This Expert Guide has been written for freelancers and small companies delivering consultancy and training services to clients and who want to review the process by which they charge for their work. These notes will be helpful to people who are new to the business or who wish to re-examine their present fee-charging arrangements.

The dangers of mis-pricing

Setting a realistic fee for your work is central to a good business plan and a viable commercial operation. Set the fee too high and you won't attract work. Set it too low, and you'll be working long hours for little return. Speak to established businesses and most will tell you some of their golden rules, including:-

Deciding how to price

When selecting your charging mechanism, you should remember that the client prefers to know exactly what their contract is going to cost; they don't want hidden extras or approximations. At the same time, you want to establish some boundaries to your own work commitment to the client so that the contract is not open-ended.

For consultants and trainers, there are two ways of quoting a fee:

1.The per-day or per-hour rate for your services. This is particularly useful for short contracts such as a training event or facilitation day, where the number of days is known in advance. Both parties know where they stand with a per-day rate - they hire you for two days' delivery and you expect to be paid for twice your daily rate. Bear in mind though that the client is only paying you for your 'visible' time. If you need to spend time in advance preparing materials, or afterwards gathering feedback, this will need to be built into your daily rate (see below)

2.A fee for the whole contract. For larger contracts, perhaps stretching over several weeks or months, the client is unlikely to be interested in a per day rate as their final liability is difficult to quantify. Instead, the client will want a quotation for delivery of the whole contract. To produce a realistic quote for this project fee, you need to work out several things: how much work is actually required in the brief?; how long will this take you to deliver?; what will your expenses be?; what sort of contingency element should you allow in the budget? If you know your own daily rate and can estimate your expenses, then you can start to build an itemised budget for the work. Some consultants break this budget down into phases, so that the client can see where the time and money is being spent. Other consultants also include a review process with the client to reexamine the anticipated budget at intervals during the contract.

You should remember a couple of useful points. First, everything is negotiable in a contract: put in what you want, and invite the client to discuss your proposed terms. Second, if a contract is proving too difficult or insufficiently attractive, walk away; spend your time doing what's rewarding to you!

Just how much are you worth?

Most consultants and trainers make the mistake of under-valuing themselves - particularly in the early days - and sell themselves too cheaply merely to ensure they have some income. Any business development programme will teach you that the success of a small business is built upon identifying a niche product/service and then charging a premium for it. Only the big players can afford to charge lower rates because of their volumes. Pricing yourself too cheaply has two other adverse consequences. You look cheap (so people don't value what you do). You feel cheap (so you don't value what you do).

Traditionally, there are three ways of pricing a service:

1.By what it costs to produce or deliver. For trainers and consultants, this is pretty ineffectual as a pricing policy. Your costs (of travel, printing, phone calls, materials, etc.) are likely to be small. The real charge is for your time - and you're unlikely to use the national minimum wage as a guide here!

2.By what other people charge for something similar. Whilst this is a useful comparative exercise, it is of little real help. Within three miles of where you work, there will be people charging from £100 to £2,000 per day for essentially the same service, depending on the 'going rate' in different sectors of the economy. And your business will succeed by showing how it is different from the others, not how it succeeds in following the crowd.

3.By what it's worth to the purchaser. If your service is something which the client needs today and you can deliver it tomorrow, they will be prepared to pay a high price because of its intrinsic value to a perceived need. Providing you can match the client's need (preferably more closely than anyone else), it will have a higher value to them.

Working with a group of consulting colleagues some years ago, we argued our fee pricing on the 'Picasso Principle'. On the face of it, a Picasso painting might be worth £30 for the canvas and paints, £100 for the frame, and £500 for the time taken to paint it. Yet it's valued at £10 million. Why? Because the purchaser places that much value on owning it. And because you are buying the accumulated wisdom, insight and expertise developed by Picasso in all the years and all the earlier painting which led up to this one. As a consultant or trainer, the client is purchasing not just a day of your time, but the accumulated wisdom, insight and expertise which has made you the professional person you are. It is this aggregated experience which ensures that their needs will be met and which invests your work with value. So what value do you place on your experience?

Creating a budget and setting a fee

Let us return to more concrete ways of setting a budget or fee for a contract. You should remember that it's not just your time that you are charging for when you set a fee, but a whole series of elements which together will make up the total contract. Here are some elements which you might forget. Some you can charge for directly:

Others cannot be charged directly, but need to be subsumed within the overall fee:

When you set these out, many consultants and trainers are surprised by just how much they amount to - and by how much they have been under-charging in the past.

Registering for VAT

In the UK, any business which has an annual turnover in excess of the VAT threshold (currently around £50,000) must register with HM Revenue & Customs (HMRC) for Value Added Tax. VAT is a tax which you collect on behalf of the government and account for every three months. You must charge the tax to your clients at 17.5% and you can off-set the VAT you incur on expenses against that which you charge.

Many training and consultancy businesses will exceed the threshold, so registration will be obligatory. In the early stages of a business, registration may be desirable as it creates the impression of business size, and enables you to reduce your expenses by reclaiming the VAT on many expenses.

There are two disadvantages of VAT registration which you should consider if you are trading below the threshold. Firstly, smaller clients may not be VAT registered themselves and therefore they are unable to reclaim the tax: you are merely increasing the cost to them of your services. Secondly, VAT accounts are rather more complex and require care in preparing the compulsory quarterly returns. More information is available at the HMRC website.

Set yourself some useful goals

If you have the opportunity, it's worth setting yourself at least two goals: how much you want to earn (e.g. in a year), and how many days you want to spend in chargeable delivery to clients (over a year). Link the two, and you immediately give yourself a notional daily rate, assuming that all your expenses and overheads can be charged extra.

Many consultants and trainers find themselves working too many days at a stretch. To be effective, you just can't work 4/5/6 days at a time. It might be profitable, but it doesn't allow time for preparation, administration, marketing, learning and maintenance. The secret is to pace yourself and charge a realistic rate for the right number of days. However, the reality for many freelancers and small firms is a cycle of 'feast or famine' with either too much work or too little work. This is where being part of a local network - or developing your own affiliates scheme - can be useful, so that there are colleagues amongst whom you can share work to ease out these peaks and troughs.

Some tips in fee-setting

Finally, here are some ideas culled from our own experience over many years in responding to tenders and quoting for work: