4 ms·

What I don't get is why are the rates so different? Arguments like: uncertainty, getting clients is hard, certain overhead isn't paid, not always having work a

What I don't get is why are the rates so different? Arguments like: uncertainty, getting clients is hard, certain overhead isn't paid, not always having work are all valid reasons. However, they don't seem to make sense for such a big difference. Based on those reasons, I'd suspect a 1.5x difference to be more reasonable, but in most cases it's like 2x to 4x.

pydry 6y ago
It's usually because of different accounting treatment and the relaxation of employee policies. A contractor can be booked as a fixed expense, can come out of discretionary budgets, you don't have to follow salary banding and it's not necessarily seen as a problem if they're paid more than management - especially if it's hard to tell if they actually are (taxes, insurance, etc. complicate things). The other stuff is retroactive justification.
kasey_junk 6y ago
Are you comparing apples to apples? That is including costs of taxes and insurance?
robjan 6y ago
As a contractor you also have to pay for most of your overheads, most notably insurance, training and any certifications. The company is also paying for the convenience of a flexible workforce and specific expertise. It's also relatively easy to treat a contractor as capital expenditure which is often beneficial for the clients accounting.
Ensorceled 6y ago
If you've ever had a client simply refuse to pay you for a two week contract ("sue me"), argued with a client for hours about whether a specification change was "material", had clients decide your estimate changed T&M to a "fixed price contract" ... then even 2x is fools game. 2x is what I might charge clients I know for a low risk, low overhead project.
sokoloff 6y ago
I don’t have to pay benefits and most overhead, which is 25-50% of what you think of as your salary, depending on your salary and geography, so that factor alone gets you to ~1.5x before any accounting for slippage, overheads that the consultant now bears (tax and accounting, marketing/sales, collections). If a consultant is charging less than 2x, I hope they’re thinking of it as a hobby or charity. On the buying side, if I need a specialist wizard on a particular topic for a week for an acute problem, I can shop for skills and largely don’t care what they charge. I want my problem solved and whether it costs $10K or $20K to solve a wizard-scope problem, I literally don’t care so long as it gets fixed. I don’t calculate “well, sure they fixed my problem but I’m annoyed that they make $1M per year at these rates!!”
rm445 6y ago
The demand side is a factor too. Some companies seem to place a premium on being able to flex numbers of contract staff rather than adding and removing numbers of permanent employees. Maybe for morale?
jbn 6y ago
a self-employed contractor is an employer of one person, as such he needs to pay the employer portion of healthcare insurance cost, employment tax, social security, etc... (in the US that's another good 30% on top of salary, in France it can double the cost of employing someone). In addition the contractor does not get the benefit of bonuses, ESPP, profit sharing, 401k contributions, and takes on extra risk, all of that is worth some premium.
ghaff 6y ago
To what others have said, billable hours are never 100%--and may be a lot less. When I was an IT industry analyst we billed something like $10K/day for a consulting engagement but we didn't bill for travel time and a lot of writing we did but didn't sell. Any marketing/selling/administration/ongoing skills development (to say nothing of time you take off) is totally on you.
PeterisP 6y ago
Different tax treatment makes up 1.5x by itself, and then you have all the overhead (accounting, insurance, legal - if you're too stingy to pay a proper lawyer and accountant in the beginning, that will cost you much more later) and "benefits" (e.g. vacation and sick days make a ~10% surcharge), so 2x hourly rate means that as a contractor your annual actual cash-in-hand for the same amount of work is roughly the same if you have a pre-arranged contract where everything works perfectly, which it does not - you need to account for customer nonpayment, you need to account for hours worked on sales proposals that don't go anywhere, you need to account for time&effort in getting this customer, negotiating scope and terms, so if you're treating contracting/consulting as a proper business then an appropriate "customer-billable-hour" rate is 2.5-3x to "FTE-contract-rate" for the same person doing the same work. If you get a good long-term customer that gets you lots of sustainable work on a retainer - reducing (but not eliminating) the overheads on sales,negotiation,downtime and legal/nonpayment risk - then you can go 2x; but 1.5x would be losing you money even in that case, you'd be financially be much better off taking the 1x full time job then.
Mauricebranagh 6y ago
Your underestimating how much the OH head costs of employees is.

pydry 6y ago

It's usually because of different accounting treatment and the relaxation of employee policies. A contractor can be booked as a fixed expense, can come out of discretionary budgets, you don't have to follow salary banding and it's not necessarily seen as a problem if they're paid more than management - especially if it's hard to tell if they actually are (taxes, insurance, etc. complicate things). The other stuff is retroactive justification.

kasey_junk 6y ago

Are you comparing apples to apples? That is including costs of taxes and insurance?

robjan 6y ago

As a contractor you also have to pay for most of your overheads, most notably insurance, training and any certifications. The company is also paying for the convenience of a flexible workforce and specific expertise. It's also relatively easy to treat a contractor as capital expenditure which is often beneficial for the clients accounting.

Ensorceled 6y ago

If you've ever had a client simply refuse to pay you for a two week contract ("sue me"), argued with a client for hours about whether a specification change was "material", had clients decide your estimate changed T&M to a "fixed price contract" ... then even 2x is fools game. 2x is what I might charge clients I know for a low risk, low overhead project.

sokoloff 6y ago

I don’t have to pay benefits and most overhead, which is 25-50% of what you think of as your salary, depending on your salary and geography, so that factor alone gets you to ~1.5x before any accounting for slippage, overheads that the consultant now bears (tax and accounting, marketing/sales, collections). If a consultant is charging less than 2x, I hope they’re thinking of it as a hobby or charity. On the buying side, if I need a specialist wizard on a particular topic for a week for an acute problem, I can shop for skills and largely don’t care what they charge. I want my problem solved and whether it costs $10K or $20K to solve a wizard-scope problem, I literally don’t care so long as it gets fixed. I don’t calculate “well, sure they fixed my problem but I’m annoyed that they make $1M per year at these rates!!”

rm445 6y ago

The demand side is a factor too. Some companies seem to place a premium on being able to flex numbers of contract staff rather than adding and removing numbers of permanent employees. Maybe for morale?

jbn 6y ago

a self-employed contractor is an employer of one person, as such he needs to pay the employer portion of healthcare insurance cost, employment tax, social security, etc... (in the US that's another good 30% on top of salary, in France it can double the cost of employing someone). In addition the contractor does not get the benefit of bonuses, ESPP, profit sharing, 401k contributions, and takes on extra risk, all of that is worth some premium.

ghaff 6y ago

To what others have said, billable hours are never 100%--and may be a lot less. When I was an IT industry analyst we billed something like $10K/day for a consulting engagement but we didn't bill for travel time and a lot of writing we did but didn't sell. Any marketing/selling/administration/ongoing skills development (to say nothing of time you take off) is totally on you.

PeterisP 6y ago

Different tax treatment makes up 1.5x by itself, and then you have all the overhead (accounting, insurance, legal - if you're too stingy to pay a proper lawyer and accountant in the beginning, that will cost you much more later) and "benefits" (e.g. vacation and sick days make a ~10% surcharge), so 2x hourly rate means that as a contractor your annual actual cash-in-hand for the same amount of work is roughly the same if you have a pre-arranged contract where everything works perfectly, which it does not - you need to account for customer nonpayment, you need to account for hours worked on sales proposals that don't go anywhere, you need to account for time&effort in getting this customer, negotiating scope and terms, so if you're treating contracting/consulting as a proper business then an appropriate "customer-billable-hour" rate is 2.5-3x to "FTE-contract-rate" for the same person doing the same work. If you get a good long-term customer that gets you lots of sustainable work on a retainer - reducing (but not eliminating) the overheads on sales,negotiation,downtime and legal/nonpayment risk - then you can go 2x; but 1.5x would be losing you money even in that case, you'd be financially be much better off taking the 1x full time job then.

Mauricebranagh 6y ago

Your underestimating how much the OH head costs of employees is.