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You’ve decided to go into the consulting business.
You’ve got some clients, but now, you’re wondering how to go about billing them. After all, you want to get paid and, at the same time, recoup any costs you incurred while providing your consulting services.
This guide will provide information on how to start the billing process, what types of billing may be right for you, how and when to bill your clients and whether to charge late payment penalties and how much.
The first thing to do when starting a business relationship with a client is to draft a consulting agreement. You can base constructing your own consulting agreement template by using a consulting agreement example. In the consulting agreement, the payment terms are set. Terms like:
How much will you be paid?
How frequently will you be paid?
Will there be late payment penalties and what will those penalties be?
Two types of billing are available to the consultant—time and value-based billing.
This form of billing can be lucrative for you but clients may be uneasy about time-based billing. The billing is not necessarily based on the value that you brought with your consulting services but based on the time you put in to provide the service.
With value-based billing, you are assigning a value to the result of your consulting services. If the result of your consulting services will be very valuable to your client’s outcome, for example, they can make much more revenue based on your recommendations, then you can assign more value to an outcome that will delight clients.
So, you’ve decided what type of billing is best for your consulting services. Now it’s time to decide what the payment schedule will look like when incorporating that into your consulting agreement.
As a consultant, your cost recovery needs will determine how you will bill your clients. Travel time and expenses as well as office supplies all incur costs as you conduct your consulting services. How and when you decide to bill a client will depend on the amount of costs and how frequently you have to address them during a project or a period of time.
Say you’re an operations consultant and you’ve been contracted to recommend and incorporate changes throughout the whole company by starting in one department and moving to the next. In this case, you may want to incorporate milestone billing when you recommend and incorporate changes in each department.
Once one department was completed, you would invoice the client. When the client pays the invoice, you would then move on to the next department. This is a type of value-based billing.
In this case, you would offer consulting services for the length of the contract. After that service contract was complete, you would invoice the client for a fixed fee for just that contract. When they want to hire you again, a new contract has to be initiated.
The same operations consultant hired to recommend and incorporate changes throughout the whole company may elect to bill as the project is in progress. Routine monthly or bi-montly invoicing during the course of this contract will help bring in cash flow when costs are sustained on a routine basis. This is a form of time-based billing.
This is probably not the most common way for a consultant to bill clients, but if you’re a good enough consultant, you may be able to do this. Clients could pay for your services on a subscription-based billing format which would be a recurring weekly or monthly billing whether they used your services or not.
This type of time-based billing would be on a cost-per-day configuration, meaning that the client only pays on the days that your consulting services are needed.
There are a couple of different ways that you can go if selecting to incorporate late payment penalties into your consulting service agreement.
You can apply interest at an annual rate on top of the sum owed to you. However, be aware that your local and state laws may maximize the amount of interest you can add, so be sure to check your local regulations.
A fixed late fee amount can be attached for every period of payment they are late. Since this will be in the consultant agreement, the clients will be aware of the amount if they are late on a payment.
Felix is the founder of Society of Speed, an automotive journal covering the unique lifestyle of supercar owners. Alongside automotive journalism, Felix recently graduated from university with a finance degree and enjoys helping students and other young founders grow their projects.
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