In a recent blog post, marketing and media expert Christopher S. Penn detailed the two methods from which consultants must choose in order to assess their fair billing rates—the floor and the ceiling.
As its name suggests, the floor is the minimum billing rate that consultants must charge in order to justify their time and thoroughly complete the projects on which they are working. Penn explains that in order for a consultant to determine his or her minimum billing rate, he or she must zero-in on a mandatory annual income figure, taking the following factors into account:
- Actual expenses (rent, food, gas, etc.)
- Federal, state and local taxes
- Health insurance
This figure must then be taken and divided by the number of work hours in a year. Based on a 40-hour work week, the number of work hours in a year can be calculated by multiplying 40 by the number of weeks in a year (52), to arrive at 2,080. However, as Penn points out, this method of required hourly rate calculation assumes 100 percent utilization—i.e. that every hour in the work week constitutes billable time, a notion that Penn describes as being “far, far, far from the truth.”
“The reality is that consultants are lucky to get 2/3 utilization, and a better, safer estimate is 50 percent utilization,” he recommends. “The other 50 percent of your time will be spent building your business. Thus, apply the appropriate multiplier based on what you think or know your utilization rate to be.”
The ceiling represents a much more significant money-making opportunity, but it is also trickier to assess, as it depends on how greatly a consultant’s work is valued by his or her client base.
“In order to develop a fair ceiling rate, you have to know and understand deeply the industries and companies you’re serving so that you know the economic value of the work you’re providing,” Penn writes. Provided a consultant demonstrates a sound understanding of clients’ business needs and concerns, the implicit value is obvious and it shouldn’t be too hard to get clients on board with paying ceiling rates, provided they believe they are getting value for money.
By using consultant billing software, professionals can easily set up and track billing rates, regardless of whether they ascribe to the floor or ceiling methods. The consultant billing services provided by Sage Timeslips can help automate the process, freeing up time to attend to other tasks.
Read Penn’s post here.
||After using floor or ceiling methods to gauge billing fairness, consultants can leverage consultant billing technology to streamline invoicing.