What goes into a consultant/contractor rate?

19 October, 2009

It might look like a big number, but it’s not really. Here’s why:

  • Consultants and contractors don’t have a reliable income stream so they need to be able to tide themselves over between jobs and it’s only reasonable that clients contribute to that because they benefit from having access to that expert resource as a consultant or contractor.
  • Consultants and contractors have to maintain a high level of professional development because their knowledge and expertise is their personal brand, their offering. No one hires a consultant who’s knowledge is 5 years out of date. Attending conferences and buying books costs money.
  • Remuneration is also used as a way of ranking indicating level of seniority and expertise within an industry. Juniors start at a low rate and work up to a higher rate. So unless someone is deluding themselves as to their worth (in a professional sense) then generally You Get What You Pay For. You opt to go for a cheaper consultant then you’re probably going to end up with a junior with little experience – but could be perfect for the role you want them for. If you want someone more senior, more experienced then you expect to pay more.
  • In a way you’re licensing their intellectual property. The contract you have with them will likely mention IP but perhaps not in these terms. An experienced contractor will have been working in their industry for 10 years and has accumulated a wealth of knowledge that they bring with them when you engage their services. Part of the rate you pay them includes a license to access that information.

    As I said, it is unlikely their contract with you will state that because technically all IP belongs to other employers and clients they’ll have worked for – but nonetheless you still benefit from those previous engagements.

  • Other costs include rent contributions (for home offices), travel, downtime, insurances (workers comp, professional indemnity even car insurance – thanks Donna) etc.
  • Contractors, consultants and freelancers don’t have paid leave entitlements. So if they they get sick, need to care for a family member or want to take a holiday they stop earning money. So they need to take this into account too; and once again it is reasonable to expect clients to help contribute to that as they’re the ones who benefit from having access to these expert resources – and especially regarding recreational leave, you do not want a burnt out consultant who’s worked 7 days a week for the past 6 months. People need downtime, and being a contractor (with all the expectations placed upon you) it’s a highly stressful situation that requires them to be able to take breaks and holidays to recuperate. It’s in the client’s best interests (thanks Marianne).
  • Also, most hourly/daily rates are inclusive of superannuation whereas salaries are generally published as exclusive of superannuation.

Any other components of a contractor’s rate you can think of?

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