Most business owners considering hiring a consultant get about halfway through the initial meeting with a solution provider before asking the inevitable question – What’s your hourly rate?
I’ve been asked this question hundreds of times. While it may seem like a simple question, there’s a lot more that goes into a good answer than a number. Keep reading to learn:
- In what situations does an hourly rate make sense for both the consultant and the client?
- In what situations doesn’t it make sense?
- Other consulting arrangements
- My thoughts
When Does An Hourly Rate Make Sense?
Paying for consulting services by the hour can make sense when the time required to complete a task is predictable. For example, hiring a content marketer to create a monthly newsletter is a situation where an hourly rate may work well for both parties. After a few months, the time to create the newsletter is predictable and the tasks required are easy to comprehend.
When a client is paying a consultant by the hour, they have an incentive to be responsive to the consultant and to pay close attention to both the quality of the work and time it is taking to complete. Knowing this, the consultant is incentivized to deliver work on-time and on-budget.
Hourly rate agreements are also the simplest to create a proposal for. Hourly rate proposals are typically shorter, simpler and less open to interpretation than other forms of consultant compensation.
Often, when commencing a relationship with a consultant, starting with a short project at an hourly rate can be a great way for both parties to get to know each other. The company gets to witness the consultant’s processes, working style, attention to detail, sense of urgency and ability to deliver on-time and on-budget, while the consultant has the opportunity to see if the client is accessible, honest and provides access to critical staff and documentation in a timely manner.
In What Situations Are Other Consulting Agreements More Advantageous?
While I don’t mind an hourly rate contract for a first-time client, I tend to avoid them on longer term assignments with more nebulous goals. I believe hourly rate contracts create a transactional relationship in which the consultant is compensated for their time to complete a specified task. Clients are disincentivized from sharing context and information beyond the scope of the project because that will run up the bill. Consultants are incentivized to “stay in their swimlane” and only focus on the tasks for which they are being paid.
In my experience, the best engagements are the ones in which the consultant takes the time to really understand the business, competitive landscape, desires of the owners and the root causes of the issues the organization is facing.
One example that comes to mind is a client that wanted to hire me to “fix” their website. “Our website isn’t converting leads as well as it used to” they said, “I want you to redesign the site so it looks better”. I was immediately curious because the website was well-designed, had good content and, according to Google Analytics, was attracting the right types of buyers from around the country. I started asking some questions, and reviewing the offerings of their three main competitors. It turned out all three competitors had recently released new products that had more features and lower pricing than my client’s offerings.
When I brought this to the attention of my client, they were appreciative of the analysis and decided to postpone building a new website and decided to focus their efforts on product development. Had I accepted an hourly rate contract to refresh the website, the client wouldn’t have been happy in the long run. Even if the new site would have been great, it would not have solved the root issue, which was increased competition. By thinking like a business owner and really understanding what was driving their issues, I was able to offer a better solution.
Hourly rate contracts tend to discourage this type of thinking. They create an incentive for the consultant to do what’s asked and nothing more.
What Other Types of Consulting Arrangements Exist?
There are many ways to set up a contract with a consultant. Here are a few of the most common:
| Contract Type | Definition | Pros | Cons | Best For |
| Project-Based | Consultant is paid a fixed amount for completing a specific project. | Both the consultant and company know what the project will cost at the beginning. No overruns or unexpected fees at the end. | Opportunities for misunderstandings if the project isn’t thoroughly documented or if the scope changes once the work has begun. | Smaller projects with well defined outcomes. Project-based work can be a great first project between a client and a consultant. |
| Retainer | Consultant is paid a fixed amount each month for completing numerous tasks. | Consultant can focus on solving problems and adding the most value as opposed to tracking hours. Company can expect consultant to think/act like a member of the leadership team and act strategically. No confusion over billing. | Intensity of work may ebb and flow over time. Consultant may be required to work “extra” hours during busy times or in emergencies without additional compensation. In slower times, company may feel like they aren’t getting as good of a value out of their consultant. | Interim leadership arrangements in which the consultant is required to act like a company leader. In these situations, the consultant should be focused on outcomes, not hours worked. |
| Performance Based | Consultant paid based on the results they generate (ex: 10% of all new sales) | Consultant compensated for the value they create, company only pays if consultant is effective. | Difficult to scope and design a contract that is fair to both parties. | Long-term projects with a high level of trust between the consultant and the organization. |
My Thoughts
While there are certainly times when an hourly rate contract makes sense for both the consultant and the company, I believe other arrangements drive better long-term outcomes in most situations. I recommend hourly rate contracts for simple, and easy to define tasks and as a way to test a potential relationship between a consultant and a company. For longer-term, more complicated and more strategic engagements, I believe project based, retainer and performance based contracts better incentivize both parties to achieve the desired outcomes.
If you are looking for a true partner to enhance your company’s sales and marketing performance, let’s talk!
Sincerely,
Brian Precious
Co-Founder & Managing Partner
RevUp Growth Partners