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Consulting Fees Explained

Recently, I heard someone talking about a pitch she got from a consultant on a topic she thought was great and necessary for her workplace. However, rather than engaging the consultant she commented, “I could do that–and cheaper!” And perhaps she could, but it made me think about how consulting is structured and how consultants are often seen by potential clients.

Yes, being self-employed, most consultants charge rates higher than a typical hourly employee wage. However, there are many reasons for this – life behind the consultant curtain is a bit more complex than is sometimes realized. All too often people only see the “face-time” with the client in relation to the consulting costs and think, “But they only spent ‘x’ hours with me, why is the cost so high?” They are seeing the visible part of the cost iceberg, not all the costs that lay below the surface.

How do independent consultants come up with fee rates? It’s a great question and one I’m still working Calculating Feeson. Fees first need to cover hard costs – practice insurance, accounting/bookkeeping, software, computers and equipment, IT support, rent, health and dental expenses, Canada Pension Plan contributions, transportation, printing and stationary materials, legal, professional membership fees, as well as websites, postage, etc.  

Then there are the soft costs, time when a consultant is not receiving income because of non-billable draws on her or his time. “Hunting costs”, for example – this includes time spent writing lengthy proposals for work the consultant may never get, meeting with potential clients before they have signed a contract or agreed to a formal engagement of services, attending industry gatherings, trade shows and mixers where potential clients might be, etc.  

Then there is the time spent on business operations – meeting with accountants, preparing tax filings, data entry and reviewing of accounts payable/receivable, ensuring compliance with contractual issues, dealing with banking (paying Visa statements!), etc.

And there’s also the time that must be spent on the consultant’s own continuing education and professional development to ensure up-to-date and in-depth knowledge of subject area. This includes time spent reading industry publications, attending courses and upgrading skills, meeting with colleagues to discuss hot topics, etc. Another serious consideration for the independent consult is income/cash flow risk; there are often substantial lengths of time where a service provider has to absorb continued costs when the order book is light. Rarely is there a set amount of recurring income for an independent consultant.

Another factor not often appreciated in fee structure is the complexity and risk level associated with the work to be done. By their nature, consultants tend to be highly experienced specialists. The whole point of engaging a specialist with your business is to mitigate risk and get the most accurate and skillful advice possible, otherwise, why not just throw caution to the wind and give it your own best shot? Regardless of industry, it is almost always the case that increased specialty and experience results in increased value. You are engaging a consultant in many cases because the stakes are high. In my particular line of work, ceasing an individual’s employment, for example, comes with all kinds of risks and containing them is important. If you haven’t done something like this before, how much risk are you prepared to take in terminating an employee without engaging specialized help? Legal risk? Risk of theft of hard assets or intellectual property? There are even emotional and physical risks to be considered.

Non-consultants are certainly within their rights to question fees charged by independent consultants – this is the healthy “push-pull” part of the marketplace for specialized services that helps ensure appropriate value for money. But perhaps the next time you hear someone criticize the cost of consultancy services, consider the time they are taking away from tending to their day-to-day business operations. Maybe when you hear, “I could do that, and a lot cheaper”, the thought-provoking reply could be, “Yes, but would you?”

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