Wednesday, June 13, 2012

Working Smarter: Consulting and Billable Hours

Many people consider working as a consultant, having the freedom to come and go as they choose and not being tied to a master. Most don't give much thought to the billable hours they can earn and how much they would need to charge to break even with an annual fixed salary.

While many consultants can earn much more than a fixed annual income, it's not simply a matter of pasting a sign at your front door and expecting the money to roll in. Not unless you are extremely talented ... or perhaps lucky.

Many consultants struggle to make ends meet; work ebbs and flows so that they live in a feast or famine cash flow situation, so before you make the jump, you really need to give it some thought.

When you consider that your annualised salary provides for 48 weeks of work (including public holidays) and maybe four weeks annual leave, you are being paid 52 weeks of the year. If you are on $60,000 per annum, your hourly rate is $28.85 (assuming 8h day and five working days per week).
It doesn't matter if you goof off at work when you are being paid regardless of outcomes. Consultants however have their hours and rate per hour monitored closely ... it's not as easy to goof off. Given the public holidays and annual leave, consultants have to charge a sufficiently high hourly rate to compensate themselves for those hours. In other words, although they bill far fewer hours, they still need to do sufficient to reach their break-even figure of $60,000 in this example.
Not every hour is a billable hour (that which you can charge your client). There are many hours too that need to go into bookkeeping, marketing, planning, purchasing stationery and so on that are not directly billable. Worst of all, unless you have a signed contract guaranteeing a certain amount of work, you never know how many billable hours you can expect to accrue in any month.

You can see by the comparison above that to maintain parity with a salary of $60,000, a consultant would need to work 35 billable weeks at $42.86 or at some point elsewhere in the table. If you can sell your services at $75 per hour, you would only need to work 20 weeks of the year. The key is in finding an hourly rate that is competitive and also satisfies your need for sufficient income to pay your debts.

If you are an engineering consultant and charge $75 per hour and everyone else is charging $55, how much work do you think you'll get? Consultants need to make sure they price their time at around that people are willing to pay. I have a friend who consults at $1,000 per day, but he has a huge, well known firm behind him and they keep part of that income. His skills are very specialised and he is well known within his area of employment. That all makes a difference.

Billable hours are of course, easy to obtain if yours is an expertise for which there is an unmet demand ie, more people need your services than there are providers. If there is stiff competition or demand is low, getting sufficient billable hours can be a challenge.

If you ever dream of being a consultant and being your own person, don't forget you have to do some work on what you can charge for each billable hour. And never give a discount. If you want to do something special, provide something additional as once you drop your rate, clients will expect a reduced rate for every job and your billable hour rate will decline.



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