A Project Management Article by Steve Arhancet
Article Summary: Before you establish your bill rate, get educated on the various approaches that are used to set this important number. This article provides an overview of three generally accepted approaches, helping define a bill-rate strategy for a project management professional considering going solo.
Project management is a skill set that is in high demand today, and for those with the right tenure and professional network, 2012 may be a time to consider going solo.
Like all good planners, project professionals begin any task with meticulous research and timelines. Adding in the bill rate question is a sensible preparatory step before considering the move to solo work and is a good annual evaluation step for experienced solo consultants. Instead of rushing to set or hold a rate, it’s best to get educated on the various methods available in the marketplace so that your value is aligned with your goals and that of the end-customer.
If you “google” the question – you’ll quickly learn there are a multitude of pricing approaches for offering services as an independent consultant or contractor: hourly rates, fixed price based on deliverable, value-based billing, success-based fees, retainers, as well as any combination of these models.
Clearly not every strategy will work for every individual and several factors must be taken into consideration. For example: What is the typical approach for your industry and occupation? How experienced are you in delivering the service? Can the service be packaged or are there too many unknowns? Are you at full capacity or do you need the project to fill in down-time or gain a much needed reference?
Finally, many smart professionals wonder how to calculate a competitive bill rate while also taking into account the state of the market, the financial squeeze companies are feeling, the value they bring to the table, and the costs of running an independent consulting practice. It may sound overwhelming.
In this article you’ll learn that it all comes down to strategy – and science.
When assessing a pricing strategy, professionals should consider three key elements:
- Competitive Market Rates
- Value Creation.
Knowing these elements will give you the knowledge and confidence for an appropriate fee-generation approach.
Cost Basis: Strictly By the Book
The most basic way to calculate a bill rate is to consider the cost-basis. Most simply put this approach helps you answer the question: can you cover your costs of doing business and make a profit on services? In this model, the goal is not just to cover your costs taking but also take into consideration your utilization, or the number of billable hours you can actually work on one or many contracts. Seems pretty straightforward, right? Not so fast.
As an independent consultant, there is a lot to take into consideration when calculating exactly what your bill rate needs to cover, and on top of that you have to stay competitive. To name a few considerations, you must consider downtime (non-billable time for administrative tasks such as back-office functions and compliance); insurance costs and acquisition timing; customer service and invoicing time – the messy business of collections; and a myriad of other matters small and large. A cost-based bill-rate calculator is a helpful approach to use to hone in on these questions.
What’s the drawback to simply sticking with this cost-based approach? Do remember, cost based bill rates don’t take the competitive landscape into account. You need to make sure that you are neither undervaluing your services nor overcharging for the work you do.
While the cost-basis allows you to learn what replacement income strategy you need, keeping an eye on the competition helps to refine that analysis further and determine whether your required rate is supported by the external landscape. Or, whether there’s more profit in your work than you even realized!
Market-Based Rate –Getting Paid What You’re Worth
While “cost-based”bill rates are black and white, market-based rates are set taking into accountyour sector and its competitive landscape at a specific point in time. That means you should be taking not only your expenses into consideration, but also looking at your competition and determining if you can meet or beat their rates. Think of it like selling a house. You’ll be able to charge whatever anyone is willing to pay, but there are comps a buyer still looks at in every housing market.
A key to setting the “right” market-based bill rate approach is research. But, before you can go out and find how you measure up against your competitors, you have to make sure you’re comparing apples to apples. Since this approach is based on supply and demand, make sure you are working with a common definition for what it is you do.
Next, make sure you are using the most current market-rate data from a reliable source. You can get this data from any number of sources. A few include Payscale.com, RealRates.com, and Salary.com – just make sure that on each of these sites you are looking at “bill rate” comps and not just salary information. The consulting bill rate should include your cost-calculation or overhead, and is not the same as a pay rate or salary.
If you look around and find that your rates are way off the average, examine how you came up with your personal cost-based rate in the first place. What unique lifestyle elements (e.g. dependent care, vacation time, or schedule constraints), have affected your income expectations?
Market-based rates are also subject to the maxim, “Location, location, location.” While researching rate information, ensure you are looking at data for the locations where you plan to negotiate work. If you can work remotely or are available for travel or relocation, you might be able to significantly elevate your bill rate potential by working in a market with higher pricing while residing in a market with lower costs.
There are some positive aspects of the market-based model: Because your pricing is aligned with the market, it will more quickly meet client expectations and may make the “sell” easier for you. Your research can also help you defend your rate during negotiations. But consider the drawbacks, as well: Could this make you a commodity? If you sell yourself as someone strictly in line with the market, you could wind up undercharging for the added value you bring as a specialist in your field.
Value Based Rate – Sliding the Scale Based on Performance
Never lose sight of the fact that clients are interested in their results, not necessarily your profit margin or how much time you put into a proposal or a project. Because of this, value-based fees often make a lot of sense.
When bill rates are calculated using the “value method,” the value you bring to the client, rather than just what your costs and competition dictate, you define yourself as more than a commodity. You become a strategic partner for the duration of your contract – one that will help catapult them to new heights as an organization, position them to win the next big contract or project, or fix a problem that will lead them to become more profitable industry leaders. Or at least that’s how to sell it.
The value-based rate strategy is the most nuanced of the three approaches. It is a strategy appropriate only for consultants who are delivering strategic value to clients, and it’s use will be specific to each, individual engagement.
While your consulting business may focus on your expertise and experience in a particular subject area or skill, what you bring to the table for each client and each project you complete for that client will vary greatly. Your price is a function of both the value you bring as well as the client’s potential ROI. For repeat business, you must be sure you can prove delivering that ROI so consider the question carefully as you price your first value-rate-based contract.
A deterrent for the value-based approach is that it might not be as easy of a sale – more time will be spent nurturing a value-priced client. With money in the bank, the end-result may be worthwhile. Your value is what sets you apart in the marketplace and what can guarantee you a seat at the table in future projects and contracts. Especially for those senior executives or specifically skilled experts in project management niches branching out, considering the value-approach can help define a new, enriching solo brand.
The Bottom Line
With the right specialized skill set, independent consulting can be a financially rewarding career.However to thrive as a solobusiness, every consultant should give careful thought as to how much they will charge for their services.Even experienced consultants should review pricing every year to account for changes in the marketplace and their own growing experience level. Remember, in calculating your bill rate, consider your costs, the market, and the value you bring and come up with an appropriate rate range.
Consider attending Webinars on the topic even if you are an experienced provider, and certainly if you are branching out on your own for the first time.Each approach outlined in this article is a great starting point for constructing your overall pricing strategy and you may want to create a spreadsheet to compare and contrast multiple approaches. It’s the secret ingredient to building a successful business of one.
Note: this article reflects the viewpoint of the author, Steve Arhancet, and does not necessarily represent the views of PMIWDC. If you disagree with or object to the views expressed here, please let us know