One of most frequent questions I receive from those who are trying to start or grow their own consulting business is: "How and what do you charge clients for your consulting services?"

The ways of billing clients are numerous. There are hourly rates, by-the-job fixed rates, contingency or performance arrangements, flat fee plus expenses, daily fee plus expenses, and many other methods of charging for your consulting services. Which one is best?

Let us consider some ways of billing for your time.

1. Hourly or Daily Rate

Many consultants charge by hour or day. To establish an hourly or daily rate, they try to calculate number of billable hours in a year. Many hours will be spent marketing and in administrative and other functions, so this time is not chargeable to client. As well, vacation time, holidays, sick days, and so on, can not be directly billed to client.

Consultants, like other businesses, must charge enough to cover their overhead expenses and also earn a profit. If a consultant wants to earn twenty-five dollars per hour of working time, he (or she) might have to charge one hundred dollars per hour to client. This assumes one half billable hours and fifty percent overhead and profit.

Your hourly or daily rate may be limited by what your competition charges, especially if you have not positioned yourself as different from them.

2. Fixed or Flat Rate

Some consultants charge by job or a flat rate. For example, a tax consultant might charge three hundred dollars to prepare a tax return for you and your spouse, including an unaudited income statement for your business from information supplied by you. If consultant takes only one hour to do this, he grosses three hundred dollars per hour. If, though, tax consultant miscalculates time required, he could take twenty hours to complete job and make only fifteen dollars per hour.

Of course, consultants can also make a profit on labour of their employees or subcontractors.

Many consultants claim to make more on a flat rate than on a hourly basis. Advantages include being able to give a quote to client up front and less disputes on price (as total bill was agreed upon in advance).

To protect yourself on flat rate assignments, always limit scope of your engagement to something that you can calculate easily.

For example, if you are asked to give a quote for setting up a website for a business, you might break this project into smaller assignments.

First, you could give a quote for preliminary research and recommendations. Estimate time required to meet with client, learn about his business and goals, develop strategies and a budget, and prepare recommendations on how to proceed. Then, give client a quote (perhaps in form of a one page letter agreement or proposal). Upon acceptance of offer by client in writing, you may proceed with this phase of project.