Consultant rates vary significantly and are influenced by a wide range of factors. Set out below is a summary of some of the key considerations and influences.
In this section I will illustrate my points using £ Sterling (UK) as the reference currency, but the relative fees apply equally to all geographies whether you are billing clients in the Americas, Asia Pacific or mainland Europe - simply apply an approximate currency conversion and the figures in whichever local currency will be broadly representative.
Consultant rates vary widely from the £400 per day contract Project Manager, to a Partner in a Global consulting firm commanding £6,000 per day in the city of London advising a global banking operation, or even higher for particularly specialist and scarce expertise.
A large number of factors influence the consultant rates that a client will be willing to pay.
If the requirement is simply for a very smart project manager who has practical experience and a good track record, and there is no such resource available currently employed within the client's business, then a good option would be to buy in this resource on a short term contract basis.
The assignment is likely to be relatively easy to define and scope, not particularly complex to deliver and relatively low risk when viewed in the wider context of the client business.
Contrast this with a large, established, high-end consulting firm contracting with a banking client to deliver, by which we really mean 'underwrite the success of', the Systems Integration aspects of a major and business critical IT Programme where the Programme budget is say £270m over three years.
In this situation the client is looking not just to buy the time, track record and expertise of some very smart people, but is looking to pay a premium consulting fee, one element of which is in lieu of the transfer of some risk to the third party consulting firm. Effectively, in paying the premium fees of a big five firm the client is buying insurance that will give some redress should there be a problem with the delivery.
Within these premium consultant rates the client is also paying for the credentials and track record of a major consulting firm along with the intellectual property, global infrastructure and pool of consulting resources that can be rapidly mobilized across multiple geographies to the scale required to meet the requirements of the assignment.
Daily equivalent consultant rates will vary depending on the pricing method selected. Set out below is a summary of the main pricing structures and approaches.
a) Simple daily rate
The consultant rate is agreed to be for example £1,000 per day. The assignment is scoped and an estimated total number of days for completion are agreed. For example it may be a thirteen week commitment which would imply 65 working days and therefore a total fee of £65,000. Typically the client will pay reasonable expenses, reimbursed at cost in addition to the basic daily rate.
The consulting contract would specify the key deliverables and there would be regular progress reviews with the client to ensure that the consulting inputs are as required in order that at the end of the contract the key requirements will be met.
The professional services of the consultant would be retained through the course of a specified period of time, typically one year. The client would agree to pay a fixed fee, for example £30,000 in order that at any time during the year he can call on the expertise of the consultant in providing expert input and guidance.
The advantage to the client is that he knows he has expert resource available at very short notice. Also, there is a fixed ceiling to the cost.
Typically the consulting contract for a retainer arrangement would include a cap or ceiling on the number of days that the client can draw down, for example, twenty days which would equate to an average daily consultant rate of £1,500. Clearly if the client only has a need for ten days during the course of that year than the average daily equivalent consultant rate increases to £3,000. The client is likely to be happy to pay this premium in lieu of the flexibility that the arrangement provides.
c) Fixed price
The client agrees with the consultant a fixed price for successful completion of clearly specified deliverables. The consulting contract makes no reference to the number of consulting days that will be invested in ensuring that the objectives are met, but typically an end date is agreed by which the assignment must be completed. For example £80,000 to complete all aspects of the planning and mobilization phases of a complex change Programme, with the assignment starting 1 January and completing 31st March.
This type of arrangement is higher risk for the consultant and introduces both a downside and upside risk. If the assignment is successfully completed in a shorter time period than was initially anticipated then the equivalent daily consultant rate will be higher.
Conversely, if there are problems with the assignment and the dates begin to slip, then the equivalent daily consultant rate will begin to be eroded. Also, there is an increased probability that the client will not be required to pay for the assignment if the final delivery cannot be achieved before the end date that is recorded in consulting contract.
Clearly fixed price contracts should only be undertaken by very experienced practitioners i.e. consultants who are confident that they can estimate with a relatively high degree of accuracy what will be required to deliver the outputs or outcomes that the client is expecting.
d) Contingency / success fee
Contingency fees are potentially very lucrative and are the ultimate manifestation of the client saying to the consultant, 'OK, put your money where your mouth is: if together we deliver the required outcome for the business then we will share that success with you'.
For example, the assignment might be to undertake a cost reduction exercise for a major financial institution where the total operational cost base is currently £300m. The client may set a target of 20% steady state cost reduction (i.e. a reduced run rate of operating cost on an annualized basis of £240m) which would imply annualized savings of £60m.
The consulting firm would be incentivized through a fee structure based on the consultant receiving a percentage of the cost savings achieved for example 5% of savings achieved which would equate to £3m. Clearly in this situation the consultants would like to receive 5% of £60m rather than 5% of a lower figure.
The challenge with this type of arrangement is reaching agreement with the client at the end of the assignment as to the amount of benefit that has been delivered. In order for this to be determined with any degree of certainty the consulting contract will need to contain detailed schedules of the definitions and bases of calculation of cost reductions. The final delivery will be assessed against these pre-agreed measures. The absence of these definitions up front is likely to result in disagreement between the client and the consultant at the end of the assignment.
e) Time and Materials basis
The client pays the consultant an agreed rate (usually time-based i.e. hourly or daily) for input provided by the consultant. Any related expenses incurred or supplies purchased are charged to the client at cost. The time and material billing page contains more information.
Know the Ropes
As you work through the process of determining appropriate consultant rates for your services there are a number of key considerations to keep in mind.
The 'Know the Ropes' series of pages provide guidance and cautionary tales drawn straight from the 'School of Hard Knocks' - i.e. what I've learned the hard way from my mistakes.
First, beware the over-zealous salesman acting on your behalf - do not allow an intermediary to oversell an assignment to a client and thereby put your professional reputation on the line. Have a look at my page on how to avoid Overselling.
Second, don't be afraid to Price for Value. Your consulting fees should be broadly reflective of the risks, effort and challenge associated with the proposed consulting project. Be hard-nosed and objective in identifying the true nature of the project and forming your own assessment of the value to the client of you undertaking the work.
Your price should fully reflect the value to the client. Put simply, if you anticipate that there will be significant pain or risk associated with delivering the assignment then accordingly you should price it high. Check out my page on Pricing for Pain.
The following factors drive differentiation and divergence in basic consultant rates. In simple terms these factors are the manifestation of market forces i.e. demand and supply determining price.
A consultant who is very experienced in his or her field will command a higher daily rate than someone who is less experienced. It sounds obvious but is useful to state nonetheless.
A more experienced consultant will have stronger credentials that can be readily evidenced by a successful track record of delivery, including reference sites and testimonials from satisfied clients who are likely to be repeat buyers of consulting services from that individual or firm.
Similarly, a consultant who has relevant professional qualifications combined with excellent practical experience will command premium consultant rates.
c) Scarcity of talent
Market forces dictate that if there is a very strong demand for consultants who have a relatively scarce professional skill set then prices will be high. It is worth providing a couple of examples from financial sector consulting to illustrate the point.
In the past few years there have been a number of high profile floatations of life and pensions companies that were previously owned by policyholders - the process of demutualization and IPO. During the period running up to floatations of this type, these client companies typically require the skills and experience of large numbers of accountants and actuaries with particular technical expertise in fund valuation and reporting. As a consequence premium consultant rates are available to individual contractors or consulting firms who possess the necessary skills and experience.
A second example would be the premium consultant rates paid to specialist consultants operating in the financial sector during the implementation of the Basel II capital adequacy requirements. Consultants with skills and experience in disciplines such as advanced credit risk management and the upgrade of credit risk management systems were able to command premium consultant rates.
A third example would be corporations listed in the United States being required to comply with the requirements of Sarbanes Oxley. Management consulting rates for firms specialising in these niche areas were and continue to be higher than average as a consequence of the focus of the regulatory authorities on key disciplines that include corporate governance, risk management and the accuracy of financial reporting.
d) Intellectual property
Consultant rates available to contractors will be lower on average compared with consultant rates available to specialist consultants who also bring a body of proven proprietary intellectual property.
For example a specialist risk management framework or business model which has been applied successfully elsewhere with clients in multiple instances. New clients will be willing to pay a premium to secure the same commercial advantage that competitors are likely to have enjoyed as a consequence of adopting such proven models, processes, frameworks or systems.
Some sectors command premium consultant rates.
In general terms consultants working in financial services can expect to receive higher average management consulting rates compared with consultants operating in other sectors that perhaps are by definition less profitable.
For example consultants engaged by clients in a public sector entity such as a health authority may receive lower rates. Another example of a client environment where budgets for consulting spend would be significantly lower would be the charities sector - by definition these clients operate on a 'not for profit' basis.
Consultants operating in the oil and gas industry can typically command a premium depending on the nature of the assignment.
Geography will influence consultant rates. For example, within financial sector consulting rates are higher in London than in other provincial cities within the UK such as Glasgow.
Comparisons between countries will also yield material differences in consultant rates. For example, daily rates available in Australia are substantially lower than those available to consultants with equivalent experience in the UK.
g) Duration of the assignment
If a client is able to offer a consultant an assignment that will last for a relatively long period of time for example twelve months, then it is quite reasonable for the client to expect a reduced average daily equivalent consultant rate compared with a three month assignment. This is to reflect the value to the consultant in absolute terms of the twelve month contract and the certainty that this will bring.
Working through an intermediary such as an agency or introducer can have a significant influence on the level of fees paid by the client and ultimately the consultant rates received by the delivery consultant. Click here to understand the key points and get on the front foot in your negotiations with agencies.
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