Five Types of Consulting Compensation and Fees
When I found my way into the consulting field, I was green. Much of what I brought to the table was learned from a very different perspective, and things like figuring how to structure fees were a bit of a learning curve. While your compensation structure as a consultant is uniquely up to you, it didn’t take long, however, to observe the norms that are already established. I found there were five main ways for consultant fees to be set up. Understanding these is important for recruiters and HR professionals who have just started or are considering becoming a consultant in whatever field they choose.
#1 – Fee Based Consulting
With fee based services there can be a lot of freedom. Payment is based on project completion, not the number of hours you or your team work. The potential exists for really great money to be made here if you are good at estimating completion times. It’s also good for the client, since they know up front exactly what to expect.
The risk, especially in the beginning, is underestimating your time, which can lead to disappointment and lower pay for your time. Keeping track of your time on early projects can help you develop a framework for how long things take. Experiment a little, it shouldn’t take long to find your balance.
#2 – Consulting Retainers
Consulting retainers are paid monthly and set a minimum amount you will be paid from that client. It allows them to have guaranteed access to your services, since you will set aside enough time to engage projects from that client. Typically there will be a maximum number of hours, and perhaps set services you provide every month.
Projects or services that exceed your maximum limit are then billed at an agreed upon hourly rate for overages. Consulting on retainer is one way to build steady, recurring income. It’s good to have a balance though, since there is no guarantee retainer clients will renew when your contract is up.
#3 – Hourly Consulting
This one is mainly used in conjunction with a retainer for overages. It can also be set up as its own contract with a set number of hours per month, or specific tasks to be completed each month at the hourly rate.
Having a set hourly rate “range” is a good idea. For regular clients, one rate might be acceptable, while a single project for an unknown client may require a slightly different rate. Also, not all projects are equal and if you do some specialty work, you may be able to charge more for hours that require more specific expertise.
#4 – Hybrid Model
My consulting business is very different from my husband’s, who works on projects that typically have an hourly rate. My consulting typically falls under fee based consulting, a retainer, or a hybrid model. Since I often advise startups in the human resources and recruiting industries, I often take on a fee based consulting in addition to equity and in some cases I’ve also taken on a fee plus commission. It just depends on your comfort level, the consulting job as well as the industry.
#5 – Sponsorship Fee
One of my favorite consultant fee models comes in the form of sponsorship. Maybe as a speaker and consultant who travels, service providers or vendors want to take advantage of your visibility which you can by charging a flat sponsorship fee. While I call it the sponsorship fee model, I think of it as the Nascar Fee Model. Companies compensate Nascar drivers by sponsoring them. The drivers have to be seen with the sponsor logo during the race, promotion and when they are out and about. This is a great way for vendors and service providers to benefit from your visibility while still doing your regular work and HR consulting.
What consulting fee model works best for you? I’d be interested in hearing your experiences and opinion in the comments.