For What It's Worth

By Paul Thomas
Excerpted from the September 1991 issue of Planning.

"Low fees lead to poor service," writes Howard Shenson in his 1990 book, The Contract and Fee-Setting Guide for Consultants and Professionals. Shenson, a California business consultant, adds, "A realistic fee announces that you are going to deliver quality service for dollars spent."

Theoretically, fee setting should be simple. First, you figure out your labor rates, then add overhead costs, and finally tack on a profit. But variables abound.

What are you worth?

Shenson suggests that self-employed consultants establish their daily labor rate by first estimating their annual worth, say $50,000, and then dividing that figure by the number of working days in a year, perhaps 250 (for a daily rate of $200). In many cases, though, the ultimate fee is determined by a combination of the consultant's financial need and what the market will bear.

Thomas Roberts, of Atlanta, uses a list of 10 factors to help him set fees. He and others charge more for jobs that require special skills--for serving as an expert witness, for example.

Paul Sedway, of San Francisco, doesn't agree with value billing, however. If you're simply going to charge what you can get away with, he says, "then there's no value to your services."

Go forth and multiply

The overhead multiplier--the figure used to estimate expenses beyond the consultant's compensation--is usually dominated by a few main expenditures: administrative and marketing costs, salaries, employee benefits, office rent, insurance, and interest and taxes.

A firm's profit may be tacked onto the overhead multiplier, but at some point it must be figured separately. Shenson calls profit "the reward for the risk of being in business," a factor that should never be overlooked. On the client's bill, profit is typically lumped together with overhead and labor fees and presented as a single hourly rate.

For firms quoting a range of prices, the lowest ones are inevitably those charged to public agencies. "They're always good for the money," explains Roberts.

A personal checklist

Here are the questions Tom Roberts asks himself when deciding whether to take a job and how much to charge:

1. How much do I like the cause?
   Does the work have important social value, or is it just "making a living"?
2. How busy am I?
   Will I have to work overtime to get the job done?
3. How stressful is the work?
   Being an expert witness can be very difficult, so I charge more.
4. Is the client public or private?
   Public agencies get a 10 percent discount.
5. How much do I like the task?
   Some jobs are more stimulating than others.
6. How much do I like the people?
   Some people are fun to work with; others are a pain.
7. How much do I like the condition?
   Florida is nice in January.
8. Does the job have advertising value?
   Will it lead to future work?
9. How much do the clients think the job is worth?
   What do they need, what can they afford, and do they equate price with credibility and prestige?
10. Will I get paid?
    What are the chances that the client will argue about the bill, won't pay on time, or won't pay at all?