Interestingly I found once one of the more popular pages on my Online Connections site was a page where I explained how much you should pay a consultant. You can find my rates on either the Online Connections site or my Computer Repairs Melbourne site.
I now use the approach to rates to evaluate if I'm happy to use the services of others and the approach also helps me charge my customers. I do vary what I charge as there a some tasks which I feel at full rates would not be the best value for clients. For example I'll set the fee to remove malware from a home user's computer at 1.5 hours even though the time involved is much more. I'd rather a the user have a functioning clean machine and save them from purchasing a new computer. At full rates the options would normally be to reformat the computer or to buy a new computer. I'm not particularly happy with either of those options and thus I fix the price to a figure I feel is appropriate for the customer. The figures suggested here a thus simply a guide.
The figure I use as a starting point is the hourly rate someone would be paid as an employee. In IT I once worked out contractors are paid around twice the hourly rate of a full-time employee. The contractor basically works the same as a full-time or part-time employee, but has to carry their own overheads plus they don't get benefits such as holiday pay, leave loading, public holidays or leave loading. The longer they work for a business the more their productivity will be similar to an employee.
For a consultant I use the figure of three times the hourly rate of an employee. A consultant only comes in for specific tasks. They should be very productive. There's no guarantee of ongoing income and in some months, or even years, they may receive no income from the business. I actually picked the three times figure up from a Chartered Accounting firm I once worked for. I felt it was one of the more useful pieces of information I learnt.
The logic behind the three times figure is one third covers the salary, one third covers the on-costs, and one third is profit. Few people realise that an employee actually costs much more than their salary. You have the on-costs which I once read can vary from 1.3 to 1.9 times their salary. I believe the 1.9 times their salary was referring to Telstra at the time. In addition you then have to take into account productivity. The following is the productivity for IT staff I managed. This if for a 38 hour week and is for billable time.
Programmer - 80%
Analyst program - 60%
Manager - 40%
Partner - 30% or below
What the above means is a programmer is effectively productive 4 out of the 5 days and thus one day is lost in terms of billable hours.
As a consultant/small business owner you become all of these people in one. As a result you can expect your productivity, or the productivity of the person you hire, will have similar productivity. The average productivity above is 57%, so I tend to use a figure of 50% or 60% when doing calculations.
What that really means is, that when you hire a person as an employee, taking into account their productivity and their on-costs, the real cost to the business is in the range of 3-4 times their salary. Sometimes it may be worth considering outsourcing some work where you can reduce that cost.
I've written a calculator (www.justlocal.com.au/clients/whatsmytimeworth/) which may assist those who wish to work out how much they should charge, or how much a person's time is going to cost them. It takes into accounts hours and productivity, but doesn't take into account on-costs.
Now when I use the services of others I use the same rates with a slight modification. These 2 and 3 times rates are based on time only. Many businesses sell time plus make sales. So for a time based business I expect to pay up to 3 times their hourly rate. For a selling business that sells time and also sells product such as a motor mechanic, I expect to pay a little over twice the hourly rate plus the profit on sales, which effectively covers the other part of the three times rate.
When I see firms charging outside these rates it's a warning to me to be very careful. I've seen accounting firms charge out at 5-10 times the hourly rate. Getting charged $80-$100 for someone that is being paid around $22 an hour such as an admin assistant to me is profiteering. An example in the accounting firm I worked for is they had a 16 year old receptionist/admin person and charged her out at 10 times her hourly rate. She was the managing partner's secretary. I consider those clients to have really been stung with excessive rates.
Sometimes we have no choice but to pay the excessive rates because of protected industries such as the legal and medical industries, but if you can, look for businesses that charge a fair and reasonable rate for their services. There's many good businesses out there that won't rip you off. Of course there's also many that will. So remember, it is only you that will ultimately look after your financial interests.
Kelvin Eldridge
www.OnlineConnections.com.au
Call 0415 910 703 for IT support.
I now use the approach to rates to evaluate if I'm happy to use the services of others and the approach also helps me charge my customers. I do vary what I charge as there a some tasks which I feel at full rates would not be the best value for clients. For example I'll set the fee to remove malware from a home user's computer at 1.5 hours even though the time involved is much more. I'd rather a the user have a functioning clean machine and save them from purchasing a new computer. At full rates the options would normally be to reformat the computer or to buy a new computer. I'm not particularly happy with either of those options and thus I fix the price to a figure I feel is appropriate for the customer. The figures suggested here a thus simply a guide.
The figure I use as a starting point is the hourly rate someone would be paid as an employee. In IT I once worked out contractors are paid around twice the hourly rate of a full-time employee. The contractor basically works the same as a full-time or part-time employee, but has to carry their own overheads plus they don't get benefits such as holiday pay, leave loading, public holidays or leave loading. The longer they work for a business the more their productivity will be similar to an employee.
For a consultant I use the figure of three times the hourly rate of an employee. A consultant only comes in for specific tasks. They should be very productive. There's no guarantee of ongoing income and in some months, or even years, they may receive no income from the business. I actually picked the three times figure up from a Chartered Accounting firm I once worked for. I felt it was one of the more useful pieces of information I learnt.
The logic behind the three times figure is one third covers the salary, one third covers the on-costs, and one third is profit. Few people realise that an employee actually costs much more than their salary. You have the on-costs which I once read can vary from 1.3 to 1.9 times their salary. I believe the 1.9 times their salary was referring to Telstra at the time. In addition you then have to take into account productivity. The following is the productivity for IT staff I managed. This if for a 38 hour week and is for billable time.
Programmer - 80%
Analyst program - 60%
Manager - 40%
Partner - 30% or below
What the above means is a programmer is effectively productive 4 out of the 5 days and thus one day is lost in terms of billable hours.
As a consultant/small business owner you become all of these people in one. As a result you can expect your productivity, or the productivity of the person you hire, will have similar productivity. The average productivity above is 57%, so I tend to use a figure of 50% or 60% when doing calculations.
What that really means is, that when you hire a person as an employee, taking into account their productivity and their on-costs, the real cost to the business is in the range of 3-4 times their salary. Sometimes it may be worth considering outsourcing some work where you can reduce that cost.
I've written a calculator (www.justlocal.com.au/clients/whatsmytimeworth/) which may assist those who wish to work out how much they should charge, or how much a person's time is going to cost them. It takes into accounts hours and productivity, but doesn't take into account on-costs.
Now when I use the services of others I use the same rates with a slight modification. These 2 and 3 times rates are based on time only. Many businesses sell time plus make sales. So for a time based business I expect to pay up to 3 times their hourly rate. For a selling business that sells time and also sells product such as a motor mechanic, I expect to pay a little over twice the hourly rate plus the profit on sales, which effectively covers the other part of the three times rate.
When I see firms charging outside these rates it's a warning to me to be very careful. I've seen accounting firms charge out at 5-10 times the hourly rate. Getting charged $80-$100 for someone that is being paid around $22 an hour such as an admin assistant to me is profiteering. An example in the accounting firm I worked for is they had a 16 year old receptionist/admin person and charged her out at 10 times her hourly rate. She was the managing partner's secretary. I consider those clients to have really been stung with excessive rates.
Sometimes we have no choice but to pay the excessive rates because of protected industries such as the legal and medical industries, but if you can, look for businesses that charge a fair and reasonable rate for their services. There's many good businesses out there that won't rip you off. Of course there's also many that will. So remember, it is only you that will ultimately look after your financial interests.
Kelvin Eldridge
www.OnlineConnections.com.au
Call 0415 910 703 for IT support.
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