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Consulting: how do you figure out what to charge?

I’m a physicist by training, statistical data analyst by trade. Although some of my work is pretty standard statistical analysis, more often I work somewhere in a gray area that includes physics, engineering, and statistics. I have very little formal statistics training but I do study in an academic-like way to learn techniques from the literature when I need to. I do some things well but there are big gaps in my stats knowledge compared to anyone who has gone to grad school in statistics. On the other hand, there are big gaps in most statisticians’ physics and engineering knowledge compared to anyone who has gone to grad school in physics. Generally my breadth and depth of knowledge is about right for the kind of work that I do, I think.

But last week I was offered a consulting job that might be better done by someone with more conventional stats knowledge than I have. The job involves gene expression in different types of tumors, so it’s “biostatistics” by definition, but the specific questions of interest aren’t specialized biostats ones (there’s no analysis of microarray data, for instance). I’m comfortable doing the work, but I’m not the ideal person for the job. I was very clear about that both in writing and on the phone, but the company wanted to hire me anyway: they need a few questions answered very quickly, and their staff is so overworked at the moment that they would rather have me — I was suggested or at least mentioned by a friend who works at the company — than have one of their people spend hours trying to track down someone else who can do the work right away, even if that person is better.

I said sure, but then had to decide how much to charge. I’ve only ever done five small consulting jobs, and I’ve charged as little as $80/hour (working for some ecologists who didn’t have any money) and as much as $250/hour (consortium of insurance companies).

Picking a number out of the air, I’m charging $150/hour. Upon reflection, this feels low to me. Of course one way to think of it is: would I rather have spent three hours last night working on this project for $450, or would I have preferred doing whatever else I would have done instead but not making any money? (My wife is out of town and I hadn’t made plans, so I probably just would have read or watched TV). By that standard I am charging a fair rate, I was happy enough working on this last night. But I also have to put in some time this weekend, when I might feel differently: I’ll probably be giving up something more enjoyable this weekend. Still, overall I think that if I focus just on my own satisfaction in a limited sense, then $150/hour is OK.

On the other hand, I think that from the company’s perspective, at least in this particular instance, they are getting a fantastic deal. Having spoken with the people they’ve had looking at the data up to now, I am definitely much better at this than they are!

So if the company is thinking “boy, this is absolutely fantastic, that we were able to get this so quickly and for so little money”, while I’m thinking “Eh, OK, this isn’t too bad and I’m getting enough money to pay for a year of cell phone service [or whatever]”, then I feel like I should have asked for more (or should in the future).

I know there are people out there who charge much more. But on the other hand, some universities offer stats consulting for $80-$100/hour, although this is surely not the free-market rate.

For the future it would be good to have a better idea of how to set a rate.

Thoughts?

19 Comments

  1. Jim says:

    I've consulted both full-time and as an adjunct to a 9-5 job, and have spent plenty of time thinking about this. This is how I worked out my rates.

    Firstly, you need to work out what your time is worth in a 'normal' job for someone with your skills and experience. This isn't just salary, this is everything – bonuses, benefits, health insurance. In addition, you have to factor in things you'd expect your 'normal' employer to pay for – training, conferences, etc. Then turn that into an hourly rate – so x / 48 / 40, for example (allowing for vacation and national holidays).

    Now come the fudge factors. Firstly, you have to account for the fact that this rate you've calculated only covers direct work. You're not charging for administrative tasks for example, or the additional burden you have in tax calculation (I work for a company with administrators, lawyers, accountants – all things I don't have to worry about normally but do when I work for myself). If you were doing consultancy full time, you'd also be spending a large amount of (unpaid) time networking and drumming up business – something that in a service company someone else would do for you. It's easy to blow over this part, particularly if the work you're doing is minimal, but it's still extra non-credited time you'll spend – and it's what every other consultant will be adding as well.

    Lastly we have the convenience factor. You are being paid as a consultant because it's flexibility for the client. They don't have to recruit someone, train them to their processes and then lay them off, with all that entails, to work on their small piece of work. They can come in, get their 40 hours worth (or whatever) and then never see you again. They have to expect to pay for this flexibility – after all, once their piece of work is complete, you now have to spend time and effort finding more. This 'flexibility' charge is where the larger multipliers come in.

    In practice, I've basically reduced this to (total salary including all benefits etc) / 48 / 40 * (3 to 4), basically working out what a 'normal' employer would pay me on an hourly rate and taking a 3-4 fold multiplier on top of that to cover the non-payable work that comes with consulting plus the flexibility fee. I find this puts me ballpark with other similar consultants.

    One last comment – the old adage of 'you get what you pay for' is very true – if you undercharge (something it's very tempting to do, because it's hard to consider yourself to be worth large hourly rates – we've all been there), people become suspicious. Conversely, if your rates are higher, people believe they are buying quality. Now this obviously isn't true – there's not necessarily strong correlation between price and quality – but avoid that temptation of pricing yourself too low – which is what I think a lot of people doing a small amount of, or just starting, consulting tend to do. Have confidence that you're worth what others in the field are charging.

  2. One possible approach you might consider is the "OMV" way of billing (objectives, metrics and value). You can define an objective with your client (e.g., we would like to be more accurate in making life insurance actuarial predictions), define a metric to determine whether this objective has been met (e.g., 10% more accurate) and determine the value this creates (e.g., this would save the client $1,000,000 per year). Then you give the client a significant multiple of your fee so that they get an immediate and substantial return on investment ("ROI") in the first year after working with you. In this example, if you charged the client $50,000, then they would receive 20 times ROI in the first year after you complete the project.

  3. John S. says:

    You probably don't want to reveal too much about your financial situation (look what happened to Greg Mankiw) but the problem I have with consulting is that it causes problems with my taxes. An employer in the US has to withhold taxes so that by the end of the year you've already paid the IRS close to the correct amount. With a consulting contract you have to pay the taxes yourself, and if you've underpaid, the IRS charges a penalty. There are alternatives. You could pay your taxes quarterly, but that's a lot of trouble. You could also set up a little consulting firm, but that complicates things even more. So I keep my consulting to a minimum.

  4. John says:

    I'd recommend charging by the project rather than by the hour if possible. Your time isn't intrinsically valuable to a client, only your results are.

    The client benefits because they know what the project will cost. You benefit because the client no longer has an interest in monitoring your time so the relationship is more relaxed. You also no longer have a conflict of interest regarding efficiency — if you find a way to save time, you can save time without losing money.

  5. Charging by the hour can be a real trap..after all, time is limited:) Consider charging for the value you bring to your client. Here's a great resource: http://www.amazon.com/Value-Based-Fees-Ultimate-C

    Cheers, Leanne

  6. Jay Ulfelder says:

    I work for a large company as research director for a US Government-funded program that hires lots of scholars as consultants. I would recommend doing three things, two of which you're already (partially) doing:

    1. Ask peers if they have done similar work, and if so, what they have charged.

    2. Be prepared to adjust the rate depending on the client (e.g., many consultants charge lower rates for government-funded work than they do for private-sector clients, and I think most people consider that fair).

    3. If you don't have a rate set already, start by asking the person trying to hire you what they had in mind. As long as you also cross-reference that proposed rate with peers, this approach should help you avoid asking for too little.

  7. numeric says:

    Democratic presidents tend to boost the economy when the enter office and then are stuck watching it rebound against them in year 4 (think Jimmy Carter), whereas Republicans come into office with contract-the-economy policies which hurt at first but tend to yield positive trends in time for reelection (again, think Ronald Reagan).

    This is a ridiculous argument on the face of it. There have been _two_ Democratic presidents since LBJ. The reason for the bad economy under Carter (and it was only bad in an inflationary sense, not an unemployment sense) was the fall of the Shah and the removal of Iranian oil from the world markets. This lead to a tripling of oil prices (hence high inflation). I suppose you can argue that Carter's appointment of Volcker to the Fed, and the raise in interest rates to conteract inflation, was a policy choice, but it was indirect (and the raise in interest rates didn't affect
    unemployment until into Reagan's term). Inflation plus unemployment was high ("the misery index"), but it was inflation that was most of it.

    As for Clinton, interest rates came down because of
    his tax increases (Clinton included a tax on carbon which would hit lower income consumers because otherwise,
    Greenspan wouldn't lower rates unless the poor and middle class were hit). This helped spark the (continuing–it started under HW) recovery, which exploded in Clinton's second term.

    The point is that there are only two examples of Democrats in the last several decades and one of them shows the opposite of what Bartels is arguing (the "peak too soon"). Here's another explanation over why Obama didn't take the stimulus fight to another level (a greater stimulus, and if not successful, complaints about its failure)–the people in the White House (particularly the economic advisors) all have nice jobs and didn't see the necessity of working against a worst-case scenario (which would have required a stimulus of 1.2 (Romer's figure) or 1.6 (Krugman's) trillion). After all, Sommers will go back to Harvard.
    Incidentally, why is he seen as a great economist? He quashed the regulation of derivatives in the late 90's (even after Long Term Capital Management), lost a half-billion for Harvard as he left by telling them to take a stupid hedge bet, and then failed to push for a stimulus that could do the job. Won't even mention his discourse on women not being able to do hard-core economics due to lack of math (the person who wanted to regulate derivates–forget her name, but it was a she–he forced out, along with Rubin, and Romer was of course correct about size of the stimulus). Seems to me the women are better than he.

  8. David says:

    A good rule of thumb is 3 times your expected annual wage, plus benefits (ie. the total cost of employing you.) If your salary would be, for instance, $100,000/year, then the cost of employing you is close to $160,000. Your hourly rate would then be $160k/2k hours per year, or about $80/hour. 3 Times that would be about $240/hour. Rush jobs can cost 1.5-3 times the regular rate, if it involves a tight turnaround, weekend work, or late hours. You may have under-priced this a bit.

    Of course, that rate may not be representative of the specific skill set needed; if it is standard, it may be more appropriate to do the work based on the salary of someone normally capable of doing the work, if you are looking for more work and are willing to get paid less to do work "under your pay grade," so to speak.

    Lastly, "What the market will bear;" how much do you think they will pay? From my experience, newer consultants typically err on the side of too low.

  9. Bob Carpenter says:

    At our natural language processing software company, we would rather sell software than services. When our consulting rates were too low, we got all kinds of basic database and web development work which wasn't our speciality. We finally raised our consulting rates until we only got specialized work in language. Everyone's happier.

    If you're used to working on a salary basis, this whole idea of being able to decide how much to work at the margin is eye opening.

  10. Greg Finley says:

    Supply and demand: If you're getting so many work requests that you can't keep up, raise your prices. If you're dying for work, lower them.

  11. numeric says:

    This should be moved to the next post!

  12. Bruce McCullough says:

    Opportunity Cost. What's the next best thing (in terms of remuneration) that you can do with your time. You're an academic? What do you get paid for overload or summer teaching? Convert that amount into an rate per hour, and there's your answer. (I am talking about classes that you've already prepped, not new preps.)

  13. Anonymous says:

    You're smarter than I am, and I charge $500 per hour, and my work is statistics about 30 percent of the time. (The rest is economics.) When we buy up a small consulting firm, the first thing we do is jack up the rates… small consulting firms always undercharge.

  14. Phil says:

    Some respondents seem to think Andrew wrote this post; nope, it was me.

  15. Bill Mill says:

    Phil, you should really consider changing the font size on the author's name! I saw that it was you, but it's really easy to skip over the author's name given its typography.

  16. Phil says:

    Bill, I have posting permission on this blog, but no other powers.

    From now on I'll probably start by saying "This post was written by Phil Price." That oughtta do it.

  17. Phil says:

    I feel compelled to mention that I didn't think any regular readers could possibly think Andrew had written it, since the first paragraph doesn't fit him at all.

  18. Jeremy Miles says:

    It could be argued that if they say "no" your price was too high, and if they say "yes" your price was too low.

  19. Phil says:

    Follow-up:
    The job that prompted this post is completed, except for the final phone call. The analysis took a bit more time than I thought at first. And then writing the report took more time than I expected, too. Since I had promised to keep the total number of hours under a pre-set limit, I ended up doing a couple of hours for free (even after I asked for, and received, permission to increase the limit by two hours). I definitely resented putting in the unpaid time, not that it's the fault of the people who hired me.

    I'm not sure what lesson to learn for next time, either: the situation might have been even worse, not better, if I had given a flat rate, for example. Obviously one solution would be to learn to better predict the required effort to do a job, but I've been doing data analysis and paper-writing for 20 years and I'm probably all done getting better at predicting how long a project will take.

    Overall I'm _still_ glad that I took the job, although really that is only true because my wife is out of town, and we had a rainy weekend, so it was less sacrifice than normal to spend several hours working on Saturday. I will definitely keep this in mind for the future, and either charge more or just say no.

    As for the advice on setting a rate: thank you all. Several of you suggested or predicted that I undercharged, and I think I proved you right on that! I'll think about the details of the advice, and hopefully do better at choosing a rate next time.