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.
Author:Lee W, MVP
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