’t leave money on the table.
Agree with the client which expenses will be covered in your fee or reimbursed by the client. Consider all your costs as a consultant:
- Travel: If the project will require you to travel, will those expenses be built into your fee or reimbursed by the client?
- Other expenses: Consider other costs you might incur such as expert networks, research reports, or other big expenses. Make sure you are in agreement about what will be included in your proposal and what the client will cover/reimburse.
Resource:
- Umbrex Resource: How to Write a Consulting Proposal.
Gold, silver, and bronze pricing
If you’re submitting a proposal with a fixed fee, you might consider offering different options with varied scopes and pricing — in effect, letting the client choose from small, medium, or large packages of services.
For example:
- Option A: $100,000 for X number of hours to achieve Y.
- Option B: $75,000 for a lower number of hours.
- Option C: $50,000 for a smaller scope of project.
This gives your client choices, and they might end up going with the bigger option to get more services. Alternately, the medium option might look attractive by comparison to the cost of the large option or the fewer services of the small option.
It also helps eliminate the issue of the client asking for a discount or reduced fee. You can simply respond, “Yes we can do it for that fee — here is what that level includes.”
Make it easy to say yes
Bachman offers another simple tip: make it easy for the client to say yes to working with you.
“Sometimes that means breaking the project into smaller pieces to reduce the risk to the client by letting them get to know you with a smaller piece.”
For example, if the project budget is $50,000, but you were thinking that you need to charge $100,000 to do everything, consider dividing the project into phases: phase one for $25,000 and phase two for $75,000.
“Then the client gets a piece of what they need to get done within their budget. And if they like you, and they want to get the rest of it done, they can,” Bachman says.
Resource:
- Umbrex video course for members: Section Six of Setting Up Your Consulting Practice.
How to handle objections or requests for discounting
Speaking of negotiating, Bachman and Fields both have some other tips for clients who ask for a discount or lower fee.
- Separate what Fields calls “faux objections” — those that are really clarifications of parameters such as expenses, time frames, signing authority, and so forth — from actual challenges to your rates.
- Shift the discussion from fees-for-tasks to fees-for-outcomes.
- Shift a negotiation discussion from one that is purely about fees to a discussion about the scope of your services.
- Considering offering a different package that includes fewer services, rather than strict discounting. This is where having several levels of service packages, as discussed in the previous section, work to your advantage. It allows you to adjust the scope of your services, rather than simply reducing your fees.
Bachman offers another piece of advice: if you’re pricing strictly on rates, make sure you know going into it what minimum rate makes the project worth it to you, and be prepared to walk away if that will not be met.
Many factors go into your decision whether or not to negotiate or discount, including other clients or projects you have in the pipeline, as well as if there are other things of value you’ll get from the project, such as:
- Important relationships
- High-profile client for your roster
- Desired experience or knowledge
- A passion project
- A cause you support
Lastly, if you do discount your rates, make sure to have the client agree that if you come on in the future for another project, or extend the project, that it will be at the initial proposed rate (and build that into the agreement).
Resource:
- Episode 373 of the Unleashed podcast: Will Bachman on Collecting Fees.
Manage utilization
Bachman admits that when he started as an independent consultant, he didn’t really know what to charge.
“I started mostly as a price taker. My goal then was to get a series of projects under my belt to show future clients that I was credible as an independent consultant and be able to talk about the projects I had done.”
He also figured that when he was working, he would be learning and gaining experience. The higher his utilization, the more he would learn.
“I may have been underpricing my own services. But for a run of nearly a decade, my utilization was over 90%. Most consultants that I know are more in the 50% range, or in the 70 to 80% at the high end. So I think I was probably a bit of an outlier,” he says.
By keeping his fees at the lower end of the scale, he was able to generate a lot of repeat business, and clients learned that when they reached out to him, he often was not available.
Raising fees
By managing his utilization and implementing the tactics above, Bachman was able to patiently raise his rates by about 15% every year.
“That meant that over a decade, I was able to triple my initial daily rate,” he says.
Fields points out that is can be more challenging to raise your fees with existing/repeat clients.
“Generally speaking, you’re best off with a short, sweet notification to your consulting client, devoid of justifications and defenses. You don’t need excuses or rationale to support your consulting firm’s escalated pricing,” he writes on his blog.
He gives some examples of such a fee increase notification:
- Just a quick update on fees: our fees are increasing this coming year. We enjoy our work with Fru Gal and we’re excited about the goals we’ve mapped out together for the next “big progress” project. As you’ll see in the attached proposal, the fee for our “big progress” work will be $1.2 bajillion, rather than $1 bajillion. If you have any questions about this, let me know.
- One quick note on the fee in the attached proposal. Since Fru Gal has been a long time client, you’ve been grandfathered through a number of fee increases. To be fair to my team and also have some equity across clients, we need to bring you more in line with what our standard fees are now. Therefore, you’ll see the next “big progress” project includes a modest fee increase to a kazillion bajillion dollars.
If you are never losing a project based on fees, you may not be charging enough, Bachman says.
“If your fees are high enough, you can afford to invest what it takes to over deliver and delight your client. And you’ll also be able to invest in staying in touch, and occasionally providing some advice for free and not charging for every little thing.”
