The CTO’s Consulting Rate Calculator

A simple formula to help the CTO determine their rates for fractional CTO services

It's 2009 and I'm having a solid conversation with a CEO of a rapidly growing startup. She brings me her questions and concerns about her current technology strategy, and I seem to have an answer to match every concern. It's not that I am arrogant or condescending in my responses. It's just that I am experienced. And I can help her. Then, she asks, 'How can I get you involved to help our engineering team directly?' My confident countenance turns to a bumbling mush. Wrapped in uhms and ahs, I stutter, 'Well, let me send you an email and we take it from there?' I can tell she's disappointed in my non-answer. I wish I had a better sense of the rates she would have to pay me to grab my time and attention.

Fast forward a few weeks with some back and forth’s over email. She gets lost in the details of my proposal and eventually loses interest in working with me. If ever there was a dissonance between the value I brought in person and the pricing I put on a page, this was it. A perfect opportunity dissipated right in front of me.

I decided to never be caught off guard like that again. It only leads to a proposal cycle of death. One that starts with your standard MSA and ends with an addendum of concessions. Hourly rates, general availability, tracking hours, blah, blah, blah.

Not for me.

Instead, I came up with a simple calculator that creates simple buckets by which I can quickly decide if a client is worth my time and more importantly, going to succeed by my efforts.

I have been doing this approach for over a decade now and it has earned me multiples of millions of dollars in consulting. I call it the Ultimate CTO Consulting Calculator.

It is deceptively easy to think you're good at consulting

I have seen so many gainfully employed CTOs enjoy the freedom of side hustles. It is a wonderful way to solve new problems. And when it goes really well, the gainfully employed CTO quits their day job to become a full time fractional CTO. Over time however, the inevitable happens. Existing contracts conclude. New contracts are elusive. And before too long, the fledgling fractional CTO becomes a slave to deal flow.

Over time the $800/hr contract turns into the $500/hr compromise which then turns into the $250/hr drudge work which in turn, creates the month end counting of hours and the brick walled calendar as all availability gets annihilated.

You may justify the drop in your rate as a market driven consequence. In fact, since the pandemic, an unprecedented number of executives have exchanged their full time corporate jobs for selling off pieces of themselves. Fractional CXO jobs were up 18% from 2021 to 2022 and 57% since 2020. (Source: MDL Partners and Bureau of Labor Statistics)

However, consider what Gerald M. Weinberg wrote in his book, The Secrets of Consulting:

“Within a certain range, the higher your price, the more business you get. Eventually, of course, too high a price will prevent clients from retaining you. Even though they'll love you, you won't get the business. You can lower your fees to get business, but don't forget that there's another way of stating this Second Law of Pricing: The less they pay you, the less they respect you.”

I definitely know how this feels.

How do you know you’re not charging enough? Your client won’t do anything you suggest because they don’t value your input.

Calculate a retainer they refuse to refuse

When I talk to a technology company that wants my help, I use a few key pieces of information to guide me in what my retainer with them should look like.

1. Annual Revenues

The annual revenues of a company is very quick way to know what you're getting yourself into. It is also a number that CEOs aren't shy to share. And if they are, just ask them for a ballpark.

In my experience if the number is below $2-3M you're looking at a company that's working on it's product market fit, tech delivery, key hires and perhaps early founder conflict. If they are bootstrapped they feel cash strapped.

In the $5-6M range I usually face companies that are struggling to transition from a flat management structure to more organized around a C-Suite. The team bumps it head against processes that used to work but are now broken. In short, expectations of rapid progress are crushed by the weight of managing a company.

The list can go on but these are examples of how I am able to get a sense of what issues I could be facing based simply on the revenues. It's not an exact science. It is but one number I like to have in my back pocket.

This number will also play an important role in an equation I use later on.

2. C-Suite Compensation

I like to have an idea of what the C-Suite is paying themselves. If I don’t know the specific number, I would throw out a range. “What range would you say your C-Suite salaries fall into? In the $100k, $200k or $300k range?”

This is an early indicator to me of whether I am going to be set up for success or not. I know that they know what the CEO will be paying me and so I don’t need to start off my engagement on the back foot.

In the back of my head I will translate the salary to hourly, add a discount and use that as my base hourly rate for the engagement.

3. Engineering Team Size

I view companies as complex systems made up of people who are in relationship with one another. The more people that exist in that system, the more complex it becomes. Knowing the size of the engineering team gives me an idea of the complexity I will face when I work with this company.

I use the engineering team size to calculate the CTO Levels™ level of the company:

L0: Team size 1
L1: Team size 2
L2: Team size 3
L3: Team size <= 10
L4: Team size <= 20
L5: Team size <= 40
L6: Team size <= 60
L7: Team size <= 100
L8: Team size <= 120
L9: Team size <= 200
L10: Team size > 200

So if an engineering team size consists of 12 in-house and 5 near shore developers, the total is 17 and makes for a L4 organization.

4. Engineer Team Budget

Show me what the CEO is spending on the engineering team and I will show you the source of all their troubles. Although it's true that one can overspend, I find that most companies I talk to have no idea how anemic their engineering teams are. The appetite for product features usually far exceeds that of the sustenance the engineering team can provide.

Once I have the engineering team budget, I can now calculate the Engineering Efficiency Ratio (EER). This is a common benchmark calculated by dividing the annual revenues by engineering budget.

For example if a startup is earning $10M in annual revenues and spending $3M on the engineering team, the EER would be 3.33. Of course there are many factors, but off the top of my head if the number is closer to 1, I would consider it to be low and if it’s higher than 10, I would consider it to be high.

What the EER could tell me:

• if it's high, I look for problems with culture, retention and sustainability

• if it's low, I look for problems with C-Suite ego, poor CTO leadership and burnout

• If it's very low or negative, I look at the stress around run rate and overall urgency to find product market fit

5. My commitment

When I look at my overall availability, I find it easy to imagine just how much time I would be spending on this client in a week. It's harder to know by the month or by multi month projects. So all I do is visualize what my week looks like and then how much time I would like to spend on this client.

The Calculator

Base rate = C-Suite hourly discounted by about 25%
The 25% is somewhat arbitrary. The reason I discount this is from experience. Whenever my retainer gets challenged, and trust me it will, I can safely say that my base rate is below that of the C-Suite hourly rate.

Difficulty rate = EER x Ln
This is the Engineering Efficiency Ratio multiplied by the CTO Levels™ level that this company should be. I call this the Difficulty rate because in my experience, the larger gap between revenues and engineering spend, the more difficult it can be to CTO the company. I told you this wasn’t science!

Complexity bonus = Ln x $1,000
Here I award myself a bonus for the headaches that the complexities that occupy this company will give me. The $1,000 is also somewhat arbitrary so feel free to adjust that upwards or downards.

Hours = (Hours per week x 52) / 12
Very basic but this helps me feel comfortable with taking what I envision spending on this client in a week extrapolated to a month. Of course if you feel comfortable with estimating by the month, then knock yourself out.

Retainer = (Base + Difficulty) x Hours + Complexity
This leaves us with a clean formula that takes our discounted c-suite rate and adds our difficulty rate which we then multiply with the number of hours we expect to be working on this client for the month. Super important that you not forget to pad your rate with the complexity bonus that you award yourself based on this compay’s CTO Levels™.

Scenario

Let's take a look at a company that has the following answers to our questions:

• Annual Revenues: $30,000,000

• C-Suite Salaries: $500,000

• Engineering Team Size: 25

• Engineering Team Budget: $3,000,000

• Hours I want to spend per week: 10

Base rate = $240/hr with 25% discount = $180/hr

Difficulty rate = 10 x 5 = $50

Complexity bonus = 5 x $1,000 = $5,000

Retainer = ($180 + $50) x 43 + $5,000 = $14,890

The 43 hours in a month is calculated by 10 hours a week x 52 (520) and then divided by 12 (43.33).

With the number $14,890 in mind I feel like a retainer in the $15,000/m ballpark should win me the fractional CTO contract.

Go invoice!

You now have a rate calculator that considers the following:

1. the psychology of your C-Suite

2. the complexity of the organization

3. the efficiency of engineering

Whenever I sign up a client, I send my first invoice. I get paid before I do the work. I take notes with how expedient my client is with paying my first invoice because how they pay the first invoice is how they pay all your invoices.

I put the calculator into a Google Spreadsheet that you're welcome to make a copy and play around with.

I hope you have fun with this!