Consulting vs contracting - for what it's worth

Toby Lucich at More Than a Living offers some good guidelines for pricing consulting rates, and how not to let the tactical tail wag the strategic dog:

If you begin scoping the work at too high a price point without qualifying your expertise, the client will likely begin considering alternative bids. Come in at too low a rate, and you will get bucketed with all the other tacticians being directed and herded.

I view this as the “contracting” versus “consulting” rates. Contractors have technical expertise, contribute as part of a larger endeavor, and are expected to be managed. Consultants have technical expertise AND strong management skills, define and or lead projects with a defined outcome, and are expected to be self-directed in fulfilling their obligations.

If your billing rates seem low, you may have succumbed to being positioned as a contractor instead of a consultant.

When setting rates, it all seems to be a matter of what you are consulting on, and how you manage your client’s perception of your value. If you are seen as temporary staffing, then your rate will most likely parallel the costs of finding a similarly experience resource through a staffing agency. If you are seen as a subject matter expert brought in to deliver a specific solution, your rate should likely reflect the market-defined value for similar professionals that deliver results under a defined methodology or implementation framework. Understanding how you will interact with the client organization is perhaps the most critical part of setting the rate.

Setting rates is always a delicate balancing act. Most consultants who have more than a couple of engagemements under their belt have at least some benchmark as to what their time is worth, but a great deal is dependent on local or industry supply and demand around a particular skill set. IT skills that were white hot in the '90s were in drastic oversupply in the post-Internet bubble. Consultants who were used to being in high demand had to readjust their expectations -- and their rates.

What are you worth as a consultant? It's one of those chicken-and-egg questions. If you have consulted and have a history with at least a couple of clients, you have some sense of what you can bill for your time. But how do you set rates when that history is still in the making? Thanks to sites like Salary.com and Payscale.com, candidates applying for perm positions can get a good sense for the going rate based on job titles and descriptions. Consultants can do a quick-and-dirty conversion from full-time salary figures to hourly rates by dividing by 2040 (the number of working hours in a year; some people use 2000 or 1980 hours per year to account for vacation time) and then adding in a markup factor (typically 30-50% more) to cover self-employment taxes and business overhead, plus the fact that hourly contract rates are usually higher overall.

But this type of calculation, while useful, is just one data point. The real question is: "What are people in my location paying on an hourly rate for my skill set?" One way to know if you are in the ballpark is to see what the other players are making.

At HotGigs, we offer rate research tools to help consultants get a sense of their market worth. For example, if you are a Project Manager, the average hourly bill rate nationally is $105 -- higher in metro markets such as Boston or the Bay Area. Billing through a firm, a PM may get between $40-$80 / hour. Enter your own confidential rate data for recent projects in a specific geography to get access to rates entered by other consultants with similar skills in that geography.

One savvy consultant I know advises those considering making the jump from full-time into contract work, "Find a consulting firm or staffing agency to work with where you have a good ongoing relationship. Naturally, they will bill you out at a higher hourly rate than they pay you, but you can get a good sense of your market worth, and many companies will only work with consultants through firms anyway."

In the final analysis, as Toby Lucich emphasizes in his post, the biggest determining factors of your rate are your credentials, performance and reputation.

Comments

[The Adsense Consultant]

I have never been a fan of the contractual route! When there is a bid open for a contractor people will bid low just to be able to get the contract won to them.

[Marilou [Louie] Myrick, the talent management architect™]

Having been in the consulting business for a number of years, I believe the primary characteristics of a consultant [as differentiated from a contractor] are:
- unique, measurable and valuable expertise
- professional credibility
- the ability to build relationships with senior executives [a true consultant can deliver the 'your baby is ugly' news in a way that is accepted and respected] In my humble opinion, in order to call yourself a consultant, you must be able to effectively engage decisionmakers in a discussion of the real challenges --in order to understand the scope of the problem, align expectations about possible outcomes [and the role of leadership in successfully executing] and develop credibility as a consultant/ problem-solver and ally. Anyone who is unwilling to tell the truth [respectfully of course] cannot truly call themselves a consultant.
- the ability to quickly understand the client's needs and the value of the solution the consultant provides
- the ability to communicate succinctly both the value of the solution and the cost of no solution or going a different direction
- the ability to manage the engagement, including all resources and relationships to achieve a successful outcome
- the understanding that no one makes a good living in consulting by pricing based on cost of time; pricing must be based on value of the solution. [Required reading: MILLION DOLLAR CONSULTING by Alan Weiss - and no, I have no connection with Alan.]