Running The Numbers on Wholesale Consulting

Every once in a while, someone asks me about the numbers behind doing contract/wholesale consulting. They usually aren't asking about specific figures, but are curious about how the numbers fit together. Because there's so much information out there about how to figure out pricing on retail consulting, I figured I'd share a bit on wholesale.

First, to make the numbers easier to work with (and keep the focus on the principles instead of the actual dollar figures), let's invent a currency where you could live comfortably on 2000 of it per month. And, since this is my little invented world, we'll use the "J" as the symbol. Apply whatever exchange rate you want to it to get dollars.

So, let's say you've got a nice, comfortable job making 2000J a year and are thinking of going into contract work.

The first number you need to be aware of is the 4000J you need in the bank in spendable savings. That's to cover the "buffer" that inevitably shows up sooner or later in contracts.

The buffer is the time from when you do the work to the time you actually get paid. A very typical cycle works like this.

1. You work a month.
2. You submit an invoice at the end of the month.
3. You get paid at the end of the next month.
4. It takes you a week or so for your own payroll process to complete and the money to actually show up in your pocket.

Given that entirely normal cycle, if you quit your job for an already arranged contract, it's pretty likely it will be at least 2 months before you see a single dime. This is the single biggest shock to most people who jump into this end of things. They figure, with a contract in hand, they don't need any savings on hand and spend a couple of months racking up credit card debt.

The up side is that you get a full-size check a full month after a gig is over and once you make it through the buffer zone, the cash flow is pretty even.

OK, so you've got the resources to handle the buffer zone. That recruiter is calling you with a 6 month contract near your house that pays 20J per hour. You know that your 2000J per month works out to about 12J per hour, so this sounds like a great raise. However, all of the freelance articles you read warn you that it might not be that much.

The conventional wisdom in retail consulting is that you never get 40 billable hours in a week. I've read DOZENS of articles where they tell you you'll be lucky to get 15-20 billable hours in a week. That's because you'd be likely to spend a lot of time doing things like sales, marketing and other overhead the rest of the week.

However, in wholesale consulting, you often can be in a situation where you can bill for a full 40 hours or more in a week. That means you can run the numbers on that contract pretty easily.

First, you've got to know how many hours you're likely to be able to bill. If you start with a 52 week year and multiply by 40, you'll get 2080 hours. However, that doesn't account for holidays, sick days and any vacation you might take.

Currently, I use numbers from my previous full-time jobs as a basis. I start with the "standard" 8 holidays that most offices are closed. Then, I take 18 sick/vacation days off. That knocks 26 working days off the total or 208 estimated hours.

Take that from our 2080 (1872) and divide by 12 and you get a monthly average of 156 billable hours a month. This is actually the number you should also use when figuring out your current employee salary for making comparisons.

Now, if you take our mythical contract at 20J/hr, you'll get a projected gross revenue of 3120. Compared to your current 2000J a month, that sounds pretty good. And it is, but we still have a bit further to go.

See, right now, if you're an American, you're paying 7.5% of your paycheck in Social Security and Medicare taxes. The thing you might not know is that your employer is also paying that much on your salary as well.

Once you're doing contract work and not an employee, you get to pay both sides. Combine that with paying for your own health care, offset by being able to pay for things like cell phones, DSL and computers before taxes and the typical shift I see is for someone to go from taking home about 70% of their check to taking home about 60% of their check.

That can mean that a 15J/hour contract is actually going to result in the exact same paycheck as the 12.82J as our hypothetical salary. That means that your higher hourly rate doesn't necessarily equate to as much in your pocket as you might think.

So, for our example, in the 2000J/month job, we'd be taking home 1400J. For our example contract, the 3120J would turn into 1872J: 472J per month extra.

Since it's a six month contract, you've probably got a 50/50 chance of it getting extended versus having to look again in 6 months. Over the course of that 6 months, you'll get an extra 2832J in take-home cash: right about 2 months worth of money.

Now, if you're new to the game, you might need that entire time to find another gig. If you're more experienced, you might not. For what it's worth, I had a total of 7 different gigs in 2007 and averaged 4 days to find each. That, in this case, would mean the difference between a decent contract and one that's just barely a break-even.

What that means is that you need to make sure the contract pays enough hourly to make it actually worth more money than you're making in your salary (all non-tangibles aside for the current discussion). However, because you can easily get 40 billable hours in a normal week, you can take a contract that's much lower than the hourly rate that you'd need if you were doing

Overall, I suggest a side by side comparsion like the following to compare a given contract to a salaried job:

That puts the numbers right there in the open. By using numbers like the 156 for hours in a month, you can ensure that, when you take 2 weeks off in the middle of the summer for vacation, you've covered your bases by earning more in other months. Of course, you have to make sure you didn't just spend the cash during those months.

So, for instance, when for January of 2008, I'm on track to bill 208 hours for the month, I will be setting aside the cash from the extra 52 hours to help cover my trip to Ireland in July and smooth out the cash flow.

At any rate, that's a quick overview to taking a look at leaving your job for wholesale contract consulting. Let me know if you'd like more articles that go through this kind of stuff or if you have no interest in it.