A Consultants Guide to Profitability Part 2: ABC Pricing and Break-Even Rates

Project Description

A Consultant's Guide to Profitability - Part 2: ABC Pricing and Break-Even Rates

One of the greatest challenges for a consultant or consulting firm is keeping track of project profitability. There are so many factors which affect it, starting from poor financial bidding to unexpected expenses due to changing client requirements, that many companies prefer to avoid the issue of bottom-line analysis (or project profitability) in favour of tracking the top-line (or project turnover).

In Part 2, we look at the fundamental issue of billable days needed to (a) implement a project properly, and (b) assure corporate profitability and break-even.

Basically, we need to understand the answer to two questions:

1.How many days should I budget for a project, and

2.How much should I charge per day?

The first part is relatively simple; the second part is very difficult.

Specific Project Results or Intellectual Property Created

A Consultant's Guide to Profitability - Part 2: ABC Pricing and Break-Even Rates

In order to budget a project, most consultancies use a variant of activities-based costing, or ABC. In ABC, we split up the project tasks into discrete steps, and then estimate the time per task per consultant to arrive at an ABC price for the project fees.

While many donor-funded projects mandate a minimum amount of consultant time, it is crucial to do this calculation independently for a number of reasons:

a.To understand the formal tender basis for your financial proposal;

b.To understand if you should be bidding for this project to begin with;

c.To re-create the planning basis your client has used to define a Terms of Reference (ToR).

I’m going to use a slightly more complex example to illustrate this process than the example in Part 1. This example concerns a commercial due diligence project in Russia, which occurs in two cities, necessitating work for a team of 3 consultants.

The ABC project analysis is seen in Table 1, below. The information presented here is a disguised example.