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Being a Consultant or Freelancer
By Kate Wendleton
Copyright by Quintessential Careers. The original article
can be found at:
The Five O'Clock
Club
America's Premier Career Coaching Organization
All positions are temporary. You may receive a W-2 form at
year-end, or you may receive a 1099--but no work you do is
permanent. However you are paid, make sure you are paid
fairly. And make sure you are gaining experience that will
help you get your next assignment--inside or outside your
present company. Have a backup plan. What would you do if your
current assignment or situation ends?
If you happen to be looking for full-time work on-payroll,
you still may be offered consulting assignments. So you should
learn how to negotiate them.
Today, more and more companies are bringing in workers on a
contract, consulting, or freelance basis. Such workers usually
get no benefits (health insurance, paid time off, training,
memberships, company-paid contribution to Social Security,
etc.). Other contract or temp workers are hired through an
intermediary company that may or may not put the workers on
payroll, and pay for their benefits.
Even very senior managers find themselves serving as
full-time consultants. Some companies are actually doing this
illegally. If you are working full-time for a company which
decides your hours and the content of your work, you are not a
consultant but an employee. This means that the company must
put you on payroll and pay the extra costs associated with
that.
At one very large company where I was consulting, there was
a relatively low-level person who worked on computers, kept
the same hours as everyone else on staff, but who was paid a
flat $15 an hour as a "consultant"--no benefits, no insurance,
no paid time off. Large companies are sometimes even more
likely than smaller companies to get away with this because
they have so many employees. A manager may hire "consultants"
because the company has a "freeze on head-counts"--he or she
is not allowed to put more people on payroll because that
would count as a "head." Yet the manager is allowed to hire
consultants, temps, and freelancers.
The worker is stuck. The company has all of the power. If
the worker wants to work, he or she is not going to complain
about unfair treatment.
To counteract this trend, workers are sometimes opting to
have "a job and a dream"--a job that pays them regular wages,
and other work done on the side to build a future that may be
more secure than working for one company. Some workers are
able to grow what was once a sideline into a stable source of
income. That work may include consulting or selling part-time,
trying to build a business, and so on.
Regardless of how you are paid, develop your skills and
your marketability to the point where you are less likely to
be taken advantage of.
THE SEARCH FOR CONSULTING OR FREELANCE WORK
The search for consulting or freelance assignments is
exactly the same as the search for full-time work "on
payroll." Target the areas in which you are
interested--following the system we use at The Five O'Clock
Club. At your meeting with your prospective employer--or
perhaps even in your cover letter--you can mention that you
would be open to either full- or part-time work. Sometimes a
consulting assignment turns into an on-payroll assignment.
Sometimes the reverse is true.
Those who have successfully made the transition to
consulting or freelance work often say they would never go
back to working for someone full-time. Some feel and indeed
may be much more secure having a number of sources of income
rather than just one.
The downside to consulting is that you must both market and
deliver your services. Some consultants get so involved in
delivery that they don't allow time to market. They suffer
having intense periods of work, with periods of no work in
between. Consultants don't get unemployment benefits during
those down times. Some consultants may tend to take no time
off: if you don't work, you don't get paid.
Therefore, you must set your consulting rates high enough
to allow for time off. You also need time for marketing. A
rule of thumb is to allow half of your time for marketing and
administration, and half for the actual delivery of your
services. "Marketing" includes everything you do to make
yourself known, such as writing articles and then reprinting
them as handouts to build your credibility, delivering
speeches, building a database of possible targets and mailing
to them regularly, and calling on companies.
Decide if you want to start a consulting business, or if
you would simply like to take a few consulting assignments
while you are searching for full-time employment. This will
influence what you decide to do in marketing yourself. At some
point--but not now--you may need a brochure, business cards,
and even an office. If you are truly trying to build a
consulting business, think through how big you would like your
practice to be, how many others you would eventually like to
work with you, and everything else you need to develop a
rudimentary business plan.
In any case, you must be positioned properly (see
Two-Minute Pitch). Decide what your target market is, what you
have that would be of interest to this market, the services
you want to offer, and how you can position yourself to seem
worthwhile. Whether you are looking for on-payroll or
consulting work, you must learn how to differentiate yourself
from your likely competitors. Then you must call on
prospects.
Follow the Stages of the Search and pay attention to the
stage you are in (Stage 1, 2, or 3). Be sure to have six to
ten things in the works at all times. Next, figure out how to
price your services.
PRICING YOUR SERVICES
There are two numbers you need to start with to determine
your consulting fee. One is what you are now making--or have
been making most recently, or what others are making--in the
field you are targeting.
We are assuming your consulting will be in the field where
you are now considered an expert. If you want to consult in a
new field (perhaps as a way to learn that field), instead of
your present base plus bonus, use the rate of those at your
level in the new field. The second number to consider is what
the market will bear.
CALCULATING YOUR "COST RATE"
Take your present base plus bonus. Let's say it's $50,000 a
year. Add a factor for benefits, such as health insurance.
Let's say 20 percent (this includes health insurance,
company-paid Social Security, and so on, but does not include
paid time off). So that's $50,000 X 1.20 = $60,000.
Divide that number by the number of hours the average
person is available to work in a year. We'll use 2000 hours,
just to keep the calculation simple. (You may want to use 1600
hours, which allows for 10 holidays and 4 weeks of vacation
and sick time.) $60,000 / 2000 = $30 per hour.
Your cost is $30 per hour--which is very different from
what you will bill your customer. If you were to be able to
bill 2000 hours a year at $30 per hour, you would stay even
with what you are now making. However, not only are you
unlikely to bill 2000 hours a year, you still have to buy your
own health insurance, put money aside for your vacations, pay
your own Social Security, arrange for your own training,
subscriptions, memberships, and so on.
CALCULATING YOUR LOW BILLING RATE
To account for some of that expense, increase your cost
rate by 20 percent--just so you will come out a little higher
than your adjusted cost rate. This allows for benefits and
also for paid time off. (See chart: Low Billing Rate) $30 x
1.20 = $36.00 per hour (Low Billing Rate)
You would try to bill at your Low Billing Rate if you are
just starting out, or if you are on a long-term consulting
assignment with a guaranteed significant number of hours per
week.
A rule of thumb for short-term consulting fees is twice
your cost.
CALCULATING YOUR AVERAGE BILLING RATE
If you need to have more than one customer, you probably
won't be able to bill 2000 hours a year because you will have
to spend time marketing your services. Earlier you saw that a
rule of thumb is to spend half your time marketing. So to keep
even with what you made before, you would have to bill twice
your cost rate. That's $30 X 2 = $60 per hour. (See chart:
Average Billing Rate)
You would try to charge the Average Billing Rate for your
salary level if you are in a specialized field and in demand.
You would also try this rate if you are a serious independent
consultant and want to sell your consulting services
long-term. You will need to make up for the time you spend
marketing.
CALCULATING YOUR HIGH BILLING RATE
If you are well-established as a consulting firm with lots
of overhead, such as office space and administrative support,
two-times cost will probably not be enough to cover your
overhead. The standard factor for this situation is three
times cost. In addition, if you are seriously starting a
consulting firm (rather than being an independent consultant
representing only yourself), you would most likely charge the
three-times rate for every billable member of your staff, or
for each person you bring in to work on a project. More about
that later.
Finally, if you are well-known in your field, you may also
insist on three times your cost rate--or, lucky you, whatever
the market will bear. $30 X 3 = $90 per hour. (See chart: High
Billing Rate)
Charge this rate if you are well-known in
your field, or to cover your overhead if you have or are
setting up a consulting firm. Overhead includes support staff
who are not billable, rent, marketing, and so on.
YOUR "MARKET WORTH" IS WHATEVER THE MARKET WILL BEAR
When I'm hiring someone as a consultant, I ask them their
hourly rate, multiply it in my head by 2000, and decide if the
person would be worth that much on-staff. For example, if
someone wants to charge me $25 per hour, I estimate whether
that person would be worth $50,000 on staff including
benefits. That way, I can quickly assess whether the person is
worth it to me. If there are plenty of people who can do the
same job for less, I can simply find someone else. If,
however, this person is a known expert, my friends tell me
that he or she is reliable, or if there is some other reason
for me to think that this person is special, I may be willing
to pay more than the typical going rate.
When you think about the rates you will charge as a
consultant, remember that someone will be deciding whether or
not you are worth it. So decide whether you are someone who
can be easily replaced, or are unique and in demand. "What the
market will bear" will be the most important determinant of
what you can charge.
What you charge will probably change over time. At first,
you simply want to get a few jobs and a few clients. Later, as
you become better-known in your field, the amount and the way
you charge will change.
You must test the waters. Talk to others in your field and
find out what they are charging, network in to see prospective
hiring managers and see what they would pay. When all else
fails, start negotiating with the hiring manager and observe
his or her reaction. Follow exactly the rules in the
"Four-Step Salary Negotiation Strategy."
After you are well-established--and have a name in the
market, there is a lot of flexibility. I have counseled
clients who have ended up working two days a week for one
company, and two days a week for another company--getting a
flat $100,000 a year from each company! These clients had paid
their dues in their respective fields, and deserved what they
got. They each worked only four days a week, and if they lost
an assignment at one company, they still had the other one to
keep them going while they looked for a replacement. Not a bad
way to earn a living.
CORPORATE RATES
Although the three-times rate is standard for organizations
with overhead, companies use different numbers of hours as the
base. That is, instead of using 2000, they may use 1600 or
even as low as 1300 to 1400 hours. This increases the hourly
rate. Or they may hike up the direct labor rates by including
not only base plus bonus, but also all benefits, payroll
taxes, estimated raises, car allowances, and so on. Then they
come up with a rate card, which may contain inflated rates.
When it comes time to negotiate, they may come down quite a
bit from their rate card.
For example, one company's "Rates to Use in Pricing
Projects" are as follows:
Use a billing rate of $225/hr. or $1800/day for:
*
Employees with salaries in the $65,000 to $80,000 range.
*
Outside consultants who cost us more than $500 per day.
Use a billing rate of $190/hr. or $1500/day for:
*
Employees with salaries in the $50,000 to $64,000 range.
*
Anyone not on staff who costs us $300 to $500 per day.
Use a billing rate of $150/hr. or $1200/day for:
*
Professional staff with salaries less than $50,000.
*
Anyone not on staff who costs us $150 to $275 per day.
Use a billing rate of $50/hr. or $400/day for:
*
Administrative support staff.
* All temps assigned to this
project.
You too may want to create a rate card for your consulting
firm. But be sure to be realistic about your worth in the
market.
SETTING YOUR RATES
When you are starting out, you will probably use just one
system for charging your clients, such as an hourly rate. When
you are experienced, you may still wind up charging every
client the same rate, or each client a different rate. For
example, you may have one or two clients who form a stable
core for you, and you may have gotten far enough in your
career that you are able to be on a monthly retainer with them
(more about that later). You may charge other clients an
hourly fee. You may charge one client per project, one a low
hourly fee, and another a high hourly fee. You may charge a
large corporation a higher rate than a small company, a
for-profit organization more than you charge a not-for-profit
(although not necessarily).
Your rates may differ by geographic area. You may charge a
certain rate in the big urban areas, and a lower rate in the
countryside; or one rate for one part of the country, and
another rate for a different part.
If you are offering your
services to individuals, you may use a sliding scale depending
on the person's ability to pay, the way that many therapists
do.
Finally, you may charge different rates for different kinds
of work. When I am hiring a public relations person, to name
one example, I may hire someone who is already working
full-time for someone else and wants to earn extra money on
the side. That person may charge me a certain hourly fee for
the brainy work, such as developing strategy, writing press
releases, and so on, and a lower hourly rate for the
"mindless" work, such as stuffing envelopes.
Find out the standard fee arrangements for the industries
or fields that you are targeting. The variety is endless.
FEE STRUCTURES
Therapists and attorneys charge per hour. Workshop leaders
usually charge per diem. Determine how people in your field
charge, and do the same--at least when you are starting
out.
The two basic structures are per time (such as per hour,
per diem, etc.) and per project. There are almost infinite
variations on charging structures going, from a per- head rate
for running a seminar, to a percent of gross billing (as in
the old days of advertising). There are certain fields in
which a success fee rules (that is, if the project works, you
make lots of money; if it doesn't, you don't). And then there
are lots of combination fee structures, such as a success fee
for completion with a guaranteed nominal base amount. If you
are working with a start-up company, and already have a full
range of consulting assignments, you may be paid in stock.
Other common arrangements are retainer, commission, percent of
sales, bonus, or a combination of the above. Find out the
standard fee structures for the industries or fields you are
targeting. The variety is endless.
For now, we will cover the "per time" and "per project"
structures. The thought processes behind these form the core
of most other billing methods.
When considering the fee structure you want to use for a
certain situation, remember that some structures are low-risk
with a predictable reward. Others are high-risk (that is, you
may wind up losing money or making no money), but high-reward
(big bucks if things work out). All fee structures can be
analyzed using this criterion.
PROJECT PRICING VS. TIME-BASED PRICING
The benefit of
pricing per project, rather than charging a time-based rate,
is that you could make much more money that way. You could
also lose money if you price incorrectly or if you do not
control your costs while delivering the service.
With time-based pricing, on the other hand, you can be sure
of getting paid for every hour you work. As long as you get
paid, there is no risk on your part. However, you cannot make
a great deal of money.
If you simply want to pick up some consulting work while
you search for a full-time job, you may want to stick to
time-based pricing so you are not at risk. If you want to have
a consulting business, you may want to become very good at
project pricing (although actually many consulting businesses
charge solely by time-based pricing).
1. Low Billing Rate. Use this rate if you are just starting
out, or if you are on a long-term consulting assignment with a
guaranteed significant number of hours per week.
2. Average Billing Rate. Use this rate if you are in a
specialized field and in demand. You may also use this rate if
you are a serious independent consultant and want to sell your
consulting services long-term. You will need to make up for
the time you spend marketing and so on.
3. High Billing Rate. If you have or are setting up a
consulting firm, the rule of thumb is to bill out at three
times labor cost to cover the cost of overhead, which includes
support staff who are not billable, rent, marketing, and so
on.
CYRUS (trying to be friendly): I'll tell you what. You want
to work, I'll give you a job. Nothing permanent, mind you, but
that upstairs room over there--the one above the office--is a
hell of a mess. It looks like they've been throwing junk in
there for twenty years, and it's time it got cleaned up.
RASHID (Playing it cool): What's your offer?
CYRUS: Five bucks an hour. That's the going rate, isn't it?
. . . If you can't finish today, you can do the rest
tomorrow.
RASHID (Getting to his feet): Is there a benefits package,
or are you hiring me on a freelance basis?
CYRUS: Benefits?
RASHID: You know, health insurance, dental plan, paid
vacation. It's not fun being exploited. Workers have to stand
up for their rights.
CYRUS: I'm afraid we'll be working on a strictly freelance
basis.
RASHID (Long pause. Pretending to think it over): I'll take
it.
Paul Auster, Smoke
(c) Copyright 1999 The Five O'Clock Club. All rights
reserved. You may print a copy of this article for your
personal viewing. However, no other use of this article is
allowed without prior written permission of the copyright
holder.
This article was published with permission of the copyright
holder at Each of Us.
You can email Kate
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