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February 23, 2005 06:04 PM

Categories: Human Resources

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ExtraLean

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Joined: 09/16/2003

Taking into consideration "employee overhead" (such as benefits, etc), what is a good way to determine a suitable hourly rate for a consultant given what an employee's salary would be for the same job?

So, for example, if an employee's salary is $55,000 to do Job X... what should the consultant's hourly rate be for Job X?

Discussion:    Add a Comment | Comments 1-25 of 27 | Latest Comment | 1 2 Next »

February 23, 2005 10:12 PM

Consultants were always paid at 30% over salaried in the larger companies I've worked in. My husband did the back and forth thing for many years, based on whoever was paying more. Same job, just different employers every other year. That was back before the Microsoft lawsuits and the change in views on consultants. My above statistic is not for Microsoft, they're just the ones who were involved in the lawsuit that made it all change.

Lisa

February 23, 2005 10:15 PM

Consultants were always paid at 30% over salaried in the larger companies I've worked in. My husband did the back and forth thing for many years, based on whoever was paying more. Same job, just different employers every other year. That was back before the Microsoft lawsuits and the change in views on consultants. My above statistic is not for Microsoft, they're just the ones who were involved in the lawsuit that made it all change.

Lisa
Interesting... thanks for sharing.

Could you elaborate on the "change in views" toward consultants? I just want to be sure I understand where you're coming from.

February 23, 2005 10:25 PM

Microsoft would hire someone through a contracting company and give them an employee job, require the same long hours and pay them well, but would not give them the benefits of being an employee. Eventually, the "contractors" got tired of it (the basic IRS rule) and they sued. Those jobs mostly turned into employee positions. The industry became very aware of what is a contractor and what is an employee. If you're not familiar with this concept and you're in the US, then you need to read:

http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html

A consultant is not the same as a contractor. A consultant comes in as an expert and gives you advice. A contractor is someone that does work for you using their own methods, schedule, usually has other clients, etc. An employee is someone that does work for you according to your methods. The IRS document is very clear and will help you more with the definitions.

Lisa

February 23, 2005 11:08 PM

It also depends on the length of period of the contract. The rule of thumb that consulting firms use is for annual billings to be at least 2x salary (without benefits) to cover overhead, downtime and all that stuff.

---

Robert Dubicki

February 23, 2005 11:23 PM

If you're not familiar with this concept and you're in the US, then you need to read:

http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html

Lisa


Thanks for the tip, I'll definately take a look at that.

February 23, 2005 11:25 PM

It also depends on the length of period of the contract. The rule of thumb that consulting firms use is for annual billings to be at least 2x salary (without benefits) to cover overhead, downtime and all that stuff.

How does the length of the contract come into play? Should the hourly rate go up or down with longer contracts? (And, what is considered a *long* contract? How about something that requires 40/hrs week and is a few months long?)

February 23, 2005 11:43 PM

Yes of course the hourly rate goes down with longer contracts. If someone is going to be billed 100% of their time for a full year, then they are not going to have down times, and the client will certainly expect to the billable rate to be a lot less.

It varies by the type of consultant, the nature of assignment, a lot of factors come into play. For example in the days of the big consulting six firms, a rule of thumb for a consultant, was to be target to be billable for approximately 1600 to 1800 hours a year at an XX rate. If you billed for less hours, then your rate better be higher to cover your costs.

---

Robert Dubicki

View unverified member's comment - posted by Jay Pimentel

February 24, 2005 9:49 PM

Thanks, Jay!

February 25, 2005 8:27 AM

Two somewhat unrelated thoughts.

1. It's not just the Feds! At my company, when we were young and foolish, we used contractors and were diligent about following all of the IRS rules. Then we had California come down on us like a ton of bricks. So, check into your state's rules as well as the Federal rules. I could give a lot of specifics, but I think your own research will be more definitive.

2. I have certainly heard Lisa's 30% number and I think it is way too low. Besides the obvious taxes and benefits, here are a number of additional factors that add cost to an employee but not a consultant:

- Typically, when an employee has to run a "quick errand :rolleyes:" during the day it is on the clock, but not so a consultant.
- You're supposed to train employees; consultants are supposed to come already trained.
- Risk of "down" time: if you ran out of work for an employee for a couple of hours or a week or two, you wouldn't lay them off -- but you'd send a consultant home on a minute's notice.
- Risk of poor workmanship: you can't not pay an employee for shoddy work, but you wouldn't pay a consultant.

February 26, 2005 9:47 PM

These days consultants are NOT paid better than the employees. You can get any skill you want very cheaply.

When I was on my last contract, some employees knew that their company was pushing rates down, while other's were on you for making so much more than them. It might have been that the bodyshops were keeping the markup for themselves. I'll be real happy when the power shifts back to the employee. But, then by then, I'll be an employer.

The lawsuits were about misclassifying employees as contractors. I just went through this. I decided not to sue, but then I had an interview at the same company just a few weeks ago. I had to drive 140 miles for the interview. And, the hiring manager had no intention of hiring me. That was my last $30 dollars. So I'm mad enough to sue them. The company itself was very clear about consultants not being employees. It was the supervisiors and leads that were making the mistake. Maybe a call to HR will take care of the problem, but then I don't get my $30 back.

The way you manage a contractor is to tell them do this much work by this date. Then, you are done. If you tell them to attend meetings, or be at their desk for eight hours, or demand to know when they will or will not be there, you are out of line, and you could get your company sued.

I don't know why a startup would use a contractor.

David Locke

February 26, 2005 9:53 PM

The business of consultant and benefits is also problematic. I went contract to perm. The employer wanted me to discount my rate, because they provided benefits. I let them get away with it, but my bodyshop actually had much better benefits. I'll never let that happen again. The employer's beneifts administator actually paid almost no medical insurance claims, which means that they created a vast liability for me, and one day I could get a demand for that money.

These days contractors get no benefits from the bodyshop. The last bodyshop I worked for had an employment contract that had every rational person I knew telling me not to sign it. I negotiated away all the problem areas. They later came back and demanded that I sign the standard contract and I refused. What a mess.

Go 1099 and charge what the market will bare.

David Locke

February 28, 2005 7:41 AM

Two somewhat unrelated thoughts.
- Typically, when an employee has to run a "quick errand :rolleyes:" during the day it is on the clock, but not so a consultant.
- You're supposed to train employees; consultants are supposed to come already trained.
- Risk of "down" time: if you ran out of work for an employee for a couple of hours or a week or two, you wouldn't lay them off -- but you'd send a consultant home on a minute's notice.
- Risk of poor workmanship: you can't not pay an employee for shoddy work, but you wouldn't pay a consultant.


One more aspect: A consultant typically has a significant amount of domain knowledge, with which he/she could get a job easily. Why become a consultant? Consultant's fees are not restricted by peer salaries. People who have a significant domain knowledge can't get higher salaries as employees since the amount of time they use that knowledge is about 10-20%. By being a consultant they can work with multiple organizations and always do that 10-20% work only, for which they get paid "the right" amount. From a consultant's viewpoint, unless he charges at least double the hourly rate, it doesn't make sense being a consultant. These rates could be higher if the consultant bring in more value by transfering that domain knowlege to a team in a company.

February 28, 2005 9:06 AM

Here you have the difference between consultants and contractors. A consultant must sell their own services or be employed by a consulting firm, which would in tern limit salaries. A contractor is hired by a bodyshop most of the time and is just another, risk free, way of getting paid. A contractor can't get a higher salary. A consultant can. Even 1999 and Corp-to-Corp faced salary reductions in the bust.

My rate went down and down, and it didn't matter what I knew.

David Locke

February 28, 2005 9:45 AM

I don't think that we want to mislead readers here. Just because companies hire people as contractors and pay them the same or less than employees, does not make it a legal action. The IRS will crack down on companies that do that. If a contractor is in such a position then they can fill out a form SS-8 with the IRS to have the IRS determine their status.

A consultant and a contractor are two terms that companies tend to use interchangeably; however, there is a defineable difference.

A consultant is a professional advisor. Someone who specializes in a particular business area and who is brought into the company to provide guidance and consulting services on how a business can improve its processes.

A contractor is someone that is hired for a particular project, to do the actual work for the project. A contractor is someone who you tell what you want done on a high level and when you need it done by. After that, they do the work and you don't monitor that work.

An employee is someone that you hire that you give direction to on a regular basis, require certain work hours, assign specific tasks, require to attend meetings, monitor their work, provide their tools.

http://cobrands.business.findlaw.com/employment_employee/nolo/ency/EC23B572-AC9F-4334-BEBFFD8ACD0E6DCF.html

Lisa

February 28, 2005 10:11 AM

Well, this is great. I don't have to sue. But, gee, I wanted to sue them. I want them to train their managers to not treat contractors like employees. I'm wondering if just calling corporate HR would get this fixed.

David Locke

February 28, 2005 11:29 AM

If they're doing this and you want to do something about it, then you can fill out the SS-8 and send it in to the IRS. The IRS will investigate and make the determination and if your "employer" is doing this, it will cost them penalties and interest on taxes they were supposed to pay. They will have to pay penalties and back taxes, you might even get some of the taxes back that you've paid while in the arrangement because they were supposed to pay half of the SS and you've been paying all of it.

The only thing is that the SS-8 initiation will automatically send a copy to the "employer" so they will know that it is you.

As a side note, I've personally been in all three situations plus one we haven't talked about in this thread -- consultant, contractor and employee, my favorite so far is business owner ;). I decided not to do the SS-8 because it would have jeopardized the jobs of my friends/colleagues who were also doing the work. It's a twisted dilemma. Now that those friends are gone from the company, I would do the SS-8, in a moment, if I thought that the energy to put into it was worth anything to me. It's just not worth my time or energy, I gained a lot of good experience at that company, as a matter of fact, I model the infrastructure of my current company after their company (but I don't do illegal IC work). I do think that the company that was doing this figured out the rule, though, because they quit the practice when my last friend was still in there. They told them that they would have to go to commission only or leave the company, they left the company.

Lisa

February 28, 2005 6:21 PM

I didn't want to sue them, but I had to drive to Austin last week for an interview with a different branch only to notice that the manager was never going to hire me. That was my last $30 and I'll never apply there again.

The bust has ruined my credit and every job I've applied for requires a credit check, from which they infer whether you are responsible or not. This amounts to writing off everyone that got killed in the IT recession. I'm to the point that I'm not going to apply for jobs anymore.

I'm still waiting for the startup to start. But, I need to work in the meantime just to eat, so this is killing me, and I really don't care about the impact of suing, since it is very apparent to me that I will never be an employee again, and that's not just in IT.

I'm trying to remain optimistic, but the call I should have gotten today never came. Maybe Tuesday. By Wednesday or never. Then, what? Wait until an employer fails to do due diligence. Congrats to everyone that made it through the bust, but I wasn't one of them.

David Locke

April 12, 2005 1:24 PM

I hire independent contractor almost every day, using the 50,000 annual sary comparison.
We usually pay between 30hr to 35hr for a 50k person.
75k to 80k we usually pay 45hr
85k to 95k beween 50hr to 65hr
100k to 110k usually 70hr to 75hr.
Obviouslly certain skills drive different ranges, but this should give you a good starting point.
On the topic of Independent contractor V.S employee, this is a very real issue.
You would be surprised at the ammount of companies that would be at risk today if sued or just audited.
Part of my offerings to anyone in here can solve this problem for there company or there client's problems for a low cost highly suffisticated way.
If you would be interested to know more feel free to shoot me an e-mail.
Randy Moore
rmoore@agsinternational.biz

April 12, 2005 3:01 PM

Rates of pay are dynamic. Last year you couldn't get medical insurance. Now, you get a better rate and full benefits. It will go south again, but for now things have improved.

David Locke

April 12, 2005 3:31 PM

David,
I certainly agree with the fact that salaries have increased, as more people go back to work it will increase alot more.
Companies we able to get good talent for cheap do to the heavy down economy as we know, but in the last few month's atleast in New Jersey the hiring has increased at a rapid rate.
We now have more opening's than people.
Standard supply and demand issue.
Randy

July 19, 2007 12:10 PM

For example person making 50,000 as an employee, you pay benifit that will cost HR about for example 25% of base salary and Bonus of 3000. So total expense for this employee is 65500.

He works 365 Days - 102 Days(8.5 Day * 12 Month Sat and Sunday) - 10 Holidays - 15 Vacation Days - 10 Sick day - 3 Admin Days = 225 Days

Total Hours is 225 Days * 8 Hours = 1800 Hours

Per Hour rate is: 65500/1800 = 36 ($41 for 7 Hour employee @ 1575 Hours)

Let me know how it sounds!

July 19, 2007 1:52 PM

I'm finding that the only rates that are reasonable are the ones requiring a clearance, aka no elgibility for H1Bs. Othrewise, I get H1B bodyshops making extremely low offers without benefits, and no offset for short-term engagements. The point here is to get Americans to say no, so they can bring in an H1B.

So I don't see rates going up as the market tightens. What I see is that if you haven't exited the field back in the bust, your persistance will not pay off. Get out now. Technical employment is history.

July 21, 2007 4:22 PM

thank you for all of the useful information.

September 13, 2007 2:42 PM

Has anyone ever heard of this before? I read it on another website. I asked someone who is in consulting and they go by this as well.

1/1000 so if you make $100,000 per year, your hourly rate would be $100/hr.

I asked someone who is in consulting and they go by this, but they do 1/1000 + 10% so the rate would be $110/hr.

Discussion:    Add a Comment | Back to Top | Comments 1-25 of 27 | Latest Comment | 1 2 Next »

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