Consulting Fees Explained

Recently, I heard someone talking about a pitch she got from a consultant on a topic she thought was great and necessary for her workplace. However, rather than engaging the consultant she bemoaned the cost and commented, “I could do that – and cheaper!” And perhaps she could, but it made me think about how consulting is structured and how consultants are often seen by potential clients.

Yes, being self-employed, most consultants charge rates higher than a typical hourly employee wage. However, there are many reasons for this–life behind the consultant curtain is a bit more complex than is sometimes appreciated.

How do independent consultants come up with fee rates? That is a great question and one I’m still coming to appreciate. Fees first need to cover hard costs like “errors and omissions” insurance, accounting costs, software, computers and equipment, IT support, rent, health and dental expenses, Canada Pension Plan contributions, transportation, printing and materials, legal, professional membership fees, as well as websites and postage. Then there are the soft costs–time when a consultant is not receiving income because of non-billable draws on her or his time. “Hunting costs”, for example–time spent writing lengthy proposals for work the consultant may never get, time spent meeting with potential clients before they have signed a contract or agreed to a formal engagement of services, time spent at industry gatherings, trade shows and mixers where potential clients might be. Time spent talking to accountants, preparing tax filings, sending invoices, dealing with late payments, contractual issues or dealing with bankers. And there is also the time that must be spent on the consultant’s own continuing education and professional development–time spent reading industry articles, attending courses and upgrading skills so that he or she can give the best service possible. Another serious consideration for the independent consultant is income/cash flow risk; there could be substantial lengths of time where a service provider must absorb continued costs when the order book is light. There is rarely a set amount of recurring income for an independent consultant. All too often, people only see the “face-time” with the client in relation to the consulting costs and think, “but they only spent ‘x’ hours with me, why is the cost so high?” They are seeing the visible part of the cost iceberg, not all the costs that lay below the surface.

Another factor not often appreciated in fee structure is the complexity and risk level associated with the work to be done. By their nature, many independent consultants tend to be highly experienced specialists. The whole point of engaging a specialist with your business problem is to mitigate risk and get the most accurate and skillful advice possible, otherwise, why not just throw caution to the wind and give it your own best shot? Regardless of industry, it is almost always the case that increased specialty and experience results in increased compensation. You are engaging a consultant in many cases because the stakes are high. In my particular line of work, ceasing an individual’s employment, for example, comes with all kinds of risks and containing them is important. If you haven’t done something like this before, how much risk are you prepared to take in terminating an employee without engaging specialized help? Legal risk? Risk of theft of hard assets or intellectual property? There are even physical and emotional risks to be considered.

Non-consultants are certainly within their rights to question fees charged by independent consultants–this is the healthy “push-pull” part of the marketplace for specialized services that helps insure appropriate value for money. But perhaps the next time you hear someone complain about the cost of consultancy services and say, “I could do that, and cheaper”, maybe a thought-provoking reply would be, “Yes… but would you?”