Calculating the "Right" Independent Consulting Rate

August 1, 2015

 

Ah, the rate question. The consulting project seems to be a perfect fit, but at what level should an independent contractor set rates that ensure that they are given the opportunity to join the project team at a rate commensurate with his or her experience? What is the market rate for independent consulting at different levels?

 

We wish we had some multivariate regression analysis that spit out a target rate. We actually may take a crack at it sometime using variables such as years of experience, academic tiers, consulting firm experience tiers, project duration, anticipated hours of business development etc. Stay tuned. Until then, we’ll share the factors that we typically see in determining the “right” independent consulting rate.

 

Full-time salary benchmark: The starting point for establishing an independent contractor rate is often based on the opportunity cost of working full-time. A very rough starting point is to back into what the firm would pay on a full-time basis. A salary of $150,000 with a burden (benefits, taxes, bonus, etc.) of 40% may effectively cost the firm $210,000. With around 225 net working days per year (excluding holidays and weekend), a full-time employee’s daily cost would be around $930/day.

 

Project duration: Project duration can be a critical component in determining your expected independent contracting utilization. Short projects can often lead to more gaps between projects, and can demand a higher rate.  Some firms – for example, those that primarily do due diligence – have short projects by definition. In those instances it can make sense to structure the relationship between a consulting firm and an independent contractor in a way that supports multiple short-term projects.

 

Project travel and intensity: Lifestyle is a key reason that many consultants go independent. It is nice to be in control of not only the nature but also the intensity of your own work. Projects with remote working potential and limited travel can lead to lower “pain” and therefore lower rates, where high travel/high intensity projects can command higher rates. Both outcomes are partially a function of the competitive market environment for independent consulting talent, e.g. fewer independent consultants are willing to take on high-travel projects, increasing demand.

 

Project attractiveness: Some engagements are “dream projects”, such as working with a non-profit that you’ve always wanted to support. Some extremely experienced consultants may take a significantly reduced rate to be part of meaningful, mission-driven work or projects that simply advance career goals. Conversely, other projects (to remain nameless) may be the type of project you left the big consulting firms to avoid. You’re capable of delivering solid results, but it doesn’t hit your buttons. The market-driven answer should be to charge a higher rate. In this case, we actually suggest that you look for other project work rather than reducing your rate…life’s too short, and it probably isn’t worth it.

 

Project fit: In some cases, you may have a Liam Neeson skillset – a “very particular set of skills developed over a very long career.” For project skillsets that are incredibly rare, you may be able to command a market premium.

 

Business development effort: An often overlooked factor in setting rates is the anticipated business development effort required to secure the project work. Are you marketing and cold calling to build the relationship and sell the work? Or is it a project that has been teed up for you, requiring only an interview or two? Given that the typical independent consultant spends only 60% of his/her time delivering on engagements, any role that allows you to dramatically reduce the 40% of your time typically required to sell that work may justify a reduced rate.

 

We’ll keep cranking on our multivariate regression algorithm. In the meantime, this context can help guide independent consultants on setting rates. If you’re interested in exposure to boutique consulting projects that could potentially tee up a rate discussion, please feel free to apply here.

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