Do I Know What to Charge as an IT Consultant? - Spiceworks ...

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 1 of 134/3/2012Experts ExchangeDo I Know What to Charge as an IT Consultant?AwardsCommunity PickExperts Exchange Approved[This article first appeared as "Why are IT services so expensive?" in my first attempt at a blog. It willbe moved to my second attempt at a blog once I get a different blog setup]As a full time independent consultant for the past five years, I've heard that question all too often.Typical rates charged by a professional IT consultant or small consulting firm can range from $75 to$200 per hour or more. Other professional services, including attorneys, auto mechanics, and certifiedpublic accountants - who frequently charge as much or more than an IT consultant - can be amongthose complaining about paying these "high rates" when seeking professional IT assistance.So why are these rates so high? There are many factors and where you live can be among them. Thisarticle uses rates and common expenses found in the New York metropolitan area. Your area mayhave different rates for certain things, such as rent, utilities, insurance, etc. The math should hopefullybe easy to follow, so you can adjust the numbers here to properly reflect your expected expenses anddetermine a reasonable rate for you in your area. (That includes potentially reducing your expectedannual income if those in your area typically make less than in the New York Metropolitan area).Let's take a look at some reasonable expenses a full time IT consultant would likely have (some thatthey SHOULD have) if they worked out of their home.Article-ITConsultingCosts-Fig1.JPG71 KBTable 1: Consultant expenses when working from home

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 2 of 134/3/2012If a consultant works 40 hour work weeks, that's 2,080 hours per year - 40 x 52 = 2,080. If we subtractthe 6 major holidays that the consultant likely wouldn't be able to find billable work becausebusinesses are typically closed, that's 2,032 hours (6 x 8 = 48). And if we subtract the week that theconsultant goes to training and the week that the consultant goes to a conference, that brings totalworking hours down to 1,952 hours. Then we can subtract another week for a small vacation andanother week worth of days for illness and family emergencies. So, we're now down to 1,872 hoursper year. In order to gross enough to cover the expenses of a work-from-home IT consultant -EXCLUDING any kind "salary" that would typically be used to cover personal expenses, like food,rent or mortgage, household supplies, etc, the consultant would need to bill at a MINIMUM $41,000divided by 1,872 hours, or $21.90 per hour. Not bad, right? Most people wouldn't have a problempaying $21.90 per hour... but...For a consultant with an office, we can add a few more reasonable expenses:Article-ITConsultingCosts-Fig2.JPG46 KBTable 2: Consultant expenses when you have a dedicated office

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 3 of 134/3/2012Before any taxes, retirement contributions (including social security taxes), and any kind of salary hasbeen paid, a consultant, to remain as effective and up-to-date as possible, needs to make at least$66,000.So, let's adjust that hourly rate. $66,000 divided by 1,872 hours that can technically be billed since theconsultant will be around equals $35.26 per hour. Notably higher... but still not THAT bad, right?Well, as they say in infomercials... But wait! There's more!You need to consider that the consultant cannot reasonably bill 8 hours per day. There is travel time toand from clients and most clients (except during projects) will only need services for 2-4 hours, onaverage. And with a break/fix service that many IT consultants offer, it's virtually impossible to have 8billable hours per day without having several unhappy clients who will no doubt leave you becauseyou kept them waiting. Typically, a consultant will bill 20-24 hours per week. That's 50-60% of theirtime assuming 8 hour work days. Thus, at best, only 60% of that 1872 hours will actually be billable.60% of 1872 equals about 1123 hours per year of actual billable time. So let's recalculate... if weMUST gross $66,000 per year, and can only bill (typically) 1123 hours each year, that means $66,000divided by 1123 equals $58.77 per hour.As you can see, this is getting expensive. And remember, that's with no salary, retirement income, ortaxes taken into consideration.The average IT salary is probably around $40,000 for a general desktop technician who does not havethe skills, knowledge, and experience to manage servers. Systems Administrators and NetworkArchitects can make $65,000 to $80,000 in many areas. More in some regions, such as New YorkCity. In order to make a reasonable living wage in most city and suburban areas, it would bereasonable for a consultant to expect an annual income of $66,000 per year. This effectively doublesthat hourly rate and brings us to $117.54. Or about $120 per hour when rounding. And when you

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 4 of 134/3/2012consider that top talent would want and need to make more, you can expect that rate to jump evenhigher - $150 to $200 per hour.A GOOD consultant will provide you service and advice, indeed a GOOD consultant should be yourtrusted adviser in matters of technology. Keep in mind, a GOOD consultant:• Can provide buying advice to ensure you purchase the correct equipment. Too often, I comeacross clients who have gone out to the local computer store or electronics department store andpurchased an on-sale computer, only to discover it didn't come with the appropriate software andoperating system to work on their network. Now the client is stuck purchasing new software andlosing valuable time installing and configuring it.• Has experience (in most cases) troubleshooting similar systems - and experience will lead to afaster resolution in most cases. Faster resolutions mean lower costs.• Has the training and practice to ensure they setup your system correct the first time. This meansfaster implementations which means fewer hours which means lower costs and lost productivity.• By keeping current on new technologies can spot products and services that can improve howyour business works, enable you to do things easier and possibly in new ways that can ultimatelylead to greater income for your business.• Helps keep your costs low even with a high hourly rate; costs should NOT be measured by thecheck you issue alone. Keep in mind that each hour your system is down is an hour of potentiallylost productivity. It could be costing you sales or at the very least, keeping your workers (who youare paying) from doing their jobs.• Insists you properly license your software. Improper software licensing (piracy) can becomeVERY expensive. Software publishers actively advertise rewards for leads to businesses violatingsoftware licensing. Your employees may like you today... but if you ever have to terminate anemployee, that employee could report you. And the fines can be as much as $10,000 per illegalinstallation (maybe more). Sure, it's cheaper to buy one copy of office and install it on 5computers... UNTIL you get reported... then that $350 product could become a $40,350 product...instead of the $1,750 it should have been.And if you're an IT consultant who is NOT charging comparable rates, consider what it is costing youin terms of your ability to grow and support yourself and your family - now or when you have one.Consider what could happen if you make one critical mistake and get sued and don't have Errors andOmissions (E&O) insurance. Or what could happen if you are audited. Or what could happen if youlose one of your larger clients - possible through no fault of your own - such as they go bankrupt.Consultants charging less are working in a house of cards that could collapse on themselves and theirclients with no notice.

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 5 of 134/3/2012About The AuthorleewLee Wilbur (leew) has worked professionally in IT since 1994. He has supported large and smallenvironments and worked with a wide variety of technologies. He has volunteered his expertise on Experts-Exchange since 1997.CommentsExpert CommentNice explanation of costs for consultant (1) to first break-even over the expenses, and then (2) earn an income.Got my yes vote above.Expert CommentAgree with WaterStreet. Very nice; thank you!Voted yes above also.Expert CommentNice article Lee. Voted Yes above.Expert CommentGreat article, and nice to have something right here on EE that I can link to when I see this common "how muchshould I charge" question. Got my "Yes" vote.Expert Comment

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 6 of 134/3/2012Great piece leew. Your stuff is priceless. Voted helpful. We're pushing for blogs on EE (they're on Beta now).We'd love to have ya as a blogger too. Thanks again!Expert CommentGreat article! I especially like how you seemed to "sell" it at the end. That probably isn't the best way todescribe it though. What at points could seem to those having to pay those costs as something that just getsworse and worse ends by pointing out, in my opinion, why those rates are worth it. Not that a company wouldwant to pay them often or regularly but the list of things a "good consultant" would do should make mostrealize they are getting value for the fee.Now how do I get someone to know all that when I quote the price or hand them the bill. :)bolExpert Commentb0l,That really is the question we who consult need to face and deal with. Perhaps someone might open an EEquestion thread seeking answers to it. leew could post there and, of course, reference this article. Maybe getEE points for referencing it in an Accepted Solution. And, maybe he or someone else might write anotherarticle here addressing your question, being more informed by the postings made in that thread.Expert CommentGreat article! thanksExpert CommentNice read leew.... :-)Expert CommentVery NiceExpert Comment

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 7 of 134/3/2012Excellent read LeeW.I think you left out the entry dealing with the roaming data charges for use on a train ... probably bump thathourly rate up a bit!Expert CommentI think he left out the taxes and insurance costs for the $66,000/yr salary. Social Security payments, SEP, etc.Author CommentTrue, I did leave out the employer's portion of the taxes. The $66,000 estimate was based on GROSS salary foran employed person. Insurance is in the first table.Expert CommentI 'work' for a volunteer core at my college campus. We only give basic IT support, and because we're noprofessionals and earn a living with it, we charge pretty low prices. But then, there are those who push it andabuse of our good will. We are volunteers, not slaves.Thank you for this article. I hope you don't mind if I use this to show my mates that we should actually chargethe TIME we waste with some people.Author CommentShare away... My personal policy (since I can be a bit social with clients myself) is that I track ALL time spentand then offer discounts/credit for quick payment. If they pay QUICKLY they pay only for the time it took todo the requested/required job. If they take their time, then they pay for the entire time I was there - whether thatwas fixing a problem a talking about how great (or bad) the latest blockbuster movie was - after all, the time Ispent there meant I had less time to spend at other clients where I could be billing.Expert CommentWell organized article, very detailed. I like my current job where I for 8:30-4:30 and don't wear a pager.I don't recall seeing the expense for a cell phone (black berry, etc ...) These are essential for a consultant.Well done.

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 8 of 134/3/2012Author CommentThanks!(cell phone - 3rd item Figure 1)Expert CommentFantastic article, I will be sharing this link around to a few people lolExpert CommentInteresting article. I guess we're a little lucky here in Australia that we don't need health insurance (we have agood public health system), so that cuts out one cost.I'd almost say however that the cost of sales should be higher, aside from advertising there is the time spentconvincing a potential customer that they should use your services (in my case, it is project based) I have yet tosee a customer that didn't need a little nudge to get them on board. Even without an actual cost (and let's face itthere is always one, even if it's simply purchasing a cup of coffee for the potential customer) there is the timecost, and that time cost can go up quite considerably if there is any sort of travel time involved as well.I personally work on the basis of 50% billable time, 10% misc (eg training etc), 40% sales, and make sure thatthe 50% billable time covers the cost of winning the sale in the first place, and covers the cost of the saleswhich I didn't win.Expert Commentcongratulations,so helpfull articleregardsedoExpert CommentWow...It's like you looked straight into my books for the IT with an office. I have been needing this article andthese numbers for years. I am way too cheap for consulting and support I do. You just made my check go up.Much thanks.Author Comment

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 9 of 134/3/2012harvyk,Cost of sales is whatever you need it to be. This is just a guideline that tries to take into account all majorexpenses. Your expenses can definitely vary and things like sales and marketing expenses don't necessarilyhave correct or even consistent answers.I was even thinking today that for clients that you may have a recurring agreement with, you can lower yourrate on. For example, if you consistently work 2 days (16 hours) per week at a given client, then, with anaverage of 4-5 hours of billable time the other three days, you could lower your rate for the consistent client.Ultimately, the point of the article to help both consultants and those who need there services understand whatan appropriate rate is for professional services.Expert Commentleew,Again, thank you for the time you spent putting this incredible article together. You know what I thinkwould be equally or more valuable to post? You mentioned agreements with certain clients. It would be great tohave a breakdown on what contributes to the determination to the cost of that monthly agreement with theclient. For example; if they have 1 Exchange Server or 2 servers, number of computers, complexity of softwareon each computer, VPN networks tying into other locations, network printers and so on. It would be beautiful tohave a rough calculator based on the equipment and setup a client has to determine an agreement amount permonth. Obviously the sell is that off-site IT is much less costly than full-time on-site IT, and generally an offsiteIT person is much more skilled than a FULL TIME on-site IT, as they deal with more computers,equipment, and more IT problems making their skill level increase exponentially over a FULL TIME 1 site ITguy, but how much less costly do you determine? There is always the infamous never paid invoice of justhaving access to a highly skilled IT Pro that is always looking out for the best situation in terms of technologyto implement or not implement into your business, including the numerous free questions/consulting youprovide over the years via email or a quick conversation on the phone.Author CommentZionTech1,What you're asking about is, in my opinion, how to price yourself as a Managed Services Provider. This is adifficult question.I'm a part of a great group of Small Business Consultants in New York City. We have monthly meetings wherewe have discussions on various business and technical topics, go over recent developments in IT and relatedbusinesses, and have presentations from vendors. A few months back we had a discussion on this topic and theonly thing that was clear was that this wasn't clear. Everyone has their own definitions of what they'll includeand how they'll include it. Some may have certain hardware requirements to even offer such a service while

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 10 of 134/3/2012others do not. Some may help desk services to their users while others do not. Truly, it's a VERY varied space.Recently, I heard it clarified this way -As a break/fix technician (who the above article really is targeting as well as those who hire them), theTechnician is paid to fix a problem - it BENEFITS the technician for the client's system to have a problem - theconsultant only makes money when the client has a problem. If you ever have your ethics questioned (silentlyor otherwise) by the client, the client might think you are sabotaging their systems so you can make money. It'salso an unpredictable expense for the client.As a managed service provider, offering, at least to some extent (you can put in stipulations, requirements,exclusions, etc), an all-you-can-eat maintenance and repair service for a fixed monthly price, the client has abudgetable price and the relative comfort to know that it's in your interest for you to keep their systems running.If they are paying you $1000 monthly for maintaining their systems and their systems go down, it comes out ofyour pocket, not theirs. So you are trying to find efficiencies to keep their systems running - and if the clientdoesn't have problems, they feel better.You'll always have clients that say things like "why am I paying you when things are working" -- and fromwhat I've heard, converting clients from the "break/fix" model to a managed fixed monthly fee model can bevery difficult - but new clients often like the predictability and those who "get it" will definitely appreciate theMSP model more.I'll conclude by saying that to address MSP pricing would require a book - not an article!Expert CommentExcellent article - Thanks!Very informative.I can't believe that medical insurance for a family is $12,000 in the US. I'm in Ireland and medical insurance formy family of five is $2,500. I suspect you guys are being seriously ripped off, and don't think for one secondthat the care you get for $12,000 is better than what I receive.Also: errors & Omissions insurance? I have never heard of it. I have public liability insurance for $1,000 whichcovers me for things like equipment I sell going on fire or buildings going on fire, or people getting injuredbecause of the work I do. This insures to a liability of a maximum of $9,000,000.Due to the nasty recession in Ireland, consultants are fighting like dogs to get work, so rates have dropped byabout 40% in the last two years, but our costs haven't!Author Comment

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 11 of 134/3/2012Depends where you are... I've heard some states are MUCH, MUCH cheaper than others for health insurance.Here, General Liability covers us for doing something stupid and setting the office building on fire orsomething. Errors and Omissions covers us when use Darik's Boot and Nuke on the wrong hard drive andcompletely wipe out critical data for which the client failed to make a backup of. (This has NOT happened tome... but that would be an example).Expert Commentleew,Very well put and I agree with you 100%. I have came to the same conclusion for the most part over theyears. I wouldn't include hardware in the agreement. That way you are not out of pocket, only out of time, butyou are paid for that. If you charge by the hour, then the better you are and the more skill you have the fasteryou can fix things, then you actually get paid less. On top of that, if you have good ethics then you put morepreventative measures in place also. There has to been some balance point between skill and value vs. time andpreventative measures. The factor of previous years billing of the client would have to come in to play to makethe determination on an agreement as an MSP monthly fee. In the end it would have to come down toleveraging your known skill level and value to the customer, and hopefully your uniqueness or rarity against nothaving you available at all. It's the hard sell if need be. Thanks leew for your input.Expert Commentleew,Have you ever considered charging flat fees?It does sound a little crazy, but I find that as a consultant, I really do not receive appropriate remuneration forthe time, effort and education I put into maintaining my skill set. I also ran into the 45 hours/week ceiling wayto fast...I couldn't put in enough time in a week to make a really good living. I also could not continue to raisemy prices; my customers wouldn't put up with it.A fixed price agreement really levels the playing field. I could go into a lot of examples, but would be repeatedthe excellent information found at www.verasage.com.If you're interested in my story, look for Kreykes Consulting on the following page:http://www.verasage.com/index.php/community/2008/01/I would welcome any conversations regarding FPAs.Have a great day!Expert Comment

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 12 of 134/3/2012You referenced a NYC small business computer consulting group... any more info on that, or perhaps becominga member? I myself am in NYC and this caught my eye. thxAuthor Commentjosephfreer,Sign up at the Yahoo group - meetings are free and occur on the second Wednesday of the month at Microsoft'sconference center in Manhattan (in the building next to Radio City)http://tech.groups.yahoo.com/group/NYSBS/And the mailing list is pretty active as well.Expert CommentGood Work leew. Your article is very good. Hope a IT Professional get that much here .... Thanks again!Expert CommentExcellent explanation. I did not knew so many factors are critical for determining a consultants' hourly rate.Expert CommentSimply Awesome!Expert CommentExcellent Article, Thank you for educating the masses.Expert CommentGood work. Helpful. Thank you.Expert Comment

How Do I Know What to Charge as an IT Consultant?http://www.experts-exchange.com/ITPro/Consulting/A_1905-How-Do-I-Know-What-to-Ch...Page 13 of 134/3/2012Great article, mate. Very informative.Expert CommentThis fails to point out however that tons of this stuff is tax deductable.Author CommentJust because it's tax deductible doesn't mean you're not spending the money on it. You either spend the moneyon taxes or the deducted expense, so I'm not sure I see the point.I didn't include a tax line for expenses. Nor did I include the EXTRA taxes a self-employed person has to pay(in the USA, the employer's portion of social security (FICA) and Medicare). Or other potential state taxes andfees for being in business.There may come a time when I revise this, but for the moment, I think it's still getting the larger point across.