Consulting firms such as MBB firms typically charge $5 million for a project consisting of roughly 6 consultants and lasts around 6 months. Project cost varies depending on scopes of work (deliverables), project type (Diagnosis, Strategy, Implementation), client location, client relationship, and sometimes depending on management decisions.
In this article, I will explain the reasons behind variations in consulting project cost and debunk 4 misleading myths about cost composition in consulting projects. Keep reading!
Read more: What is management consulting?
Table of Contents
Consulting firms calculate project costs based on a wide variety of factors. The most important factors are the ones that cause the most significant variations in project costs. These factors are project deliverables, project type, client location, and client relationship.
No. 1: Project cost varies depending on the volume of deliverables
A deliverable is a final product of a consulting project. Examples of deliverables are tangibles such as PowerPoint decks (which list everything done, measured, and delivered), implementation plan documents, dashboards, and tools to implement the project. Intangible deliverables are technical training for employees at client company or change in their attitudes.
Generally, the more deliverables a project requires (the larger a project’s scope of work), the higher number of consultants will be involved. This leads to significant increases in project costs.
No. 2: Project cost varies depending on project type
The type of project clients choose for their business problems causes major changes in total project cost. There are three main types of consulting projects: Diagnosis, Strategy, and Implementation.
Diagnosis projects are the cheapest among the three types because deliverables are limited to the diagnosis of root causes. Meanwhile, implementation projects have lower costs per unit of deliverables relative to the other two types.
Strategy projects are usually the most expensive because (1) deliverables contain long-term strategies to resolve the identified root causes and (2) they are usually the first projects that client companies hire consulting firms like McKinsey, BCG, and Bain (from the second project onwards there’s usually discounts).
No. 3: Project cost varies depending on client location
Project cost also depends slightly on the client’s country of operation. Projects in developed countries cost more than projects in developing countries because of factors like differences in currency (which affects consultants’ rates), standards of living, and affordability (how much clients can afford per project).
For example, a client company simultaneously requests two projects, one in China and one in the UK. When these two projects are billed on paper, say, in USD, the one in Thailand might cost less than that in the UK. One reason is that the consultant pay rates are lower in Thailand than in the UK.
No. 4: Project cost varies depending on client relationship
For most consulting firms, clients with closer relationships (having signed one or more projects in the past) usually get discounted price on their future projects.
The first few projects that clients sign are often the most expensive. After these first few, prices gradually decrease for the second, third, fourth projects, and so on. Discounted prices also apply to clients purchasing more than one project type (Diagnosis, Strategy, Implementation).
No.5: Project cost varies depending on partner’s decisions
Sometimes, projects are offered discounted prices when Partners decide to leave footprints in a certain location.
At McKinsey, for example, Engagement Directors (ED) might want to establish new offices in Busan (Korea) for many reasons (personal, professional, etc). In this case, the ED will likely offer discounts to secure projects in Busan.
The five factors listed above are the main drivers of changes in project cost. To make it even clearer, I will show you the factors that do not contribute that much to project cost, yet are commonly believed to do otherwise. Without further ado, let’s debunk a few common misleading myths!
Myth #1: Projects involving large numbers of people cost considerably more
A common way of thinking is that more people means more salary to pay, which greatly increases project costs. This is thinking partly true but consultant is the keyword it misses.
In reality, the number of people only alters project costs by a negligible amount. Whereas, because consulting salaries are the highest, the number of consultants (which depends on a project’s scope of work) is the significant influence.
Myth # 2: Distance from client base to office base play a big role in costing
Another common myth is that the larger the distance from a client base to consultants’ office base, the more expensive the project becomes.
The truth is, commuting and traveling costs account for a very small part of the entire project cost. Location-wise, the differences that matter are salary rates, currency, the standard of living, etc.
Myth #3: Projects with more support services cost considerably more
Support services are also insignificant variables in project costing but often believed otherwise.
It is true that consulting firms value consultants’ time, offering them a wide range of resources to capitalize on, from expert coach sessions, and professional slide designing, to Excel expert support. However, these costs are extremely trivial relative to other costs, and will barely change the overall project cost.
Myth #4: Competition significantly affects project pricing
Some also entertain the idea that competition among major consulting firms (Big 3 firms) will decrease the price of certain advantageous projects by a large margin. A project in, say, Shanghai, maybe so lucrative (not just monetary-wise) that firms will significantly lower project prices to get their hands on it.
Although this sounds valid theoretically, it is rarely the case in reality. Most projects at MBB firms have their own price range. Changes in these price ranges are rarely subjected to competition, and will only vary by a notable margin depending on the five factors mentioned above.
Consulting career is monetarily rewarding and is especially beneficial in gaining career capital (such as network, experiences, and skills) that opens up even more rewarding exit opportunities. That said, getting into consulting requires you to go through 3 extremely challenging rounds of resume screening, ability tests like the McKinsey PST, and Case Interviews.
As an ex-McKinsey myself, I spent more time looking for prep materials than preparing, and really wished they were all in one place. But you can certainly do differently and save valuable prep time and effort, because I’ve gone through all the hassle for you to create the Ultimate Management Consulting Program, containing everything you need to get into consulting. Good luck with your prep!