Starting a consultancy business: 3. Pricing and terms of business

In this series, Calvert Markham, former Director of the Centre, provides basic guidance on starting and running a consultancy business. Previous articles have covered defining your consultancy service and how to cost it. Now we turn to commercial aspects – how much to charge and the terms on which you do business.

In many ways the process of selling management consultancy is the process of product design: shaping a proposition to meet the needs of a prospective client. Determining the work to be done will be the subject of a later article, but in this one we will assume that the scope of work has been agreed and that you now need to work out how much to charge and the terms of business under which you will be performing the contract. As ever, we will assume that you are working as a sole practitioner – just you in the business.

Your offer to the client will be embodied in a written proposal and in preparing this you should have defined a work breakdown structure and estimated how much time you will need to carry out each work package. Where there is some uncertainty you may like to estimate a range; or if the later stages of a project depend on findings of earlier stages, then breaking it into phases acknowledging the imprecision of estimates for later phases can be helpful.

So, you can start with estimating the cost of a project: number of days required times your daily fee rate. If there are expenses you are going to incur – for example, travel – then you will need to add these. Remember that the client hiring you will need to have budgeted for consulting support and so needs to have a clear idea of how much it will cost; asking for more once the project has started without good reason creates difficulties for both client and consultant.

So very simply you can price the project at this estimate of cost. But will the client pay this?

Imagine that you plan to have the outside of your house painted and ask for quotes from 4 firms of painters and decorators. The quotes come in at £2,500, £5,000, £5,500 and £8,000. Which will you choose?

The quotes of £2,500 and £8,000 seem to be outliers, and you might question why they are different from the others. Are they quoting for the same job or is what they are offering to do different? If they are quoting for the same job then, for example, how is it that a firm can do it for £2,500 while another one estimates it as £5,000? Will the cheaper one skimp on quality?

This illustrates the pitfall of under-pricing. Again, if the last time you had your house painted the cost was £4,500, you would expect a price around this – or a little higher to allow for inflation. It is therefore useful to know what budget a client has in mind. (Or it may be that if they are conducting exploratory discussions the client doesn’t know quite how much to budget for consultancy support, and, as a result, is looking to you for guidance.)

There are circumstances when you may want to price a proposal above or below the cost. In the former case, this is when the value of what you are contributing is very considerable – for example, in facilitating a strategic merger, or if you are offering results-based fees. (Results-based fees should be offered with extreme caution; there is the risk that short-term performance can be improved at the expense of long-term outcomes).

If price is a barrier, you may want to reduce your price in those cases when the project provides access to a sector or area of work in which you want to create credentials.

By contrast with price, terms of business are those contractual elements that are going to be much the same for all contracts and, for this reason, it is worth developing a standard set. They might include payment terms, intellectual property rights, cancellation and termination terms. As consulting projects are in effect joint ventures between consultant and client, it is worth noting that any undertakings depend also on the efforts of the client. (It may be useful to search for terms of business on the internet to see what other consulting practices include).

Clients may also have terms of engagement for consultants. Read these carefully as sometimes they will be aimed at different types of work than yours; for example, when I first came across these, they were written for IT programme developers.

 

For more on this and other related topics, see Calvert’s book Mastering Management Consultancy