Tuesday 11 October 2011

What is a fair price for consultancy work? Does paying peanuts buy monkeys?

What is a reasonable price for my consultancy services? How should I set my prices? In a recession, should the price I charge fall? Does cutting price increase business? Are other people under-cutting me? Is this impacting on my business?

Those running consultancy businesses have had to confront these questions since the fat lady stopped singing.

There are numerous horror stories circulating amongst town planners about how some planners are charging rates which are putting established firms out of business. Architects, engineers and other construction industry professionals maintain similar concerns.

Competition is a healthy thing. I accept classical economic teachings about its benefits. We all used to wait for taxis. But what happens when your competition is not engaged in fair competition, but instead is a retired public sector planner, a university lecturer, an unemployed planner earning on the side or a firm quoting below cost?

In the past two+ years, I have provided quotations to existing and potential clients. In some cases I have been told my prices are considered too high; too high because another planner is willing to do the job for less – sometimes substantially less. I am reminded here of a job for which I wrote a substantial proposal, met with the potential client, and then found the work went to a planner charging e25 an hour.
Now, let’s admire this for a second. e25 an hour: wow! What a bargain. Normally six years of university and a minimum of two years of professional experience to join the Irish Planning Institute, and this person’s happy to sell their work for e25 an hour (inclusive of VAT, before tax, business expenses, etc). Is this a competitive price or below cost selling?

The existence of such a low rate being charged by a planning consultant may exist because – and I agree they are needed – of the Competition Acts (2002 & 2006) which aim to prevent the fixing of prices. Some consultants may just not know what to charge, but I don’t think so. I think the lowest prices are being charged by those not trying to price in a sustainable way.

I have not spoken to any planning consultant about pricing, but I think all those engaged in providing professional services need to recognise the value of their work; recognise that such work should be capable of providing a sustainable income.
I return to a question asked in the opening paragraph – ‘what is a reasonable price for my work?’

A consultant should begin by comparing their hourly rate charged with that earned by contemporaries in the public sector and then add a weighting to take into account the differing nature and costs of operating as a consultant.

A public sector planner of my age, for example, will typically earn around e55,000 to 69,000. Take the average of e62,000 and a typical mileage allowance of e1800 per year (ignoring pension entitlements), I’d earn e5,316 rounded per month before tax. To arrive at an hourly rate of pay, I’d work out the number of days in a year I have to work. Removing 104 weekend days and approx. 40 days of holidays, bank holidays, Christmas closure days, etc, I’d find myself working 221 days in the year. Taking an approx. 7.5 hours per day, that’s 1657.5 hours worked in a year at e38.49 per hour.

Then there is a substantial difference between private / public sector planning work which affects fees. In setting up as a planning consultant, help is provided by a Royal Town Planning Institute (RTPI) publication named: ‘Starting in Private Practice’. The RTPI points our how a consultant must take into account the number of chargeable hours in a day. While a public sector planner can work continuously and is paid in recognition of this, a consultant can, the guide states, only expect to charge for 40-50% of chargeable hours per week, the rest being taken up with calls, writing proposals, meeting potential clients, doing administrative work, doing accounts, chasing invoices, IT/office maintenance, etc. On this basis, anyone aiming to earn e63,800 as a consultant and work the same days as a public sector planner, will need to charge e77 rounded per hour for approx. 830 chargeable hours a year.

To this rate must be added the costs of running a business – even a sole trader pays indemnity insurance, phone, heating, electricity, stationary, advertising, accountancy, accreditation and other costs (before paying anything toward a pension). These costs must reasonably be added to the hourly rate.

The rate which would pay me the same wage as an average public sector planner of my own age over a year is around e90-100 an hour. Is this is a reasonable price for planning consultancy services? Would this price ensure an adequate income to support my wife and 3 kids? I think so. Is this the price I am charging? No it is not. I have, in practice, reduced my prices in today’s recession: but not to e25 an hour. Jobs cannot be done any more quickly, so the same hourly rate is being quoted, but I now provide a fixed quotation with fewer predicted hours. I accept jobs will take longer than quoted. In this way I have reduced my prices significantly, often at the cost of evenings and weekends.

Have reduced prices increased business? No they have not. Reducing prices have only served to retain existing work and to help ‘try’ to compete for new work. It has not increased work. But, importantly, in writing quotations, I have remained focused on ensuring that my work provides a sustainable income. To do otherwise, would, I think, cause a race to the bottom: a race which anyone seeking a sustainable income cannot win.

Reducing quotations has not generally increased new work because the some competitors are charging prices with which I cannot compete. I know university lecturers, retired public sector planners, unemployed planners, and non-qualified ‘planning consultants’ undertaking work at costs which have no place in sound business planning. In most cases this is because the person in question is topping up an existing income – a wage, a benefit, a pension or is offering a service they are not qualified to provide. In others, it is because a firm wishes to hook business with a low hourly rate on an hourly based contract, but expects the job to substantially exceed the predicted hours.

How badly is this impacting on my business? It is difficult to tell. Anecdotal evidence continues to point to a move by one-off clients away from long standing professional consultants who depend on their practice for their full income to moonlighting consultants who do not. More established clients appear to recognise the value of an experienced consultant with whom they have previously worked or about whom they have received a word of mouth referral.

My message is clear, if you are offered a price which appears too good to be true, it is too good to be true. It is because someone is in a position to sell at below cost. Below cost selling is bad for everyone in the construction industry.

Brendan Buck
Irish Construction Industry Magazine


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