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How Do I Know What to Charge as an IT Consultant?

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[This article first appeared as "Why are IT services so expensive?" in my first attempt at a blog.  It will be 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 certified public accountants - who frequently charge as much or more than an IT consultant - can be among those 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. This article uses rates and common expenses found in the New York metropolitan area.  Your area may have different rates for certain things, such as rent, utilities, insurance, etc.  The math should hopefully be easy to follow, so you can adjust the numbers here to properly reflect your expected expenses and determine a reasonable rate for you in your area.  (That includes potentially reducing your expected annual 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 that they SHOULD have) if they worked out of their home.

Table 1: Consultant expenses when working from home
If a consultant works 40 hour work weeks, that's 2,080 hours per year - 40 x 52 = 2,080. If we subtract the 6 major holidays that the consultant likely wouldn't be able to find billable work because businesses are typically closed, that's 2,032 hours (6 x 8 = 48). And if we subtract the week that the consultant goes to training and the week that the consultant goes to a conference, that brings total working hours down to 1,952 hours. Then we can subtract another week for a small vacation and another week worth of days for illness and family emergencies. So, we're now down to 1,872 hours per 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 $41,000 divided by 1,872 hours, or $21.90 per hour. Not bad, right? Most people wouldn't have a problem paying $21.90 per hour... but...

For a consultant with an office, we can add a few more reasonable expenses:

Table 2: Consultant expenses when you have a dedicated office
Before any taxes, retirement contributions (including social security taxes), and any kind of salary has been 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 the consultant 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 to and from clients and most clients (except during projects) will only need services for 2-4 hours, on average. And with a break/fix service that many IT consultants offer, it's virtually impossible to have 8 billable hours per day without having several unhappy clients who will no doubt leave you because you kept them waiting. Typically, a consultant will bill 20-24 hours per week. That's 50-60% of their time 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 we MUST gross $66,000 per year, and can only bill (typically) 1123 hours each year, that means $66,000 divided by 1123 equals $58.77 per hour.

As you can see, this is getting expensive. And remember, that's with no salary, retirement income, or taxes taken into consideration.

The average IT salary is probably around $40,000 for a general desktop technician who does not have the skills, knowledge, and experience to manage servers. Systems Administrators and Network Architects can make $65,000 to $80,000 in many areas. More in some regions, such as New York City. In order to make a reasonable living wage in most city and suburban areas, it would be reasonable for a consultant to expect an annual income of $66,000 per year. This effectively doubles that hourly rate and brings us to $117.54. Or about $120 per hour when rounding. And when you consider that top talent would want and need to make more, you can expect that rate to jump even higher - $150 to $200 per hour.

A GOOD consultant will provide you service and advice, indeed a GOOD consultant should be your trusted 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 come across clients who have gone out to the local computer store or electronics department store and purchased an on-sale computer, only to discover it didn't come with the appropriate software and operating system to work on their network. Now the client is stuck purchasing new software and losing valuable time installing and configuring it.
Has experience (in most cases) troubleshooting similar systems - and experience will lead to a faster 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 means faster 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 how your business works, enable you to do things easier and possibly in new ways that can ultimately lead to greater income for your business.
Helps keep your costs low even with a high hourly rate; costs should NOT be measured by the check you issue alone. Keep in mind that each hour your system is down is an hour of potentially lost productivity. It could be costing you sales or at the very least, keeping your workers (who you are paying) from doing their jobs.
Insists you properly license your software. Improper software licensing (piracy) can become VERY expensive. Software publishers actively advertise rewards for leads to businesses violating software licensing. Your employees may like you today... but if you ever have to terminate an employee, that employee could report you. And the fines can be as much as $10,000 per illegal installation (maybe more). Sure, it's cheaper to buy one copy of office and install it on 5 computers... 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 you in 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 and Omissions (E&O) insurance. Or what could happen if you are audited. Or what could happen if you lose 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 their clients with no notice.
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Author:Lee W, MVP
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by:WaterStreet
Nice explanation of costs for consultant (1) to first break-even over the expenses, and then (2) earn an income.

Got my yes vote above.
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by:Kevin Cross
Agree with WaterStreet.  Very nice; thank you!
Voted yes above also.
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by:tigermatt
Nice article Lee. Voted Yes above.
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by:lherrou
Great article, and nice to have something right here on EE that I can link to when I see this common "how much should I charge" question. Got my "Yes" vote.
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by:BMilneSLO
Great 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!
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by:b0lsc0tt
Great article!  I especially like how you seemed to "sell" it at the end.  That probably isn't the best way to describe it though.  What at points could seem to those having to pay those costs as something that just gets worse and worse ends by pointing out, in my opinion, why those rates are worth it.  Not that a company would want to pay them often or regularly but the list of things a "good consultant" would do should make most realize 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. :)

bol
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by:WaterStreet
b0l,

That really is the question we who consult need to face and deal with.  Perhaps someone might open an EE question thread seeking answers to it.   leew could post there and, of course, reference this article.  Maybe get EE points for referencing it in an Accepted Solution.  And, maybe he or someone else might write another article here addressing your question, being more informed by the postings made in that thread.
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by:Skjnsyt
Great article! thanks
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by:johnb6767
Nice read leew.... :-)
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by:mikebesurfing
Very Nice
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by:Richard Quadling
Excellent read LeeW.

I think you left out the entry dealing with the roaming data charges for use on a train ... probably bump that hourly rate up a bit!
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by:rgautier
I think he left out the taxes and insurance costs for the $66,000/yr salary.  Social Security payments, SEP, etc.
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by:Lee W, MVP
True, I did leave out the employer's portion of the taxes.  The $66,000 estimate was based on GROSS salary for an employed person.  Insurance is in the first table.
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by:Ecchin
I 'work' for a volunteer core at my college campus. We only give basic IT support, and because we're no professionals and earn a living with it, we charge pretty low prices. But then, there are those who push it and abuse 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 charge the TIME we waste with some people.
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by:Lee W, MVP
Share away... My personal policy (since I can be a bit social with clients myself) is that I track ALL time spent and then offer discounts/credit for quick payment.  If they pay QUICKLY they pay only for the time it took to do the requested/required job.  If they take their time, then they pay for the entire time I was there - whether that was fixing a problem a talking about how great (or bad) the latest blockbuster movie was - after all, the time I spent there meant I had less time to spend at other clients where I could be billing.
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by:mr_gustav
Well 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.
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by:Lee W, MVP
Thanks!

(cell phone - 3rd item Figure 1)
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by:locdang
Fantastic article, I will be sharing this link around to a few people lol
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by:harvyk
Interesting article. I guess we're a little lucky here in Australia that we don't need health insurance (we have a good 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 spent convincing a potential customer that they should use your services (in my case, it is project based) I have yet to see a customer that didn't need a little nudge to get them on board. Even without an actual cost (and let's face it there is always one, even if it's simply purchasing a cup of coffee for the potential customer) there is the time cost, 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 that the 50% billable time covers the cost of winning the sale in the first place, and covers the cost of the sales which I didn't win.
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by:Ernesto
congratulations,
so helpfull article
regards
edo
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by:Zion Phil
Wow...It's like you looked straight into my books for the IT with an office. I have been needing this article and these numbers for years. I am way too cheap for consulting and support I do. You just made my check go up. Much thanks.
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by:Lee W, MVP
harvyk,

Cost of sales is whatever you need it to be.  This is just a guideline that tries to take into account all major expenses.  Your expenses can definitely vary and things like sales and marketing expenses don't necessarily have correct or even consistent answers.

I was even thinking today that for clients that you may have a recurring agreement with, you can lower your rate on.  For example, if you consistently work 2 days (16 hours) per week at a given client, then, with an average 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 what an appropriate rate is for professional services.  
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by:Zion Phil
leew,
     Again, thank you for the time you spent putting this incredible article together. You know what I think would be equally or more valuable to post? You mentioned agreements with certain clients. It would be great to have a breakdown on what contributes to the determination to the cost of that monthly agreement with the client. For example; if they have 1 Exchange Server or 2 servers, number of computers, complexity of software on each computer, VPN networks tying into other locations, network printers and so on. It would be beautiful to have a rough calculator based on the equipment and setup a client has to determine an agreement amount per month. Obviously the sell is that off-site IT is much less costly than full-time on-site IT, and generally an off-site IT 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 IT guy, but how much less costly do you determine? There is always the infamous never paid invoice of just having access to a highly skilled IT Pro that is always looking out for the best situation in terms of technology to implement or not implement into your business, including the numerous free questions/consulting you provide over the years via email or a quick conversation on the phone.
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by:Lee W, MVP
ZionTech1,

What you're asking about is, in my opinion, how to price yourself as a Managed Services Provider.  This is a difficult question.

I'm a part of a great group of Small Business Consultants in New York City.  We have monthly meetings where we have discussions on various business and technical topics, go over recent developments in IT and related businesses, and have presentations from vendors.  A few months back we had a discussion on this topic and the only thing that was clear was that this wasn't clear.  Everyone has their own definitions of what they'll include and how they'll include it.  Some may have certain hardware requirements to even offer such a service while others 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), the Technician is paid to fix a problem - it BENEFITS the technician for the client's system to have a problem - the consultant only makes money when the client has a problem.  If you ever have your ethics questioned (silently or otherwise) by the client, the client might think you are sabotaging their systems so you can make money.  It's also 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 a budgetable 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 of your pocket, not theirs.  So you are trying to find efficiencies to keep their systems running - and if the client doesn'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 from what I've heard, converting clients from the "break/fix" model to a managed fixed monthly fee model can be very difficult - but new clients often like the predictability and those who "get it" will definitely appreciate the MSP model more.

I'll conclude by saying that to address MSP pricing would require a book - not an article!
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by:Paulclane
Excellent 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 for my family of five is $2,500. I suspect you guys are being seriously ripped off, and don't think for one second that 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 which covers me for things like equipment I sell going on fire or buildings going on fire, or people getting injured because 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 by about 40% in the last two years, but our costs haven't!
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by:Lee W, MVP
Depends 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 or something.  Errors and Omissions covers us when use Darik's Boot and Nuke on the wrong hard drive and completely wipe out critical data for which the client failed to make a backup of. (This has NOT happened to me... but that would be an example).  
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by:Zion Phil
leew,

     Very well put and I agree with you 100%. I have came to the same conclusion for the most part over the years. I wouldn't include hardware in the agreement. That way you are not out of pocket, only out of time, but you are paid for that. If you charge by the hour, then the better you are and the more skill you have the faster you can fix things, then you actually get paid less. On top of that, if you have good ethics then you put more preventative measures in place also. There has to been some balance point between skill and value vs. time and preventative measures. The factor of previous years billing of the client would have to come in to play to make the determination on an agreement as an MSP monthly fee. In the end it would have to come down to leveraging your known skill level and value to the customer, and hopefully your uniqueness or rarity against not having you available at all. It's the hard sell if need be. Thanks leew for your input.
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by:bjkreykes
leew,

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 for the time, effort and education I put into maintaining my skill set.  I also ran into the 45 hours/week ceiling way to fast...I couldn't put in enough time in a week to make a really good living.  I also could not continue to raise my 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 repeated the 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!
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by:josephfreer
You referenced a NYC small business computer consulting group... any more info on that, or perhaps becoming a member? I myself am in NYC and this caught my eye. thx
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by:Lee W, MVP
josephfreer,

Sign up at the Yahoo group - meetings are free and occur on the second Wednesday of the month at Microsoft's conference 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.
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by:Pratik Parmar
Good Work leew. Your article is very good. Hope a IT Professional get that much here .... Thanks again!
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by:proman121
Excellent explanation. I did not knew so many factors are critical for determining a consultants' hourly rate.
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by:Anjeneya Murthy
Simply Awesome!
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by:avarela99
Excellent Article, Thank you for educating the masses.
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by:twohawks
Good work. Helpful. Thank you.
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by:mihailpetreski
Great article, mate. Very informative.
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by:n4th4nr1ch
This fails to point out however that tons of this stuff is tax deductable.
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by:Lee W, MVP
Just because it's tax deductible doesn't mean you're not spending the money on it. You either spend the money on 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 and fees 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.
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by:rjearley1966
Fantastic article.  Thanks.
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by:kinecsys
n4th4nr1ch:
This fails to point out however that tons of this stuff is tax deductable.

Could you explain, how specifying which expenses are tax deductible affects Leew's calculations? How the bottom line of reasonable hourly rates should change based on your comment? I may be just missing your point.

Leew: Excellent article! I just did $20,000 worth of work for a client and let them get away with paying only half. I've been arguing with my conscience about it for a couple of weeks and today my conscience, with your help, finally won the argument: I need to grow some guts and get paid for my work.
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by:n4th4nr1ch
Well because the calculation is saying "the consultant would need to bill at a MINIMUM $41,000 divided by 1,872 hours, or $21.90 per hour" which isn't exactly correct, since those expenses can almost all be written off, which will lower their impact, especially for a consultant who will be filing a 1099, and thus paying taxes quarterly. Minor point worth including in your next update, I believe.
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by:Lee W, MVP
I'm not a tax expert... but if they're written off, and you make exactly (on average) $21.90 per hour, then your net income - before the other items, like salary - is ZERO.  So you pay no income tax unless your state has some kind of minimum simply for being a business of the type you may be.  If you made less the government doesn't refund that to you - they consider it a loss and may be able to count it towards next year's income.  If you made more (and assuming there were no other expenses, like salary or other items), then you'd pay SOME tax on that excess (assuming you didn't have an equal or greater loss the previous year).  

I'm probably still missing something.  I'll try to remember to ask my accountant the next time I see him and possibly have him read the article and give me thoughts on the tax implications.
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by:n4th4nr1ch
Well if 100% of your expenses were tax deductible it would be a rare situation. But if that were the case, then you would still be taxed, because you can't just write off everything forever. You have limits, which I believe are in the ballpark of 8,000$ for a single person. But my point is this really:

$41,000 doesn't leave your pocket. Which means the minimum you could make and break even is not $41,000.

The difference I'm pointing out is, if you work a normal W2 job, and still had these expenses for some reason, you would need $41,000 to cover them. But with a 1099 you would not need $41,000 because some of it comes back to you quarterly in the form of deductibles.
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by:Lee W, MVP
Corporations NEVER have to make money.  Sole Proprieters do or it is considered a hobby after too many losing years, but a corporation shouldn't have those issues.  So there is a point there.  BUT, my assumption in this article is that you are keeping EVERYTHING business separate from work.  The two exceptions - one of which I've heard (don't know how true, but I've heard) you don't want to do is deductions on your car and home office.  Your car can be deducted at a mileage rate or percentage of expense based on your percent driven for business.  It's almost always better to deduct the mileage in my experience.  But I've been tracking both my expenses and mileage meticulously and I've found (at least for me in the Northeastern USA) that every mile costs me about 54 cents... give or take a penny.  So I'm not making any money here despite deductions - I'm just going to need to buy a car sooner than if I didn't use it for business.  So that's a wash.  And the one you shouldn't deduct (unless you have a CLEAR workspace with a separate entrance) is your home office.  Not that it's not deductible, but if it significantly increases your chances of an audit, it may not be worth the headache to save a few hundred dollars in taxes.

This article is meant as a basic guide to understanding why rates appear high and how an IT Consultant should determine their rates.  At the end of the day, every consultant should come up with a spreadsheet (at least) and plug in their costs.  The article should provide details about what you can expect in terms of expenses as well billable hours.  

Further, this article is aimed at the "Break/Fix" Consultant.  Managed Services Providers can have a very different price scheme.  And remember, you also have to price in your skills.  If you know what you're doing and can accomplish a task in 5 hours with a proven track record that your accomplishment won't need "fixing" later, you should be charging more than a person who takes 10 hours and has a generally proven track record that their work needs fixing later.  And it's not just a matter of money you charge - it's also LOST PRODUCTIVITY to the client.  So 5x$100 is not equal to 10x$50 when each hour the company is unable to work results in $1000 of lost sales and $250 in lost worker productivity (sitting on their hands doing nothing while the tech works on the systems).  Some clients will never understand this... the smart ones do and aren't as concerned about price as they are about your abilities.
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by:n4th4nr1ch
I am definitely not trying to challenge this article, I was just pointing out that tax deductions are a very important thing to factor into any budgeting if you are trying to figure out the actual break even point. Nowadays I only charge per-project and therefore avoid a lot of the details of this stuff, but I support myself already from my full time job, which makes things even easier because essentially there's no cost to doing freelance other than lost personal time. But now I can technically write off portions of my home, electric bill, internet bill, etc, if I can prove it was used only for freelance purposes.
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by:Lee W, MVP
I'm not opposed to a challenge.  And while I think you make good points -- that some of your otherwise everyday expenses may become deductible if you work from home, but the effort above was designed to illustrate things assuming that, for the most part, everything was separate.  Such expenses, in my opinion, shouldn't have a significant impact on your bottom line.  I know what my related expenses were and together, they made about $300 worth of deductions.  In the grand scheme, that's not going to reduce the effective rate you need to charge by much.

I may seem argumentative, but I do want to sincerely thank you for posting your comments - while (as I understand them) I was somewhat intentionally leaving those details out of the article, they are absolutely worth mentioning, just in my opinion, GENERALLY not a significant impact on the bottom line rate.
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by:n4th4nr1ch
I find the $300 very odd: my wife is 1099 and writes off everything which she has to spend for work. That would mean with your diagram even the phone bill alone would be a $900 write off.
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by:Lee W, MVP
What she does LEGALLY and not would be the question.  If the phone is also used for personal use then it's not 100% deductible.  You can take a reasonable amount as a deduction, but not the whole thing when you're also calling your parents and checking on movie showtimes and the like.  I deduct a PORTION of my phone bill because I use it for both.  NOT the whole thing.  Now if I got a separate phone for business, then I could deduct the whole thing.  And the article assumes that you do, in fact, get a second phone for business.
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by:Radek Baranowski
great article!
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by:odroubi
Thanks for the article. Nice break down. I think a rev2 should include relative taxes only because small businesses in america get taxed so hard.  when I am on a great project I can get the 35 to 45hrs a week-but doing maintenance and on other projects the average weekly billing can average 8 to 25hrs of billable time-and some of that is after hours and weekend. I find that even with remote-only clients that I had charged $80/hr- I would need 30+ hrs a week to break even. the nominal rate for bigger consulting houses on the west coast range from $115 to $225. My Microsoft Infrastructure and Messaging practice and experience puts me right in the middle- where the big boys will bill $150 to $200--but I bill $125 to $150 on average. I make it clear to my clients that when they say they have a guy who can do the work for $60 or $75 an hour- I ask them to check insurance (and I have both E & O and general liability) and I also state the fact that most of these lower charging techs are between jobs and really looking for a full time-and they wont be around in 6 months. That is usually the case but I do know a few guys who can charge that little and just have their clients sign them out of all liability so they dont pay for insurance (but would that hold up in court?-doubt it). On a closing thought- maybe NY is expensive because you work on a lot of financial systems-but your E & O for 6k sounds really high. Try www.techinsurance.com out of texas. they have done well by me and really specialize in IT. I hate to drop names but I have very happy with them. Thanks for the great article. My total insurance for General liability and E & O for 1mil each with a 2.5 mil cap is about $3,500 a year total.
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by:John Kawakami
Great article and a great thread.  I went out on my own a while back, failed and learned a lot.  Might do it again, but this time around I would definitely aim toward being on retainer, or having service contracts, and possibly also doing equipment leases.  Break/fix can't work in IT - it's just too difficult and risky.

It's not like plumbing, AC, or electrical work.  In these fields, tech and building codes change by the decade.  In IT things change yearly.

It's more like accounting or law, where the laws change annually.  Indeed, IT is overlapping with law more and more.  

Product innovations change the entire cost/benefit ratio -- look at what's happened to backup over the past decade: we went from tapes to disks, now to cloud storage.  That, in turn, affects the value of the internet connection.  So as a vendor, you always have to be moving clients from one platform to another, better platform, and changing their infrastructure every few years.
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by:Lee W, MVP
For those who haven't read it or aren't aware I have another article related to the subject of consulting, you might want to check out:
Becoming a Small Business IT Consultant: Choosing a Business Model
http://www.experts-exchange.com/ITPro/Consulting/A_6633-Becoming-A-Small-Business-IT-Consultant-Choosing-a-Business-Model.html
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by:Andrew Davis
Great article Lee.
I read this back when you first posted it, and just got back and had another look.

Reading the comments regarding Tax, I must agree with you that for the sake of this discussion you are best of leaving Tax out of the equation. The fact is that EE is a comunity of experts from all corners of the world (I am in Australia), so trying to include Tax is futile as everyones position will be different. Personally i have no idea what a 1099 is but figure its some kind of tax declaration. The important thing i got from that was that "deduction" was mentioned a Lot. What are you deducting your expences from??? i assume it is your Tax that you must pay. But if you make no profit, then there is no Tax. Unless you are deducting it from monies earnt in another job, in which case everyones situation will be different.

Bottom line is leave Tax deductions out of the conversation, and the worst that can happen is you end up making a bit more money than you thought. Certainly if you end up making serious money then you will pay an accountant to examine and advise you on your tax, But any break that you may or may not get when tax time comes should never be factored in prior budgeting.

Just my 2cents (Non Deductible) worth ;)

Cheers
Andrew
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by:mbizup
Lee,

Great article!
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by:Felicia King
I have been an IT consultant for 19 years. I agree that you have to leave tax deductibility out of the conversation. We have to pay both the employer and the employee side of payroll taxes. We take all the risk and nothing is guaranteed. And we have to hustle hard and work exceptionally long hours to make similar money to our cohorts that are employed in fat-cat corporate jobs where they get paid whether they are on vacation or not, and whether or not they perform.

I am personally getting taxed at a 51% total tax rate when you consider state, local, and sales taxes. We have to pay for our own equipment and comes directly out of our profit margin. Corporate employees get all their equipment paid for.

If someone is not willing to pay your rate, then move on. They don't respect you or the services you provide, or your expertise.
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by:derek7467
Very nice writeup.  I currently do side work as a consultant.  I did get into that help with one thing leads into much more.  I started with a favor for configuring MS Outlook w a Pop3 GMAIL account to installing a surveillance system.

Im at the point at handing the lady a bill and seeing how she reacts.  But, now when family asks me to do favors for their friends, i say no unless they are ready to pay my rate.

End of the day, im not gonna spend hrs and time away from my family to do a favor; no matter how small it turns into something big!
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by:123dne251
This is not only true for IT consultants, it is a great guide for many other types of consulting work! Thank you for the reminders!!
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by:systemsgo
Very helpful article. Thank you. Yes++;
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by:PaulMiddaugh
Pertinent tips and helpful information to assist formulating consultant pricing,
Thanks for your time in putting it together.

Got a yes vote from me.
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by:toroblanco2002
Excellent! thank you for your time and advise on this topic.
This is an A+++ article.  


Best regards
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by:KRUNAL TAILOR
Nice Article.

Thanks to share this Lee.
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by:Davy Paridaens
Nice article, every IT professional should be aware of this :)
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by:Duy Pham
Thanks Lee for your nice article. This does help me a lot when deciding to start IT consulting business.
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by:Greg Besso
Really good article pointing out the true costs of anyone even showing up at the table willing to work as a consultant. Really it points out to anyone NOT already charging a high enough rate of the impact it will have on their ability to sustain that chosen profession.
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by:Ben Personick (Previously QCubed)
LeeW  I think the format and information structure of the article should be updated, and there should be a section directly speaking about Food/(Mortgage/Rent)/clothing etc. misc expenses you need to account for as part of your family of 4.  I see from skimming you sort of cover this when you say if you look at a salaried employee blah blah blah.

Also, there is the additional FICA Tax burdens others have brought up, which while specific to the US, should definitely be in a section near the end saying if you live int he US add X just for those additional taxes, and if you live in other countries check into your local tax laws.

When considering new positions, I have to judge between salaried and contract work, and I generally take goss salary of a full-time position of comparable level and multiply it by 1.6 then divide by 2000 to get a rough estimate of one verses the other.

I think if you are working solely consultancy this is a fair guideline to use as a rule of thumb on whether a project is near the correct value for your time (so long as you can appropriately estimate the salary you should be billing at.)
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by:Lee W, MVP
Ben,

While I don't argue the article could use an update (and I do hope to at some point sooner than later), I would disagree with some of your points.  For example, Food, Clothing, Housing, those are all PERSONAL expenses and not business expenses.  As a full time consultant you are, in essence, a business, not family.  The calculations I present represent business expenses only.  Your salary, which I mention, is what would cover your food, clothing, housing - this is the same thing you would get if you worked for a more traditional employer.  

While the article was written while focused on the United States (and more recent posts and writing efforts try to take a more global view) the basic idea is the same.  I don't know how folks get paid in other countries, but I assume there are payroll deductions of a sort.  At the end of the day, the point of the article is to do the math.  The math for one locale may differ greatly from another... charging $175 per hour may be appropriate New York City's Manhattan or (roughly equivalent) Singapore, while in Walla Walla, Washington (or Monsaraz, Portugal), maybe only $75 per hour (or even less) is necessary or even warranted by a likewise skilled and experienced consultant.

Further, this article is meant for the IT Consultant who charges by the hour, not the MSP with a contracted, flat paying, monthly client base or the contract worker who works 40 hour weeks for one company on a project for 3-6 months and then leaves because the contract is up.
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by:Ben Personick (Previously QCubed)
In case there was some confusion from my first comment, I thought you did a great job creating a good article, and I wanted to mention that up front in this comment.

that said.

Food, Clothing, Housing are requirements to live and work within your chosen area of consulting.

Ignoring that you must provide for yourself to live and eat and meet other basic needs, is to ignore your own humanity.

  I am not saying they are 100% business requirements but I think that the article should explain how to properly factor them in "find your need" in X.

People need to take into account all of the requirements to actually live not just to work, otherwise they are not charging a rate which values their humanity, they are treating themselves as a machine without basic human needs.

Likewise, they should have some instruction on how to put away money for a 401K and how to factor that into their asking price.
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by:Lee W, MVP
I think you're misunderstanding the point of the article... or perhaps I'm still misunderstanding you.

If you work for Microsoft as an employee, you are not a consultant.  Microsoft does not consider your meals, your clothes, for rent/mortgage, to be expenses to Microsoft.  Your SALARY *IS* an expense to Microsoft.  You are expected to use that salary to cover your meals, your clothes, your rent/mortgage.  

Likewise, in my example above, I say you should allocate a salary to yourself - decide what that should be.  $40,000?  $100,000?  $250,000?  $75,000?  Whatever you decide, you decide.  That's where your food/clothes/rent/mortgage should be accounted for.

The only possible exception for this is if you are working for a company as a consultant where that company explicitly requires you to travel.  In which case, those are actually travel expenses.  They should be accounted for.  The article covers many things explicitly, but is intended to cover several things implicitly.  Things that may be required for your particular circumstance but not necessarily everyone.  The moral of the article, so-to-speak, is add up your expenses and your desired salary and then divide by a number of reasonable hours you expect to work.  The result is your hourly rate.
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by:Ben Personick (Previously QCubed)
The definition of salary is just a flat compensation for work performed.

  I take it you are considering salary to mean these costs and all the other costs I haven't mentioned here that you need to live etc.?

   It isn't clearly stated that it is how you intend to define salary as it comes up in a paragraph where you say to give yourself a salary.

  I contend you should draw more attention to the fact that you need to generate that number based off your other needs and desires (food, rent, clothing, daycare, planning for retirement, planning for college, etc), you aren't explaining the other cost factors which go into planning for that salary number.

  A surprisingly large number of people do not properly account for those things and come up with hourly rates which are not a service to themselves or others.

  This is just my perspective on how you could address more details in the article, as I've said it's a good article on the whole, but my perspective is a little different from yours and I think the article would be helpful for a broader audience if you are inclined to entertain the notion.
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by:Lee W, MVP
I may not be inclined to take your advice, but I thank you for offering - the discussion alone can be beneficial to those who choose to read through the comments.
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