Author Topic: How to scope and price a consulting engagement?  (Read 4239 times)

brewer12345

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How to scope and price a consulting engagement?
« on: July 03, 2014, 11:20:22 AM »
I ERd in January, but will be having a sit down at the end of this month to discuss a possible consulting opportunity.  I don't need the money, but it would be nice to have and as described this sounds like a worthwhile way to get it: part time, flexible, work from home, mostly deal with a longtime friend and past coworker, high pay rate, limited time engagement of perhaps a year, and travel limited to a few days every 2 or 3 months to a place where most of my family still lives.  The project involves a complete overhaul of the client's existing policies to meet regulatory requirements and make it jibe with the megacorp global policy.  I have yet to see any of these policies, but this is well within my abilities and a large part of the sit down is so that I can see what needs to be done and talk abut how to scope it.  My buddy has told me that the client has basically budgeted the equivalent of 1 full time equivalent for a year for this year long project, although he does not know exact dollars or what level FTE they have in mind.

How do I credibly scope this and how do I price it?  I think I have an idea of how the work should be organized and I will have a much better notion after I talk to the client.  Do I quote an hourly billing rate with X number of estimated hours?  Monthly Y dollars lump sum?  Set milestones with associated payments? Something else?  I know what minimum amount I would have to earn in order to trouble myself with all of this would be, but I would much prefer to earn the most possible.  The client will have no costs aside from my billing rate except whatever it costs them to bring me to their location every few months, so I imagine a pretty high hourly rate is indicated.

Freedom2016

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Re: How to scope and price a consulting engagement?
« Reply #1 on: July 03, 2014, 11:31:39 AM »
You need benchmarking data for your industry to get a sense of the appropriate amount to charge.

In my (very different) industry we have different pricing models. First, we distinguish rates between "full rack" clients (corporate), quasi-governmental (usually 50-75% of rack rate), and public/non-profit (10-50% of rack rate) clients.

Second, sometimes we charge by time (when it's hard to know for sure how much effort it will take), other times we charge a lump sum (when it's very predictable work). Either way we clearly document the scope of work so that if/when scope creep occurs we are in a position to discuss additional fees. You don't want to leave the scope fuzzy enough that there are any misunderstandings whereby they squeeze (significantly) more uncompensated work out of you. Having said that I don't nickel and dime my clients, and I do accommodate minor requests.

DoubleDown

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Re: How to scope and price a consulting engagement?
« Reply #2 on: July 03, 2014, 11:52:51 AM »
Congratulations on the possible gig. It is certainly in your best interests to bill by the hour, not by task completion. In that way, all the risk is on them for possible scope creep or other problems along the way. Going by task completion (for example, "firm fixed price" contracts) puts all the risk on you. Especially as an early retiree, I'd prefer to be able to walk at any time if a problem arises, without having to argue who is at fault for failure and trying to recover payment.

If you're particularly hungry for more money and don't mind the associated risk, you could negotiate a fixed price or hourly contract with an award fee, where you earn larger pay for exceeding certain benchmarks or completing tasks ahead of schedule, for example.

One other suggestion: Keep good records of your hours worked and the tasks completed in those hours, and be prompt and regular in your billing/invoicing. I.e., invoice immediately at the end of a billing period, and do it on a regular schedule. I'd say it's best to submit invoices every two weeks or every month at most. Back when I worked as a consultant, I would provide a brief summary of the work delivered along with my invoice, so the clients had an idea of what was accomplished for that invoice. They seemed to appreciate it, particularly for long durations like this gig you're considering.

DoubleDown

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Re: How to scope and price a consulting engagement?
« Reply #3 on: July 03, 2014, 12:06:15 PM »
Oh, regarding your "How do I scope this?" question, which I kind of missed in my reply: I don't know how to scope things in your industry, but hopefully you'll be able to scope this work once you've had a chance to sit down with them and get more details. I always used my experience which seemed to be a reliable and accurate heuristic. That is, I knew the work well enough that I could formulate reliable estimates. I've found all the Project Management (with a capital P and capital M) methodologies for estimating work to be ridiculously inaccurate 100% of the time, so I'd be loath to suggest that you seek those out for your industry. It's like they're pulled out of someone's ass who has no idea of the actual work involved.

If you go with an hourly rate and an estimated range for completion, I would think everyone should be satisfied, and you'll have no risk (other than to your reputation) if you're off in your estimate. For example, if you think it will take about one year, you could give them a range of 12-15 months to provide a bit of a buffer.

VegasStache

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Re: How to scope and price a consulting engagement?
« Reply #4 on: July 03, 2014, 01:13:41 PM »
Couple of things:
1. Your question is the subject of many books.  It will be very difficult to answer well in a short manner as there are many facets to this.
2. Do not forget to obtain some form of protection (corporate formation + Errors & Omissions insurance) against the future threat of you being 'on the hook' for creating policies that end up going awry.
3. Remember that your take home pay will need to be utilized to pay for #2, plus local/state business license, a decent accountant, contract attorney, payroll service (good accountants will probably handle this for a nominal fee) as well as quarterly tax payments to Uncle Sam.  Not trying to scare you, but it's a bitter pill to swallow if you realize this after your bid is accepted.
4. Use your professional network for advice in this matter.  You probably have acquaintances that can advise you as to the details (like the rate that you should bid to get this position.)
5. Use some method to guard against scope creep.  This can be easy if you bid an hourly rate with benchmarks and document everything with the project plan and how all your work applies to the plan's scope.  This can be a nightmare if you bid the completed job without having something very clearly spelled out as to what, exactly comprises a 'completed job'.
6. Attempt to get paid up front.  10-50% of the bid, or a few weeks worth of travel expenses, depending on how much the travel expenses will be.  If you're going to bill the Travel and Expenses separately, book your first week on site and get a total to estimate what you'll need so you're not out of pocket for the engagement.  Multiply this by the number of weeks until they pay you.  Now you know what taking this gig will cost you, not including your time.
7. Under promise, over deliver.

Best of luck!

brewer12345

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Re: How to scope and price a consulting engagement?
« Reply #5 on: July 03, 2014, 01:23:05 PM »
Thanks for all the tips.  I had completely forgotten about E&O insurance.  Time to do a bit of sleuthing on that issue.  Everything else is good food for thought.

ShortInSeattle

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Re: How to scope and price a consulting engagement?
« Reply #6 on: July 03, 2014, 07:51:30 PM »
You might also check out the Value Based Fees model. Alan Weiss is an author who covers the concept. I negotiate a flat price for my projects and don't count hours. As your skill and reputation rise, you learn to work faster *and* you can charge more because you are known - it's like a multiplier.

This can be done on a project-by-project basis when you are producing deliverables rather than putting in time. It doesn't work well when you are working as a pseudo-employee.

I don't work by the hour. I get sh*t done. My clients don't watch the clock and neither do I. We both value results, not face time. I negotiate a fair value for the impact of my work. I highly recommend this approach.

Good luck with the gig!