Since I’ve been consulting for most of my career and the owner of a small services company for the last twenty-plus years, I’m asked for advice from those looking to move from being a full-time employee to a highly paid consultant.  I thought I’d summarize the information I share on this topic.

I don’t recommend a series of books about how to be a good consultant or how to be an expert.  When friends of mine are considering making a move to consulting, I point them to books about the business of consulting first.  Why? Because it’s a different business than the employer/employee business.   Entering the consulting industry with no small business knowledge will probably cost the new contractor about $50k-100k a year in lost revenue, extra costs, and poor decisions.  Yes, maybe six figures a year, left on the table.

Working with Agencies Without Getting Scammed

How can you avoid these costs?  By learning how the broker/agency/contractor business works.  One of the best ways to learn about the tricks and scams in the agency business is to read everything you can by Janet Ruhl.  Ruhl is the author of many consulting business books, namely The Computer Consultant’s Guide: Real-Life Strategies for Building a Successful Consulting Career or  Janet Ruhl’s Answers for Computer Contractors: How to Get the Highest Rates and the Fairest Deals from Consulting Firms, Agencies, and Clients.  These books show you how the agency and consulting firm business works and how disreputable agencies will try to scam you out of tens or hundreds of thousands of dollars, then offer you another contract to do the same thing again.  These books are a bit dated now (the most recent one was published in 1997).  But they contain excellent backgrounds on how the recruiter/agency biz works. I’ll update this page as I discover other resources I can recommend.

For instance, did you know that it is common for corrupt agencies to keep your last paycheck?  They know you won’t sue them for a small amount, so they just won’t pay you your last month of billables and travel.  For another example, do you know how to handle a situation where a broker calls you in the middle of your contract and says that your client is asking for a $4.32 reduction in your hourly rate? It’s not your client looking for that pocket change — it’s your agent.  Four dollars doesn’t sound like much, but if he can negotiate that much from a hundred contractors, he’s making a significant addition to his bottom line.

Do you know what to say when an agency asks for your list of references?  Do you know how to handle a broken contract?

While most of the content of these books are focused on US law and US business practices, I’ve found that most of the content is directly applicable in all contract situations.

Not All Agencies Are Bad…But You Need To Know the Difference

Not all agencies are bad — I know quite a few whom I trust and refer people to regularly. It’s just a sad fact that when there is money to be made, some business owners choose to skim off your wallet instead of wanting to place you on repeat contracts.  You need to know the warning signs and the solutions to the scenarios you may face.

Another great book I recommend to nearly everyone is Jerry Weinberg’s Secrets of Consulting: A Guide to Giving and Getting Advice Successfully.  This book is about consulting, but it is also about dealing with tough situations a consultant will face.  I especially like the fact that this book is told in parables, short stories that make a point.  So Rudy’s Rutabaga Rule reminds me that when I get rid of my number one problem, my second problem receives a promotion.   And the White Bread Warning reminds me that if you use the same recipe, you get the same bread.  I re-read this book at least once a year, it’s that good.

So you have there a handful of book recommendations, which I believe you must read before your first interview, discussion, or negotiation.  If you wait to read them later, you’ll leave a pile of money on the table, I will guarantee it.

Consultant Stories

I recommend that new consultants talk to as many active consultants as they can.  You may get different opinions, but you are guaranteed to hear some horror stories.  For instance, I’ve had all these happen to me:

• Asked to provide references of former clients during an interview for a new project contract.  These clients were then contacted by the agency in an attempt to sell them on their excellent contracting services.  Guess what?  There was no original contract — the agency was collecting references to make sales calls to my references.  You should never provide references to an agency — only the end client.
• Sent to a client for an interview, which lasted several hours.  In the end, I was asked what salary I wanted.  I told them my hourly rate.  They said they wanted to hire a full-time employee.  When I told them that I was a business owner and not looking for a full-time job, the client blew a gasket because he’d been informed by the agency that I was currently a contractor but hoping to go back to full-time work.  So both the client and I had wasted our time.  Agent chalked it up to a “communication error”. Always clarify upon scheduling an interview on what sort of employment relationship you are interested in.
• Asked for a resume in a specific format for a proposal.  No client actually existed — the new agency was building a resume database to submit on future proposals, even though I’d never work through them.  I found out because my resume was pitched to a client months later, without my permission.  And I was already working for that client, so they thought I was trying to leave. I now embed a text-based “watermark” in my resume to track where it’s gone.
• Received my *own resume* in response to a request for proposal we had sent out.  The agency had done a terrible job of physically taping someone else’s name over the top of my own.  I could see the tape marks in the copy.  The agent got my resume via public records access for the primary RFP, then submitted mine and others from our team with new names.  The agent claimed it was not fraud, just reuse.
• Asked to lower my rate. Agency calls to say that they have somehow “taken over” my direct contract with a client and are now the party I am to negotiate with.  Immediately demands a 20% reduction in my rate.  When I tell him he can’t “take over” a contract with a third party, he insists he has “bought out” my contract with the client.   He was trying to get consultants to lower their rates, then go to the CIO to show how good he was at negotiating. Never accept a rate reduction request from a third party or an agency mid-contract.  Consult your attorney.

Q & A From Readers

Do you have questions about getting into consulting and contracting?  Send them to me.  I may answer privately and share my responses here.  I will respect your privacy in doing so.

If a company contacts me for a full-time position, is it OK to answer that I would instead prefer contract? In general, how should a consultant approach a company who is looking for full time?

You should always tell your recruiter that you are accepting only contract positions if that’s all you want.  If a company contacts you directly, you should say to them that you have a business (you do, even if it’s just a sole-proprietorship) and you can only take on contract opportunities.   You should also watch for “Contract-to-hire” positions.  They are indeed contracts, but at the end of a short period, maybe 90 days, the client expects you to convert to a full-time worker.  I know some people have successfully remained contractors for a while, but the client didn’t like it and found a full-time worker.  Again, some people love these types of offerings (they are like test runs), but if you are trying to build a consulting business, you are being dishonest to the client if you aren’t willing to convert to full time.

Do tell them you are happy to chat with them about their needs because you might know someone who would be interested.  This leaves them with an answer other than “no” and shows them you like win-win situations. I do this to every full-time inquiry I get. It’s fun to find out about projects organizations are working on, and I have used this to match up people to full-time work.  A true win-win-win.

What would you estimate as to the range of hourly rate for a senior consultant?

I really don’t know. You should not be afraid to add this sentence to your consultant toolkit. I know what we charge locally, based on our experience.  Jerry Weinberg in Secrets of Consulting gives you some advice on how to approach this question.  I don’t have just one rate. I have a rate range that includes how much agony there is involved: travel, work-life balance, time zones of project teams, technologies used, etc.  I specialize in troubled projects, so there’s a lot of agony in getting groups back on track. I also don’t have a single rate because I deal with currency exchange and supply/demand issues.  Having said that, I never quote a rate until I see the contract the organization (recruiter or direct client) wants me to sign. There can be onerous requirements such as $6 million of liability insurance, a one-year non-compete, etc.  Those requirements cost money.  And in the cases of non-competes, can cost you lots of money later. I’ll write more about this later.

If an agency calls you out of the blue, they already have a range that they want to pay for this gig.  Bad agencies are going to assume you have no clue what a reasonable rate is, and they are going to offer to help you set a rate.  They will ask, “what is your current salary.”  Then they are going to take that number, divide it by 2200 hours, then add about $5-10 more to that rate and tell you that’s what the going rate is.  They will likely be fibbing at this point.  The problem with this math is covered in Jerry’s book, but that rate assumes you will be billable for 2200 hours a year (you won’t be, and you should not be). It’s also going to ignore all the business costs you will have in maintaining your business. That’s just the tip of the iceberg on this topic.

My other advice is not to quote a number, but to ask them, “what is your budget for this?”.  When I get pressed for an amount, I tell them that based on my experience, my rates are 2-3x what a less experienced (3-5 years)  data architect will charge.  You might say that your rates are market rates, given that you are new to consulting.  Try not to be the first person to quote a number. Remember that once you give a number, the negotiations will only go down from that number. And you can’t come back and say “I looked at the contract, I need an extra $20 an hour to cover your insurance and non-compete requirements” You are stuck with the number (or lower) you gave.

Finally, I always quote a rate of $XX plus travel expenses.  Always say “plus travel expenses”. Even if they say there is no travel involved.

Keep your questions coming.

Top 10 Employee-to-Consultant Myths

1. Consulting makes you rich automatically.
2. Being a consultant means you are your own boss.
3. Consultants are free to take time off whenever they want.
4. Being a consultant means you are an expert.
5. Rates don’t matter when you are the best candidate for the project.
6. Having a lot of clients is more important than longer engagements.
7. If it worked on one project, it would work on another.
8. It doesn’t matter what’s in the contract because your client likes you.
9. You only need to set your rate a bit higher than your salary to come out ahead.
10. You need to bill at least 40 hours a week to be working full time.