How Are Freelance Consultants Paid?

by Elizabeth Layne

Businesses hire consultants to provide professional or expert advice on some matter. A consultant might be an employee of a consulting company, or work on her own as a "freelancer," or more exactly, an independent contractor. An independent contractor sells specific services to businesses without being an employee, typically for short-term projects with specified outcomes. A freelance marketing consultant, for example, might advise a business on promoting itself, as well as develop marketing materials.

Payment Options

A consultant working as a freelancer or independent contractor typically offers several payment options, including payment by the hour, by project or on retainer. Some clients prefer to be billed by the hour. Others prefer paying by project, viewing it, perhaps, as a way to prevent consultants from padding hours. Consultants receive an agreed upon fee for work on a project completed by a specified date. They usually determine project fees by estimating the number of hours it will take to complete the project, multiplied by their hourly rate. Usually, consultants require some terms, such as that a percentage of their fee be paid when the business signs the contract. Consultants on a retainer receive a set monthly fee, for which they agree to be available for a specified number of hours. This arrangement saves a business money from not having to hire a staffer, while offering flexibility in using the consultant's services. Consultants sometimes offer a discounted fee if the client keeps them on retainer.

Pay Rate Establishment

Freelancers determine their rates on several factors, Forbes notes. These include the years of experience they have in their field; how much expertise they've developed; and how they compare to others offering similar services in their field in terms of experience and services offered. A common formula consultants use to determine their hourly rates is to add their labor cost -- frequently an amount based on what their salary would be as a fulltime employee in their field -- together with overhead costs, such as office equipment, accounting fees, marketing and health insurance, then adding the profit margin they'd like to have. The consultant might add 10 to 20 percent as straight profit. Then, they divide the total of all this by the number of hours they anticipate working.

Written Agreements

After a fee is agreed upon, consultants frequently offer their own legal contract, which should stand up in court if there are any disagreements. Among the items the contracts include, according to Nolo, are the services the consultant agrees to perform; for what amount; how and when she will be paid -- by an hourly or project rate or retainer; whether she will be paid up front, at completion, or in installments and in what percentages; and whether the client will pay late fees for tardy payments. Contracts also indicate who will be responsible for paying what expenses and how the contract can be terminated.

Finding Independent Contractors

The U.S. Small Business Administration recommends that business leaders find reliable freelance consultants by asking for referrals from their network of business colleagues, friends and acquaintances in person and through social media sites such as LinkedIn.

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