How much should you be charging as a consultant?
How much should you be charging as a consultant?
Around double your current rate as a full time employee.
In general, employers are weak at doing the math around contractors and fully loaded cost. An engineer that is hired on contract is not equivalent to a full time hire. As I mentioned in previous posts, the contractor usually has to pay for their own healthcare, their own equipment, and is not provided equity in the business.
Moreover, consultants that work full time are typically not fully loaded. For example, in a 5 day work week, only 3-4 days should be spent doing billable work, on average. That's because a consultant can't *guarantee* that work with a given client will continue. So they need to spend time getting new clients. This "sales and marketing" aspect of the work is not billable to existing clients, of course.
Since it's been a while, let's do some rough math on Jimmy, a 24 year old software engineer who graduated from a top 20 school in the USA in computer science and has worked for a couple of years in industry:
Typically, Jimmy earns 150K per year working 40 hours a week, 50 weeks a year for an average software company (at FAANG he can earn a lot more, and doing IT work for a non-silicon valley company he'd earn a lot less. But 150K average is about right.) The job is salaried, so he gets healthcare benefits, and stock options which are of uncertain value (could be worth a lot or a little). Let's assume the options are worth $0.
The "weekly equivalent" of Jimmy is $3K per week (150k divided by 50).
One day a week needs to be spent doing sales, marketing, and customer discovery, so that leaves 4 days of time.
Jimmy also has to pay for healthcare, which his company previously covered. The typical coverage for a reasonable plan is about $600 / month.
Any costs Jimmy has now, that his employer previously paid, are much higher. For one, he has to pay for everything post tax. Let's assume Jimmy is taxed at 40% / year. That means a cost Jimmy has to pay at $600 / month actually means $1000 / month in billable hours (60 / 0.4).
In the end, Jimmy needs to earn $3250 / week in order to break even (3K + 1000 / 4).
$3250 / 32 hours a week = $101 / hour
So assuming that Jimmy can do contract work for 4 days a week for 8 hours a day, he should be charging $101 / hour. What if Jimmy can't guarantee 4 days a week? What if instead he only has an 75% chance of fully booking himself? How much should he charge for any existing contracts to try to break even in expectation?
101 / 0.75 = $134 / hour.
What if he only wants to work 3 days a week, with the equivalent book rate?
3250 / 24 hours a week / 0.75 = $181 / hour!
The math here is pretty brutal. A company hiring a contractor is not looking to save on cost exactly, they're looking to pay for the flexibility of onboarding and offboarding someone really quickly. But that flexibility has a price, and it is priced directly into the rate that the consultant must charge in order to break even relative to a day job.
One thing I will say though, is that starting out you have to figure out how to get real deal flow. And sometimes that means starting at lower than market rate and walking it up over time. You're trying to maximize the area under the curve...it does you no good to charge $1000 / hour but only get one engagement at that rate. Everyone would hire you for $1 / hour. So you have to find the right place in between to maximize the total revenue.
When you first start consulting, companies that aren't used to hiring contractors will often say things like:
“We never pay that high a rate for an engineer. It's more efficient for us to hire full time employees.”
That may or may not be true. The person whose hiring you doesn't realize they are paying for flexibility. Like it or not, they cannot easily fire their full time employees and rehire them at will. But they can do that to contractors / consultants.
Still, you may need to change the pitch in order to successfully land yourself consulting jobs (remember that part above where you are salesman 20% of the time).
A few tactics that may help:
Rather than negotiate rate, negotiate scope.
Say - "it sounds like $1000 / day is too expensive for regular software engineering. What projects are worth accomplishing in a day that make this worth it"? Sometimes that will change clients from giving a boring low priority project (which is never worth externalizing) to a high priority project (which is always worth getting done, tomorrow).
Change the type of work.
Most knowledge workers start from doing some sort of task (writing code, copywriting blog posts, sending emails to prospects, 3 figmas) to doing some sort of advising (how to write code, how to copywrite, how to build an SDR function, how to design) because of this leverage in advice vs task execution.
Take on scoping risk.
If you're setting an hourly or a daily rate, you're not actually promising an outcome. They have to take on the risk that you do 8 hours of work and have nothing to show for it, and they price that in by negotiating a lower rate. If you take on the risk, you can charge a lot more. So instead of $1000 a day for 8 hours of code, it's $5000 total, and I guarantee the project will finish. You have to be very careful here (it's easy to have a scope that blows out such that your equivalent rate will be a lot lower), but the guarantee is worth a lot of dollars.Retainers.
Sometimes folks just "don't want to think about" a problem. For example, managing their AWS spend. So they'll pay a retainer monthly which doesn't really translate to a specific hourly wage, because the average month you'll only spend ~2-3 hours keeping an eye on things. Usually this is only possible if you've built a thing for a client and your maintaining that same thing in perpetuity.Niche down.
If I'm providing advice on PM hiring, there's like 1 million people in the world that have that skill set, and therefore the rate I can charge is pretty low. But advice on building a B2B vertical SaaS business in the life science space? There's maybe 100 people in the world who can do that. Probably 2 of the 100 are hireable / findable right now. So I can charge a very high rate for that sort of work.
P.S. A few programming notes: 1) we changed the name of this substack to partly.work, since that matches the branding of the product we're building, withpartly.com. 2) we'll be publishing this substack a little more regularly than last year, so feel free to unsubscribe if it isn't useful for you!
P.P.S. Partly is now in alpha! If you want to track your paperwork as a contractor, you can create a free account at withpartly.com.