Congrats! Someone thinks enough of you and the work to ask how much your services cost. The natural engineering approach would be to quickly quote them an hourly rate that you have already defined as what you need in order to make a living. That's not a bad approach, especially since it is so simple for everyone to understand. However the use of your time is not the only variable in play, and it is best to consider a few more aspects when writing a quote.
It's important to bear a few things in mind when writing a quote. While it is part of the sales cycle, quoting with the singular goal of securing business is a poor approach because it only considers the consultant's bottom line. A good quote will make sure both parties involved understand how a working relationship will benefit everyone throughout the entire project. It is very possible that the relationship is not a good fit due to the consultant's capabilities, price, or availability. Determining this early is a blessing, even if it results in a loss of potential business and time spent creating a quote.
Another important point to bear in mind is that the person writing the quote is being hired for knowledge and expertise. Therefore it is important that a consultant fully understand the goal a potential client is after. The client is depending on the consultant to come up with the best, fastest, and cheapest way to accomplish the big-picture goal. If a client says they want to follow a specific path that you know will not work or is inefficient, it is your responsibility to tell them that. A poor consultant will assume the client has already devised the best possible plan and will write a quote for a task without considering the big-picture goal. In some cases a client will insist that a particular approach is correct. The quote can still be salvaged by getting the client to put their decision to follow a certain path in writing. Even with this disclaimer, the consultant may decide not to sign on to a project based on their risk tolerance or the client's unwillingness to accept the consultant's recommendation that the client's approach won't work.
There are two ways to quote: hourly or by the job. There are 100 reasons why a consultant or client would favor one method or the other, however I have found that the project's characteristics determines which approach you should use. Let's compare each one.
By-the-Job
This method of quoting is preferred by many because the deliverables, dates, and fees are all set in stone before any billable work begins. The chance that a relationship will go sour is much lower thanks to a clear, up-front agreement. The biggest challenge here is that the project must be completely understood at the start by all parties. If there are changes that are needed, the whole job must be re-quoted. To face this challenge, it can be helpful to divide the work into sections with their own fees, deliverables, and schedule. For example if the design and prototyping work are quoted as separate tasks, it would be easier to re-quote a request to double the number of prototypes delivered without upsetting the design portion of the quote. Another challenge is that the quote must be extremely well-defined. Again, it is the consultant that must make sure that the client is not allowed to 'figure that part out later.' If part of the job cannot be defined at the beginning, the quote should not include it.
Similar to a pre-flight checklist, a consultant should go through the list of quote attributes to be sure all of the big definitions are covered. Here is a list of things I always include when writing a quote:
- A description of the project in plain English.
- A list of the deliverables for each portion of the project.
- Due dates for each deliverable.
- Assumptions that the deliverables and deadlines are dependent on such as part availability, technology risks, and response time from the client for the consultant's questions (usually 1 business day).
- Consulting fees for each portion of the project.
- Who pays for the parts, materials, shipping, and consultant travel if required.
- What testing will define the project as complete.
Generating a quote of decent quality is a significant amount of work without any promise of pay. It might be a good idea to ask what the project budget is or inquire to the company's funding before starting work on a quote. Sometimes consultants charge for the quoting process. Remember, this is part of the sales process and there will be some quotes written but not accepted. Be sure to bake in these sunk costs with consulting fees.
Hourly Contracts
Although this is the simplest way to quote up front, it adds complexity to the project over time. Some projects are not well defined by the client. In the technology business, unknowns are a fact of life, and that's not a bad thing. The hourly contract shifts the risk of consulting cost overruns from the consultant to the client. At first glance, this sounds like a great deal for the consultant. On closer inspection, one must realize that a consultant is being hired to give the client a positive outcome. An unsatisfied client with a project that failed because of their own mismanagement is still an unsatisfied client. The effort and planning that the by-the-job quote forced up front is spread throughout the project when you go with hourly contracts.
When quoting an hourly job, it helps to explain to the client the nature of risk they are taking on. Similar to renovating a house, the expected time and cost of the project can be dwarfed by later design changes. The reason is that work paid for by the client must be thrown away in order to make room for each new change. Even with this disclaimer, the burden of management still falls, in part, to the consultant thanks to the specialized knowledge for which he or she is being hired. It is a good idea to schedule a periodic review of the project, its progress, and how well the consulting agreement is working out.
A note about hourly rates: it is based on the honor system. It will ruin a professional's reputation and harm the rest of the industry if clients are taken advantage of. It's best to give the benefit of the doubt to a client every time when deciding if a certain time is billable or not. That way, if the client notices anything unusual about the amount of time they are paying for, it will be because I am not charging their account at every available opportunity.
What about money? I've waited until now to address this because money is the easiest variable of this equation to define. There are a lot of ways to calculate a reasonable rate (like this), but the question really boils down to two things:
- How much is this work worth to the client?
- How much would the consultant be willing to accept for doing this work?
The first point relates to their plans for the design. Are they planning on making a million units someday, or are they trying to develop a custom piece of equipment for their internal use? What would another consultant charge to complete the job? Are you particularly good at this type of project, enabling you to provide the high value for low effort?
The second point is a personal question. Are you just getting started as a consultant? Is there potential for work from this client in the future? Have you done something similar in the past allowing you to bring big value for little effort? Have you been going through a dry spell and can no longer afford beer?
If you have a good understanding of both quoting approaches discussed above, then finding a reasonable price to ask for-- and a price you are willing to negotiate down to --should be easy. Unfortunately, no article can tell you exactly how to price every job you may want. Sometimes you'll miss jobs because you charged too much, and you'll take jobs because you charged too little.
The best thing to do is give it a shot, do remarkable work 100% of the time, and learn from both successes and mistakes.
James Benson is writing a series on 'Engineers As Consultants' to educate and encourage salaried engineers to consider if hanging a shingle is right for them. New posts on the first Monday of every month.
Pt. 1: So You Want To Be A Consultant
Pt. 2: How Do Engineers Find Consulting Gigs?
Pt. 3: How To Price Consulting Services?
Pt. 5: Finding The Best Client Mix
Pt. 6: How To Turn Down A Client
Pt. 7: How to Write a Client Acceptance Clause
Pt. 9: Taxes, Writeoffs, and Accounting
Pt. 10: When Subcontractors Quit
Pt. 11: When a Client Turns into a Deadbeat
Pt. 12: Getting Paid with Company Stock
Pt. 13: How to Assign IP Ownership in a Contract
