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Posted by: jsonmez | May 26, 2010

Consultants: Know Your Markup

Now that I am not a consultant anymore, I can finally write about this topic.

This is one of the likely to piss people off topics, but this is something I feel every consultant should know.

So, what am I talking about?

Basically, I am saying if you are working as a contractor, or other type of consultant, and there is a middle-man between you and the direct client, you need to know what you are being billed out at.

money house

Why does it matter?

The main reason is that you need to be able to know how to negotiate your rate.  Over the course of your career in software development, negotiating your rate can be worth hundreds of thousands of dollars.

That is kind of a big deal!

It just makes good business sense.  If you are working as a consultant, you are, to some degree, running your own business. A good businessperson knows what everyone is making on the deal.  It isn’t an unreasonable thing.

Let’s consider an example.  Have you ever bought a car?  If you have, did you walk into the dealership and pay the sticker price?

When I go to buy a car, I ask for one thing.  The dealer’s invoice.  Then after he gives me the fake one, I ask for the real one.  I want to know what their cut on the deal is.  The dealer deserves a fair markup for the service he is providing, but as a customer and businessperson, I also deserve to get a decent price.

Taking that example a little further, what if you went in to buy a car and the sticker price was $25,000.  Then the dealer and you negotiated and he came down to $23,000.  Now, let’s suppose you found out that he got the car from the factory at $20,000.  The seems fairly reasonable.  3k is a decent amount to make on a car, but the dealer is going to have some overhead and other costs associated with being in business.

Now, imagine in that same scenario the dealer bought the car for $10,000. If you found out that piece of information, you might be pretty outraged.  You might consider why you need the dealer.  Is he providing 13k of value to the transaction?  Should you get your own dealer’s license?

In any kind of business deal, everyone should have a good idea of who is adding value and at what cost.

I’ve been in the real estate business, the software development business and a few other industries, and one thing I have learned is that the best business deals have the most transparency.  Nothing will ruin a deal or make a sour relationship more than missing disclosures.

In business everyone has to make money, but everyone wants to feel like they are getting a fair shake.  When I am selling something, I will gladly state my cost.  When I am buying something I expect someone to be able to tell me what their cost is.

If you are a consultant you need to be making sure you are in a good deal, otherwise you are in risk of under pricing yourself.  You need to push for transparency.  If it is a good deal, it should be a good deal for everyone.

They won’t tell me my bill rate

Did you ask?  How did you approach negotiations?

One important thing I have found is not to talk about hourly rates.  Instead, you should be talking about margins and markups.  As a consultant doing 1099 work through my corporation, I always state that I allow for a 15% markup on my services.

In my opinion, this is more than reasonable.  And yes, I am flexible to a degree, but the point is: from the beginning I am talking about markups and margins, not about hourly rates.  Make sure you start the conversation there.  You are a professional and a business person, act like one.  If you don’t want to be treated like a commodity don’t act like a commodity.

You may not be able to get the exact numbers, but you should be able to get a general idea of what the bill rate is.  There is no reason why any professional should be billed at 2-3 times what they are being paid.  The middle-man does not provide the value that deserves that kind of markup, yet it happens all the time.  Don’t be a victim.

Don’t be afraid to do some research yourself.  It is fine to say “I know that you are probably billing the client around $100/hr… “ Don’t be afraid to fish a little.

One word of caution here.  A middle-man does deserve to make some money.  If they found the job, and found you, and they are handling the payroll, that service has value.  You cannot expect them to make nothing, just make sure it is a fair amount in regards to the service they are providing.

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Responses

  1. +1
    Transparency and Honesty wins!


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