Why are consultants’ fees so high?

Hand holding moneyIndependent consultants typically don’t have the overhead of a larger firm, and while they are usually an excellent value by comparison, why do their rates still sound so high? Not only is this a question some clients may ponder, but those new to consulting often struggle with it, as well.

The truth is that big-money consultant may not be pocketing as much as you think. When setting rates, consultants must take the following into account:

1. Taxes

Virtually all countries have increased tax requirements for businesses. If based in the U.S., a self-employed business owner pays both the employer and employee portions of FICA (known by the misnomer, “SE tax”). So, rather than paying approximately 7.5% of earnings for Medicare and Social Security (as traditionally-employed workers do), an independent consultant pays the full 15%.

As a result, many U.S.-based consultants pay roughly 43% of every dollar earned (28% tax bracket + 15% social security) to the IRS (the tax rate is marginalized, so this figure is rounded up). While the ability to deduct business expenses from income softens the blow a bit, there is no doubt about it – being a business owner comes with increased tax responsibilities.

2. Unbillable Time

It’s important to realize that working 40+ hours a week is not the same as billing 40+ hours a week. Consultants don’t get paid for time spent bookkeeping, networking, marketing, and a variety of other non-billable activities that need handling when you run a business. Consulting fees must take this downtime into account.

3. Expenses

Everything from professional memberships to paperclips – a self-employed consultant buys it all. There’s no company credit card for covering travel expenses, conference fees, or computer repairs. All of these charges come directly off consultant’s bottom line, and have to be built into the overall rate.

4. Support costs

You may not see their names on the company roster, but self-employed consultants and business owners usually have an accountant, possibly a lawyer, and other support vendors (such as virtual assistants, tech support, etc.) on call. The cost of these services is absorbed by the consultant, and must be reflected in client fees.

A consultancy is a business – one that comes with many of the same responsibilities as larger agencies. We’re firm believers that the rewards (monetary and otherwise) of being a solo PR pro far outweigh the downsides. But if you’re a new independent consultant, don’t learn about the additional financial requirements the hard way – make sure your fees are sufficient to cover these items and still provide you with a sustainable living.

If you’re looking to hire an independent consultant, before you balk at their proposed fee, realize the majority of it isn’t going into their wallet. Please keep these additional burdens, which you may not have considered previously, in mind.

What’s been your experience? If you’re a solo PR pro, were there any expenses that surprised you when you started out?
[box type=”note”]Just released! Part Two of the “Show Me the Money” course on setting rates is now available to members of the Solo PR PRO Premium Member Site.[/box]

  • YES YES YES! I couldn’t have said it better myself. I’d also like to point out that if those that balk at these fees were to compare to the cost of hiring someone they might realize our rates are more reasonable than they thought. Go ahead, pay someone for the HOURS a consultant spends keeping up on the latest in their field, not just the hours they spend on your project, don’t forget about the cost of any medical benefits you provide them with, retirement plans, paid vacations, sick days and holidays plus the office space, equipment, unemployment taxes and so on. 

  • YES YES YES! I couldn’t have said it better myself. I’d also like to point out that if those that balk at these fees were to compare to the cost of hiring someone they might realize our rates are more reasonable than they thought. Go ahead, pay someone for the HOURS a consultant spends keeping up on the latest in their field, not just the hours they spend on your project, don’t forget about the cost of any medical benefits you provide them with, retirement plans, paid vacations, sick days and holidays plus the office space, equipment, unemployment taxes and so on. 

  • Gsideman

    Great information. Many of the people who balk at our fees don’t realize the value they receive when they work with an independent, compared to an agency, the latter which typically bills by the quarter-hour for thousands more dollars each month. With us, there’s little to no chance their account will be handed to an account executive after meeting and feeling confident with a company owner. I employ interns from time-to-time to help create media lists and such, but interaction will always be with me. 

  • Excellent point about the benefits trade off, Debbie! An employer pays far more than salary for its employees, and hiring a consultant is usually more cost effective in the long run. 

  • You’re right — I think many of our biggest fans are companies who’ve had the old agency bait-and-switch pulled on them. Access to senior level counsel is a key reason to work with independent consultants. If there is a team of subcontractors put in place, it’s with each individual client need in mind. Thanks for weighing in!

  • Anonymous

    I loved this post, but I also think rattling off taxes, overhead and such is defensive.

    I ask prospects what they think their PR/marketing problem is costing them. And if they don’t know, we work through it so they *do* know, or at least have a ballpark on the number. Really great clients have well-defined problems that are causing them pain — there are few better ways to define the problem than to assign a big, fat dollar value to it.

    Then they stop worrying about rates.

  • Love the post. Don’t forget the thousands of dollars on the things that allow us to do our job. Everything from media databases to press clip services are absorbed by the consultant. This could easily amount to several thousands of dollars each year. Every now and then you can bill this back to the client, but I’m finding that these clients are getting harder to come by.

    John Sternal
    @sternalpr:twitter

  • I’m planning in implementing some Skype and Google+ video consultation this year. Almost everyone has access to the technology and for those watching costs – it is less expensive.

  • I need to take into account my preparation and follow-up, also my drive time as two hours on the road means two hours not working for other wages. Consultation on the phone is less $.

  • Very true, John. Some clients want a set price that includes everything, and as a result the fees must reflect that. Thanks for stopping by!

  • Agree with you 100%, Greg — we shouldn’t be leading with this information. Benefits/value statements are the way to get the green light to bigger projects, which you do a great job of reminding us!

    Just putting this information out there for new consultants who haven’t yet learned it the hard way (trying to save them some pain), and also for prospective clients who are trying to understand our rates better. Sometimes the internal point person for a solo PR pro can be resentful when they see a large invoice come across their desk — it can be reassuring for them to realize we aren’t making off like bandits!

  • Preparation, research and program development should always be included in client fees, as you say Jason. You also raise a great point about travel time – it should always be taken into account when negotiating fees with the client.

  • susan hart

    Great and timely post!  I almost would retitle it “Why aren’t consultants fees higher?”.  Good stuff!

  • susan hart

    And another thing: any “fee” attached to my institutional knowledge, professional in-the-trenches expertise, reliable contacts and tried-and-true experience is priceless.

  • Kate Robins

    Nice points, Greg. Can you expand on working up the ballpark number?

  • I think I own royalties on the “work/billable hour difference.” Now add in all the social marketing, reputation management, online presence and engagement – we do a lot of work that’s not billable. I still am a great value vs a large agency, but it does not mean that all the same work and expenses come cheap. Then there is also worth and value, qualitative, beyond the time. You are preaching to the choir w/ me.. and remind me to stick strong in negotiations. FWIW.

  • I like the way you think, Susan!

  • Stay strong, Davina — you’re worth every penny!

  • Meisha Young

    I am experiencing clients that feel as if PR Professionals should work for free first to prove that they have the goods, and then they will consider signing on the dotted line. Impossible!

  • Hi Meisha- this is a huge red flag. There are some unscrupulous people in the world, and those asking professionals to work without compensation are among them. Good for you for not falling for it!