Fairly Evaluting Consultant Versus Full Time Rates, Part I

Any Consultant will Frequently be engaged in rate discussions with potential clients.  Many times these are hiring managers, not HR folks.

Sometimes, these hiring managers expect consultants to work for the same hourly rate a full timer would perform the same task for.

If they are quoted a rate higher than that, they feel they are being “ripped off”.  Are they?

Let’s consider a Full Time Employee with Benefits (“Full Timer”) versus a Consultant (“Consultant”) at the same Hourly rate.  To make the comparison simpler, let’s assume they are both paid as W-2, and that they have equal talents, possibly even the same person just being paid one way or another.

Now, let’s say the “Full Timer” is getting $60/hr.  What rate should the Consultant be getting?

First of all, how much is the $60/hr Full Timer really costing the company?  If one were to say $60/hr, one would have a lot in common with many hiring managers who don’t know the true cost of an employee.

  1. Full Timers generally get 5 weeks of vacation: 2 weeks of vacation, 10 paid holidays, and 5 PTO/Sick Days. This is 5 weeks out of 52, or basically 10%.  Therefore, with vacation factored in, that full timer is costing $66/hr.
  2. Insurance can run $5-$10k, or another 10% of salary. Now that Full Timer is costing $72/hr.
  3. Add in 401k, office space, equipment, software, etc, and that’s another 10%-15% bringing it to $80+/hr
  4. Now factor in that the Consultant must continually market themselves, and must spend a percentage of time in business development, waiting for projects to start/contracts to get signed, etc, and that cost must be covered somehow.

The above analyses clearly shows that Companies are paying far more for their full timers than the base hourly rate would suggest; these are true and actual costs, and should add ~30% or more to the rate being offered to a consultant who is bereft of those additional benefits.

Additionally, hiring companies are enjoying the flexibility of the consultant relationship, and therefore should bear a fair cost of the business development, sales and marketing and other operational costs that consultants must bear in providing services.

Therefore, even on a W-2 versus W-2 basis, Consultants need to make an hourly rate of 30%-45% more than a full timer just to achieve parity.

Additionally, Consultants often have unique or in depth skills that the organization lacks, which would tend to push their rate above standard employees in any case.

Hiring companies who think that Consultants should work for the same (or less!) hourly rate than equivalent full timers do not understand the economics of the situation; this has led many consultants to exit the field and reduced the availability of consultants in the marketplace.

Hiring companies want to hire the “best and brightest” … What part of the “best and brightest” would operate as a consultant for less money than they would make as a full timer, in the bottom line analysis? If you find someone who would agree to that, one can almost guarantee they are not the “best and brightest” — certainly not at math anyway.

Hopefully this posting illuminates some of the issues facing the rate that many managers and consultants are unaware of.

All of the costs in 1-3 are true costs born by the company when using full time employees.  #4 is an adjustment cost (the cost of sales) that is passed on by the consultant.

Companies could lower #4 by using more efficient hiring practices (eg, interviewing only 3-4 candidates,  and making a decision within a week). Industry trends away from this baseline (interviewing dozens of candidates and taking a month to reach a decision) raises the costs of sales of the consultant.  It is only fair to pass this along to the hiring organizations, who are “benefitting” from this longer process.

In a future posting I’ll go into more depth about W-2 versus 1099.

The good news here? Hiring Companies who think they are being “ripped off” by their consultants almost universally are not.  In a fair analysis, one will find that the rates are not as far fetched as might have once seemed before the true costs of the Full Timer are appropriately factored in.

 

DISCLAIMER:  THIS IS NOT FINANCIAL OR CAREER ADVICE; JORDAN IS NOT AN ACCOUNTANT OR TAX PROFESSIONAL; EVERY SITUATION IS UNIQUE; FOR A COMPLETE ANALYSIS TAILORED FOR YOUR UNIQUE SITUATION PLEASE CONSULT YOUR ACCOUNTING PROFESSIONAL OR HR DEPARTMENT.

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About postagilist

Architect, Manager, Developer, Musician, Post-Agile thought leader
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3 Responses to Fairly Evaluting Consultant Versus Full Time Rates, Part I

  1. Joon says:

    Hi PostAgilist

    This is a very good discussion about achieving parity. But I think that you did not mention an important point – that old law of supply and demand.

    Typically those of us that consult do so because we believe (rightly or wrongly 😀 ) that we have skills that would be wasted spent on one project or even one company. Therefore we can charge a higher rate, and should really, IMHO at least, be charging more than parity, because we bring more to the table.

    In an environment where some people are hugely more productive than others, it makes sense for consultants to spend time at the start of a project, making sure that it is off to a good start, and then going on to something new, leaving the less productive or experienced individuals behind to finish the project and gain experience from the structure that a good consultant would leave behind.

    Then of course there are those BS Artists that give the rest of us a bad name, just go over to http://www.thedailywtf.com to see more of those.

    Anyway, enough of my ramblings, I do enjoy your blog and find myself nodding along to most of what you say here

    Regards,
    Joon

  2. PostAgilist says:

    Hi Joon

    Well, in this post I didn’t touch on using Consultants as specialists but I do have a posting about that here:

    http://www.infoq.com/news/2008/06/agile-generalist-specialist#view_24417

    PostAgilist

  3. SAI says:

    NICE ANALYSIS

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