Wednesday, October 11, 2006

How much should you charge as a consultant?

A post on the JoelOnSoftware Business forum wonders what one should charge as a consultant, and whether dividing required income by 1000 is a good way to set an hourly charge.

Typically, as an employee, you would make some money as salary and some as benefits. Benefits include employer payments into your retirment or pension plans, medical insurance, gratuity etc. Usually this is around 25-30% of your base salary. So if you made Rs. 10,00,000 (10 lakhs) a year, what do you need to charge if you become a consultant? (In India, most consultants would charge by the day or the month so I'll stick with that charge)

What's different between an employee and a consulant? Lower benefits, yes. So you've gotta make that up somehow - 25-30% of base must be added to the amount you should make.

But we haven't considered taxes. If you are an employee you get a few deductions for housing and that's it. For a consultant, you can expense out a lot more - the depreciation on your car, the cost of fuel to get to work, what it costs to run your website etc. The savings in India can be 20%! My auditor has told me that the tax department expects that at least 40% of your consulting revenues will be profit - meaning you can expense more than half of your income - of course, only using legal means. If you can expense out 50% of your income, you would pay tax on only the remaining 50%, which at today's rates would be 15% of your total revenues.

Let's say that as an employee you make Rs. 700,000 post tax (on Rs. 10 Lakhs) and another Rs. 200,000 in benefits. So what you need to make post tax now, is Rs. 900,000. Depending on how much you are allowed to expense that you otherwise spend anyhow (such as your web site, commute cost, internet charge etc.) you can figure out what you really need to make pre-tax: For the above figures, Rs. 10.6 lakhs if you were able to expense 50% of your revenues.

With regards to an hourly calculation : 1000 hours is perhaps ok. If you worked half of the available 50 weeks a year, you'd make 25x40=1000 hours a year.

A daily charge can be arrived at using the same kind of formula: 50 workable weeks of five days each gives you 250 days. Divide this by two for a reasonable buffer. In my example, you would charge Rs. 8,480 per day.

Multiplied the daily cost by 20 for the month's charge.

For a two-four week gig, this pricing should be fine since it's going to take you as much time to find another contract. But if you need to pitch for a contract that lasts 9 months, you might think of reducing your price for it's now more than a half years work (which is what you have considered in your pricing)

Of course, in the end, it's all about how much your customer will pay :)

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