Appropriate Compensation

The following article appeared in Winter 2003 edition of The Consultant

Appropriate Compensation for the Consultant

By Harry V. Wiant, Jr. and Dr. John R. Brooks

The appropriate compensation for consulting is a delicate subject, but one of utmost interest to both the consultant and the client. Poor decisions made on this issue can easily lead to serious consequences for the consultant, including loss of business and eventual failure of the consulting enterprise, if not worse.

There are obviously two extremes, charging too little or charging too much. Surprisingly, foresters have a built-in tendency to error at the first extreme. Historically, foresters have not earned high salaries, and as a result they do not appreciate the uniqueness and value of their knowledge. To illustrate this, give the average non-forester a d-tape and a map and ask him to inventory a 100-acre tract of timber! Yet, this is not a great challenge for the average forester.

Compensation Considerations

The consulting forester has at least 4 years of college education and is expected to continue that education through short-courses and professional meetings. Business-related taxes must be paid, there are professional dues, office expenses, even if it is a home office, and other business-related expenses (health insurance and vehicle use, for example) that must be included in a reasonable fee schedule. One contentious aspect involves professionals who provide consulting services on a part-time basis. In many cases, the office and vehicle expenses are not included as overhead costs and thus provide an avenue for underbidding the competition. This poses some ethical issues concerning just compensation and is a topic normally addressed by professional organizations such as the Association of Consulting Foresters.

A logical step-by-step approach is:

Ascertain the yearly salary that seems appropriate in view of your education, experience, and expertise. We will use $50,000 as an example. Any business should show some profit, which may be reinvested, above expenses and salaries. Assume yours is a one-person operation, and a 10% return is acceptable. The figure is now 50,000 + 0.1 x 50,000 = 55,000
You have health insurance, retirement investment, and office expenses. This could easily be $25,000 per year. (55,000+25,000 = 80,000)

The number of billable days per year will probably be between 100 to 200, closer to the lower figure when beginning your business. Assume 150 days. A reasonable daily rate in this example is 80,000/150 = $533.

Some consulting will be billed on an hourly rate; simply use the usual daily rate divided by 8. Keeping a fair account of the number of hours spent on a project can be somewhat perplexing, as there will be interruptions in your work. Some attorneys keep hours to the nearest quarter-hour, which is workable if not considered a bit excessive.

Charging a percentage of the amount a timber sale brings (often 10%) when working for a client is common and, frankly, the most lucrative for many consultants. This approach is often criticized as leading consultants to recommend cutting stands too heavily in order to increase their "take". The argument can be made that the timber sale provides a period of cash flow for smaller clients who normally could not or would not invest in timber management services. Frequently, this income is used to offset the cost of previous or future management activities. Also, this approach encourages the consultant to obtain the best price possible for the client. In the final analysis, this is an ethical decision which will affect the long-term reputation and income of the consultant.

It is generally recommended that compensation rates be fixed and not adjusting depending on the client. However, when a consultant must put their reputation and expertise on the line in legal cases, a higher than usual rate is not unreasonable. One consultant charges twice the daily rate for any day or part of a day spent in court and has not had difficulty with this policy.

Invoicing

Undoubtedly, most consultants would prefer to have some portion of the amount they expect to receive for a job paid up front. This, however, makes many clients uneasy. A more palatable approach is to bill at intervals as the work progresses. Before work begins, a one-page document describing the work you plan to do for the client and signed by both parties is usually sufficient to guarantee payment. An invoice should include the addresses of both parties, a description of the work completed with dates, days or hours being billed other expenses billed and the total to be paid with, perhaps, a penalty for payment late by 30 days.

Problems

Problems will arise, and the best one can hope is that they can be minimized. A business-like approach, honest dealing on the part of the consultant, and a clear written understanding of the services the consultant will provide will preclude most problems. If a client refuses to pay, legal steps may be required, but those cases are rare. Invoicing at intervals for long-term jobs will help minimize loss from the rare dishonest client.


This article is one of a series we plan to include in a book we are writing, The Consulting Forester. Readers are encouraged to send us comments and suggestions for improvements.

HARRY V. WIANT, JR.
lbberson Chair Forest Resources Mgt.
PSU School of Forest Resources
212 Ferguson Building
University Park PA 16802
email: hvw3@psu.edu and

DR. JOHN R. BROOKS
Associate Professor Forest Biometrics
West Virginia University
Division of Forestry
P.O. Box 6125
Morgantown. WV 26506-6125
jrbrooks@mail. wvu.edu