How do I determine what percentage of a billed rate should a software consultant be paid? [closed]

Question

I've worked for a consulting company for about five years and have been doing more work on contracts and budgets. I was surprised to see that my billed rate was more than 50% more than my salary.

I work for a company with around 20 employees in the US. I am full time, salaried, with some amount of bench time if needed. The company does not have office space, so there is no overhead there.

How do I determine what percentage of a billed rate is 'fair' for the contractor? What factors play into this percentage, and should the size of the consulting company play into this?

EDIT: I do not mean to bash my current employer. I am happy working with the company and am treated well. This is purely a request for information that I wasn't able to tease from Google.

Answer 1

It sounds like you're being paid pretty fairly. Most businesses will estimate that the fully loaded cost of an employee is going to be in the neighborhood of 150% of that employee's salary. Individual businesses and individual employees, obviously, vary quite a bit but there are a lot of overheads to consider.

First, there are taxes. Your employer is paying the 6.2% employer half of your Social Security tax and the 1.45% employer half of your Medicare tax that you'd have to pay if you were self employed. That's 7.65% of your salary. Plus, there are going to be additional taxes for things like unemployment, state taxes, etc.

Second, there are benefits. The amount that an employer pays for an employee's health insurance can easily exceed $10,000 a year. You can potentially look to see what sort of rates you'd pay if you bought your own insurance policy on your state's insurance exchange to get an idea of what that adds to your overhead. Then there are things like 401(k) plans and other fringe benefits that employers have to pay to establish and that employers may contribute to.

Then, there are vacations and holidays. If you're getting 2 weeks of vacation and another 10 days off for holidays and sick time, that means that you're actually billing 48 of 52 weeks in the year. That adds ~7.7% to the employer's fully loaded cost. And that goes up if you spend a week or two a year on the bench in an average year or if you're getting more holidays.

Next, there are all the administrative things the company does. The company deals with going out and finding clients so you're minimizing the time you spend on the bench and the hours you have to invest in marketing. The company probably pays someone to do some amount of "relationship management" with clients that isn't billable to the client but helps ensure work for others. The company deals with preparing and sending invoices and following up with the company when they don't get paid on time. They pay your salary on time rather than when the particular invoice got paid. They deal with the risk of clawbacks if a client goes bankrupt.

Finally, there are issues of scale. Companies that want to contract out work find it much easier to deal with a single invoice from a single company rather than separate invoices from individual freelance developers. Companies find it much easier to deal with a single company that they can ask for more developers from or ask for people with different skill sets rather than going out and recruiting individual freelance developers themselves. Consulting companies charge more for these conveniences which also adds to the bill rate you see. That "scale premium" isn't really overhead, but it is something that you'd need to factor in if you were trying to compare what you could make as a freelance developer rather than as an employee of the contracting company to see what a "fair" wage would be.

Answer 2

First some background, I've worked for a consulting company like yours, where I was hired out for around 5 times my take home pay, I now work as a lone software consultant contractor and charge my own rate.

Firstly, it may feel like your employer is just raking in profit from the work you are doing. While they will be making a profit over what they are paying you, consider the service they are offering to both you and the company that you've been hired out to (I'm guessing at a few of these and the list may not be exhaustive, but it illustrates my point):

Services to you:

• You are an employee, and have all of the security and benefits that the law dictates an employee should have.

• Your company may have invested time in training you so that you are more able to complete the task required by the hiring company.

• You are guaranteed work while you are employed by your employer, your employer is not guaranteed anyone's business.

• Out of the whole time you've been employed, how many of your hours have been chargeable?

• Your company manages your payroll, pays you holiday and sick time. All of this you would have to provision your self if you went it alone.

Services to the hiring company:

• Provision of skills without the need for hiring company to recruit
• Management of personnel services such as payroll
• Guarantee of a replacement for you if you leave your company / are off sick / on holiday
• Provision of specialist skills without training

So, are you getting a fair cut?

If you have been subcontracted out, you maybe in a powerful position in terms of renegotiating your salary. If the hiring company likes you, and your employer has enough margin in the rate they charge for you, they may well be willing to part with some of the profit they are making on your time. How much depends on the numbers and your negotiating skills.

Bear in mind that your employer has many overheads and taxes to pay, and the Gross profit they make on your time, will not be the same as the Net profit.

Also, if you manage to negotiate a pay rise, if the contract with the hiring company ends, and your company cannot immediately find more chargeable work for you, you may be too expensive to keep on the books, and be made redundant. Depending on how specialist your skills are, this could be a good / bad thing. If the skills are pretty niche, you'll need to be extra careful not to upset people.

That didn't really answer your question?

There is no definite answer. Back to my background, I left my employer while contracted out to a hiring company. I was fed up with the travel mostly. The hiring company offered me work, suggesting they could work around any contractual obligations to my employer, but I turned it down.

I now freelance / contract in the same industry. Do I earn 5 times my old salary? Nope. It's pretty good, but not that good! Companies can often charge more than you could as an individual contractor, for reasons including the services to both parties above. Plus I have accounts to do and no job security. Not everyone is comfortable with this style of work.

All of that said, don't sell your self short. I've been happier in my work since going alone, and you might be too.

Good luck!