Consultants: Best way to raise rates?

In My Humble Opinion
1

I have a friend who has a small business. She has grown the business such that she now has to turn away customers. The problem is, she isn’t charging enough to make the business viable and has to supplement her business by tending bar and other odd jobs.

I maintain that when you are turning away business, now is the time to raise the rate.

I also maintain that a short letter to the customers is the best way to do this.

Dear Customer,

I due to the rising cost of doing business I am forced to raise my rates to XXX dollars per hours. This rate will become effective on April 1st.

Sincerely,
YYYYY

I maintain that she should keep it short, should not apologize and should start at the beginning of the next quarter.

Your advice would be valued too. How would you word it?

Thanks!

2

Why not raise the raise the rate very high for new customers, and tell them it’s because she’s so busy. When a new client agrees, drop one of the old rate customers, and tell them it’s because she’s so busy.

If they inquire about what they would need to do to keep her services, quote them the new rate.

3

And this would be the, “Passive Aggressive,” business model and strategy?

4

I was going to suggest a sprinkle of gray in the sideburns but I noticed your friend is a “she”. So I’m thinking… New boobs?!

What?..

5

Actually, she has great boobs, so … no.

6

A brief letter such as the one you describe is fine, with maybe an extra phone call to clients with she has a longer history and/or does lots of work for, as a courtesy.

Before she announces a rate increase, though, she really needs to take a good look at her financials because she may be drastically undercharging for her hours. For example, has she ever had an accountant calculate her overhead rate? At my former employer, we used a FAR overhead rate as a bare minimum (usually the max rate that gov’t agencies would accept), with private clients being charged some 25% above the FAR rate. We also calculated profit as a separate percentage. So a person’s “loaded hourly rate” would include base salary for the job, plus overhead, plus a 15% net fee (our profit) on top of that.

If she has only been charging clients for her salary and nothing else, they may have sticker shock once she adds in overhead and net fee (although it’s quite likely they’ve known all along that they were paying less than they would be elsewhere, and shouldn’t grumble too much at the increase). If she’s worried about losing existing clients, then she should get her accountant’s help in calculating a new loaded rate and then trying it out on potential new customers. If they don’t bat an eye, she should look to raising her rates with existing clients pretty soon (I’d suggest June 1).

Apologies if she already has all this sussed out, but she sounds a lot like my former employer, who toiled for years out of his kitchen at barely subsistence level because none of his clients would let on that he was severely undervaluing his time. Trust me, the business will not go away as long as she doesn’t suddenly charge twice the going loaded rate in her region.

7

What’s so passive aggressive about it?

8

Those are some great ideas sunfish. I’m fearful that they may fall on deaf ears, but I’ll pass them along.

Do you know where I can find the FAR rates? BTW, she is a translator of business documents.

9

I am a consultant but not that kind. What does she charge now? Independet consultants usually charge a hefty fee and it is unlikely one would ever need odd jobs on the side if they are booked solid unless the rate is very low.

10

You won’t find overhead rates themselves posted anywhere, khadaji; your friend’s accountant will have to calculate what her particular rate should be, based on her past expenses. Because expenses can change over time, a new overhead rate should be calculated on an annual basis. (The FAR rate I mentioned before refers to the Federal Acquisition Regulation System, and is just one method of calculating overhead rates. It’s not something I would ever attempt to do for myself!)

She really does need to work with an accountant to determine her true cost of doing business, which is what the overhead rate is supposed to cover. Any expense that can’t be charged to a particular project goes into determining overhead (sometimes called indirect costs), and she may be surprised to discover what gets included in here. Some things that I can recall off the top of my head are: [ul]
[li] office supplies[/li][li] depreciation for computers and other office equipment[/li][li] software purchases/upgrades[/li][li] postage/courier fees, if not billed as a direct cost for a given project[/li][li] communications charges (e.g., work-related phone calls)[/li][li] if she works from home, the appropriate percentage of her home rent/mortgage/utilities based upon the square footage devoted solely to her business[/li][li] health insurance for herself [/li][li] professional liability insurance (to protect her in the event of an error that leads to a client suing her)[/li][li] the cost of her time tending to administrative tasks like bookkeeping, if she does her own (this would likely be charged at a lower hourly rate; salary.com gives good regional salary estimates for this sort of thing)[/li][li] the cost of her accountant, her lawyer, or any other professional fees (e.g., web design) she might incur in the course of doing her business[/ul][/li]
There may well be other things, which is why I think she should not attempt to determine an overhead rate on her own. It sounds like her overhead rate might not be that high compared to my former employer, for example, where we had more equipment write-offs and such, but she really shouldn’t be assuming expenses that should rightfully be passed on to her client.

Also, it just occurred to me that she shouldn’t skip “fringe benefits” for herself, i.e., she should give herself vacation pay, sick time, personal time. Fringe may or may not include her health insurance; if it does, health insurance isn’t included in overhead. A common percentage tacked onto hourly wages for fringe benefits is about 30%.

So let’s see an illustration of what proper loaded rates can do for you. Assume an hourly rate of $30.00, fringe at 30%, an overhead rate of 130%, and a net fee of 15%. She gets a job that takes her 10 hours to complete. With the fully loaded rate, her bill to the client becomes:

10 hours x $30.00/hr = $300

  • $90 (30% fringe) = $390
  • $507 (130% overhead) = $897
  • $134.55 (net fee on wage+fringe+overhead) = $1,031.55 in total

If she is only charging an hourly rate, and nothing else, we get:

10 hours x $30.00/hr = $300

  • $390 (overhead on her hourly rate only) = - $90 at a minimum (because her actual overhead compared to hourly rate only is going to be a higher percentage)

I’ll bet the latter example explains why your friend has to supplement her income with other jobs. Please show her these numbers and encourage her to get things done right for herself, because as a self-employed person, no one else will do it for her!

If any of her existing clients refuse to accept the rate increase, then you know what? There will be other clients who are more than willing to pay, especially if she does good work. The difference in her income alone will make up for anyone she loses in the short term. Good luck to her!

11

Thanks for the amazingly detailed reply sunfish. I’m (only) vaguely familiar with the FAR (although for some reason I thought it was *Financial *acquisition regulations) as I used to program text retrieval software for the FAR and the DFAR. I was hoping that they had a schedule of rates posted somewhere for certain services.

I am firmly trying to get her to change the way that she does business, but she has been a tough sell. She just doesn’t seem experienced in the *business *aspect of doing business. I believe that she is afraid that it will be too complicated for her. In the end, I suppose I will have to allow her to make her own mistakes, as we all do in life.

But I do appreciate the time you spent replying. Thank you.

12

You’re very welcome, khadaji. I think where you’d see FAR overhead rates specified online, they are probably for state or federal agencies that set a cap on the overhead you’re allowed to charge. (For example, IIRC PennDOT required a FAR overhead rate to be calculated for contractors, but then set a max permissible rate of 115%.) In all cases these capped rates would be lower than what your friend could charge to the private sector, so I wouldn’t use them in lieu of a rate calculated from her own business costs.

Oh boy, she really sounds like my former employer now, and that is not a good thing!

If she loves what she does, wants to make a living at it working solo, and does not want to run afoul of her state tax dept and the IRS, she does need to learn the ropes of running a business. Most of the day to day stuff is really not that hard, and the more complicated matters should be referred to professionals, anyway. Maybe she could look into hiring a bookkeeper/admin assistant for a few hours a week to help keep the business end of her business rolling along, with quarterly check-ins with her accountant. (She’s got to make sure she stays current with income and sales taxes anyway, and the accountant can make sure of that.)

I’m saying all this because unfortunately, I’ve had a bird’s-eye view of what happens when you don’t do these things, and it ain’t pretty. If any advice I can offer helps spare someone else the pain, so much the better. :slight_smile:

13

Unfortunately, I am far too intimate with the problems of not running a business properly. I used to be a software consultant. I made great money at it, but I was never too keen on being a bookkeeper. The government liked to remind me regularly that they frown on this. :slight_smile:

But this is why I am gently trying to guide her. It truly isn’t my business, so I cannot push too hard, but I am trying to give her gentle pushes in the right direction.