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Friday, February 25, 2011

Part II: How to become a consultant , employed, independent or contract - Pricing model

Related to Part I: How to become a consultant

Part II: What should be the pricing model

So what could be pricing model. Interesting you may find, all across Europe, your services are rented on per hour basis. For instance her in Asian sub continent, one would ask your monthly expected salary. But if you were somewhere in UK, do not wonder if they ask you about hourly charges. You better calculate that before appearing in any interview. Same holds good for USA. Not sure about the eastern region - Singapore, Malaysia, Australia, etc.

Generally there are 250 billable days per year. How so? Lets see a possible breakup for billable hours per year; a breakup that you can also think of, could be as follows:

1 Month = 4 weeks
Now, 4 weeks x 12 months = 48 weeks + the odd days of the month (for instance, not all months are of 30, so add 2 weeks, ~15 days, of variation)

So, 48 weeks + 2 weeks = 50 weeks.

Note that the above 50-weeks includes weekends, holidays, and sickness leaves.

This concludes that your baseline in calculating the work weeks shall be 50 weeks per year.

Now lets calculate the work hours per year:

A usual 9 to 5 job corresponds to 8 working hours. So, working for 8 hours per day(btw, do you work for straight 8 hours?), that makes it:

8 hours x 5 days a week = 40 hours per week; if you are lost, then continue reading - you don't have a choice (0;
This concludes 40 hours x ~50 weeks = 2000 hours a year. (Correction provided by Haris, Updated:2011/Sep/12)

Note that, sometimes contractors avoid adding weekends, holidays, leaves/etc, when they quote the price; how would this help them? They tend to charge higher per hour; so either way the actual result is same.

What makes the most difference is how many links are in the chain between the company (who's paying) and you (the resource). In most cases, there's a middle-man or an staffing firm who has the prime contract; and all the resources gets sub-contracted through them.

Gulf is full of such contracting companies. Hiring guys for different large companies, but on their own payroll.

A very well known company that does just that in the Middle Eastern region is the IT People. Btw, a google will tell you that most of these are Indian companies, and they have "Consulting" as a suffix to their company name.

These middlemen come into play because of the liability protection for the company. Which works as a insurance company for the large corporates. But getting a contract directly from a company is actually better for both, the consultant as well as the company; why? Because company will be able to pay less(no middlemen) to you, while you'd be able to see more money pouring in - no middlemen.

There is one more point about hourly vs. daily rate. There are a number of different ways a company can spin it. For instance, now you are a contractor, and you hire a couple-a resources - how would you go about their salaries? You may call it "work-day" rate or they can also call it a cap-on-billing. Like for instance in case of my company, it says "I don't care how many hours you work for, I want to see 8 hours a day across the board.".

Typically the company does a day rate to limit the overtime they would normally have to pay if they're driving hard on a project. It's free labor to them. Also, daily billing usually simplifies the time reporting requirement. Which probably in turn helps management "justify" their management. This is an interesting information.

Enjoy!

And yes, in case this interests you, my friend decided to use the "Consultant" title, and Consulting as a suffix in his company name.

2 comments:

  1. Haris3:34 PM

    You made a little mistake in your calculations. There are 40 work-hours in a week and 52 weeks in a year. If I use your assumptions, i.e. 50 work-weeks in a year, then there are 2000 work-hours in a year. You have mentioned in your blog that there are 14600 hours a year. Other than that, the article is interesting.

    ReplyDelete
  2. Thanks for correction Haris. Updated.

    ReplyDelete

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