Consultant Hourly Rates: How to Charge What You're Worth

New to independent consulting, freelancing, or contract work? Learn to set your rate like a pro. Factor in what employers do when budgeting for personnel. Your rate should reflect the overhead you take on and the risks and responsibilities that shift from the employer to the contractor.
Written by
Kim Le
Published on
February 3, 2024
“You’ll never get rich consulting,” said a former colleague.

This is a common fear that most freelancers, gig workers, and independent consultants face when they ditch the 9-to-5 to go solo. It’s also a common misconception echoed in society.

Successful independent consultants don’t discuss their rates in public. Their rates are negotiated behind closed doors much like most big sales contracts. They don’t always have set rates, and even if they do, they can always change their rates. For example, between the beginning of my first year to the end of my second year consulting I increased my hourly rate by 50%. As a contractor, I can re-negotiate my rate with a client on an ongoing basis. This might seem unfair at first, but the client can always terminate the contract without reason and without paying severance, unlike with employees. What this means though is that contractors have more control over their rates than employees do over their salaries.

Consultant Hourly Rate and Retainer Ranges

As the person typically responsible for either paying the bills, tracking the bills, or approving the bills, I’ve had the privilege of knowing how much moderately successful consultants get paid. I callout moderately successful, because highly successful consultants end up turning their solo practice into a company. In broad strokes, consultants’ rates usually come in the following ranges:

  • Typical mid-level talent doing individual contributor work charge roughly $100 to $200 per hour, with variation based on the function they’re serving, ie higher rates for engineering and lower rates for marketing
  • Most sophisticated consultants land six-figure contracts or five figure monthly retainers for strategic advisory and/or project based work. These get the most flack from finance teams since it’s uncertain the ROI is any good.
  • White collar professionals who are subject matter experts in specific niches can command $500 to $1000 hourly rates such as lawyers, tax accountants, professors, etc.
  • Offshore contractors in entry or low level work can be as low as $7 to $15 per hour for admin or data entry work and up to $30 to $50 per hour for more basic engineering tasks like QA or website design

The rates here span engineering, marketing, product management, sales, business operations, and similar functions serving small to mid-sized companies in the software space. Additionally, these rates are tied to high cost of living, urban cities such as NYC and SF. Outside of tech and outside of urban cities, the rate should take a 10 to 30% rate reduction.

These are general guidelines to provide a frame of reference. However, what any individual consultant can charge boils down to how well they present their value, set their rates, and deliver on work.

It’s Not Negotiation, It’s Pricing

A former colleague and VP of Sales once told me I should never go into sales, because I would suck at it. I’m not naturally competitive with others, and I usually am too much of my own harsh critic, which means I typically lowball myself. That’s why when I went into independent consulting I typically didn’t negotiate my rates. My rates were often take it or leave it.

This approach on first blush defies conventional wisdom, and seems outright stupid. However, there are three reasons that this approach can work well:

  • Sales Velocity
    What I’ve learned from working with sales team is that sales velocity is the key in landing multiple, successive deals. Getting stuck on pricing also likely means that I’ll lose not just this deal but maybe the next. The extended negotiation time eats into time I can spend on other deals or actively billing hours. If I can quickly win or lose a deal, then I can quickly move onto my next deal and spend more time making money.
  • Be Willing to Walk Away
    Whether it’s a real estate bid or a sales contract , the individual with control is often the one willing to walk away. In the take it or leave it approach, I’m willing to walk away, which gives me the upper hand. It’s also pertinent to know when the other side cannot afford to walk away. Your greatest leverage in rate setting is how much the other side needs you.
  • The Price is Right
    The last and probably most critical part is setting the price “correctly”. I define “correct” here as pricing high enough that the client has to think about it, but just low enough that they “think” it’s a good deal. Whether or not something is a good deal is highly subjective. A $10,000 diamond ring can seem immensely valuable to one person and be just a piece of junk to someone else.

Consulting Rates and Agreements

As a new consultant, getting good at pricing is an incredibly important skillset. It means the difference between scraping by versus making a good living. However, most advice on rate setting is garbage.

Go Hourly

New consultants should focus on setting hourly rates, with potentially a first month’s retainer. All other pricing models are too complicated and requires more experience in order to do well. For example, when I first started out, I typically underestimated how many hours a particular task would take, but with 2-3 years of practice I can now either estimate within a small variation of the hours needed or know enough to say I can’t yet assess until I put in a few hours.

Why You Need a Retainer

Secondly, unlike wages, consultants are paid through the typical accounts payable workflow instead of through HR. Employees are paid usually twice a month on the 15th and the 30th of each month. The longest time between time worked to payment received is at most two weeks.

Contractors, on the other hand, bill in arrears. I bill for the month of January in February because I only know how many hours I worked in January after the month is over. Additionally, bills are often paid net 30, meaning the accounting department will pay your invoice from Jan 1st on Jan 31st, 30 days later. That’s if their payment department is efficient. It’s not uncommon for some AP departments to pay net 45 days on average when terms are typically net 30 due to inefficient approval workflows. Therefore, from the time you’ve put in your first hour to the time you’re paid can be up to 60 to 75 days later. Requesting an upfront retainer that is applied towards the first month’s work can help with managing cashflow as you start out.

Personally, I typically forgo retainers because of the complexity of administration, personal lack of a cash need, and the healthy cash positions of my clients. It’s a recommendation to protect yourself as a contractor, but not a requirement.

How to Determine Consulting Rates

For new consultants, the most common place to start when setting your hourly rate is to convert your annual salary to an hourly rate with one of the many conversion calculators that’s everywhere on the internet. This is appropriate if you’re going from an annual salaried to an hourly EMPLOYEE, but it’ll significantly underpay you as a consultant. Other recommendations take some sort of heuristic that isn’t particularly sound and not sufficiently defensible to get to a higher hourly rate.

In reality, there’s a very formulaic and logical way you can get to a healthy hourly rate. This method is based on how companies estimate costs associated with having employees, typically called “overhead”. Every year during year end, the finance department will be working to pull together next year’s budget, including all personnel related costs. In that budget, they’ll likely identify a rough multiplier to approximate all costs associated to personnel that are non-payroll. These costs range from employer taxes, health benefits, office rent and utilities, to employee perks; and are lumped into a broad category called “overhead”. Overhead for an employee can run anywhere from 50% to 250% of employees’ gross wages. This is just one component of the budgeting process, but we’ll utilize the concept of overhead in our methodology for setting hourly rates.

Annual Salary to Hourly Rate Formula

Here are the steps to finding your hourly rate from your annual salary:

  • Take your gross salary
    Start with an annualized gross salary, including bonuses and cash equivalent for any non-cash compensation such as options or equities
  • Estimate your health benefits 
    Estimate the full annual costs related to health benefits that you and your employer would pay. Here are two ways to find this:

    1. If you have a W-2, you would find this in Box 121
    2. If you separated from your company and received COBRA paperwork, it will tell you how much you need to pay to keep your insurance benefits.

    If you can't find it, you can use $25,000 as an estimate cost for an average family of four.
  • Estimate your working hours per week
    Estimate your number of working hours per week as 40 hours, what is typically considered full-time.
  • Estimate your paid time off
    Factor in your paid time off, company holidays, sick leave, etc. You can also estimate using ~35 days for white collar professions in medium to large corporations
  • Factor in your additional self-employment tax
    The self-employment tax rate is 15.3%, which covers federal social security and medicare taxes. If you were employed by a company, this would be similar to a payroll tax where the employer and employee share the cost at 7.65% each. As a consultant, you are responsible for the full cost, so you must add back in the 7.65% that the employer would have paid.
  • Use a health benefits multiplier
    It can cost 30% more to get health insurance on the open market than through an employer-sponsored plan
  • Account for unbillable time
    20-30% of working hours is spent on business administration, like invoicing, proposals, business development -- all of which is required to support your independent consulting business but not necessarily in the direct scope of your work with clients
  • Account for administrative overhead
    Add a multiplier for overhead, typically 50 to 100% of gross wages, for office space, equipment, tools you use, and the things an employer would usually pay for.
  • Calculate your hourly rate
    Finally, take the fully loaded wages with the estimated annual benefits and divide by the adjusted number of working hours

You can try out the calculation here on our calculator page. Refer to the examples outlined below for a comparison of utilizing this formula based approach versus the typical hourly conversion for three different salary levels.

A sample table showing hourly consulting rates based on annual salary
Source: le-herring.com/calculators

The pay difference is stark. The main thesis behind this approach is that costs typically covered by employers are now the consultant’s responsibilities. Note that employees are further protected by many HR policies and regulations in the workplace that independent consultants are not privy to, which are not quantified here. Independent contractors take on disproportionate levels of risk in comparison to their fully employed counterparts. Their rates should appropriately reflect these risks.

Betting on Yourself

However, with great risks can be great rewards. By taking on the employer’s risk, an independent consultant can price at much higher rates, and how profitable they are boils down to how well they manage their operations. Corporations suffer from layers of administration and management causing overhead costs to drag down the company’s margin and subsequently depressing employee pay. Small shops can operate leaner and faster, allowing them to thrive because of their small size. Whatever efficiency consultants can achieve becomes their take home pay. Essentially, the consultant is betting on themselves as opposed to betting on someone else.

To those who think you can’t get rich consulting, you should really think again.

Consulting Hourly Rate Calculator

We built a calculator! It's on our Etsy Shop where you can purchase it for $4.99. Convert your annual salary to an hourly rate as an independent contractor. Ensure you are getting the same take-home pay as you would if you were employed, by factoring in overhead, administrative work, benefits and more.

Consulting Rate Calculator Convert from Salary

Get the Consulting Hourly Rate Calculator here.

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Consulting Best Practices: The Do's and Dont's When Working with Clients

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