Wednesday, May 25, 2011

Employee Wage versus Consultant Rates

Recently an old colleague was nailed in layoffs at his company. He was originally a consultant, then became an employee, and now progressed (involuntarily) to alumni. He had two offers on the table for his next pay check:

  • 6 month contracting at $75/hr (B2B) to help a company determine their new development patterns. It would be a walk in, evaluate MVC3, etc and resolve what would be used. Then he was not expected to continue working there. He loved the people he interviewed with. It would get his skills up to date for the next job…
  • Employee situation as an architect paying $140K/yr. He was unsure about personal growth in this position.

To him, he deemed the two offers to be financially equivalent. I did not.

 

While it is not unusual to bill 60 hr/week as a contractor – there are enough occasions that you are locked to 40hrs/week – or should I say, the Purchase Order was written on a 40hr/week basis (you may bill 60hr/week – and then discovered that you have an unpaid vacation for a few weeks). So, I always assume a 40hr/week.

 

So, for one year it is 40 x 75 x 52 = $156,000. [No vacation, training or time off]  From this you need to subtract:

  • Employer Social Security aka Self-Employment Tax: ~ 6.7% or  $6,700/yr
  • Medical Insurance (depends on age & family size):   let us say $12,000/yr
  • Other taxes – in WA, B&O would be $1,300
  • So we are down to $136,000

Next, I usually factor in a “on-the-bench premiums” to cover the gaps between gigs, I figure 2 months in good times, 3 months in moderate times. So 10/12 x 136,000 = $113,000.

 

Now let us look at the items to add to the employee situation, $140,000 – assume 10 days of vacation and 10 (official holidays and sick days)  and 5 days of courses.  so we have  140,000 / 47 x 52= $155,000. Now add 50% matching for 401K, that’s $3,000 at least. $158,000.

 

So we have adjusted rates of $113K versus $158K…..

 

In other worlds, his rate should have been $75 /113 * 158 = $105.00.

 

Or, at $75/hr, the employee equivalent rate would be $140000/158 * 113= $100K.

 

From the business perspective, a $100,000 employee costs most firms $200,000 when all overheads are added in. So paying up to $150/hr appears rational, but this is often discounted because the contractors are more ad-hoc hired (and thus more risk of poor skills). The usual criteria is “as cheap as the market allows”. It is no longer unusual to see development departments that are 80% contractors and 20% employees – it makes economical sense as long as there are ample contractors who will work for far less than what an employee would cost(not what they get paid, but the loaded cost).

 

Many contract developers do not do the math and make poor decisions (i.e. work cheap).

 

Money is not everything

There can be other significant factors besides money. A friend recently posted that he has had 4 new bosses in the last 3 months.  Bosses can be bad or good. As a contractor it is easy to bail from a gig and no one will ask why you finished the gig! As an employee, you will be asked if you quit because the boss was intolerable.

 

One joy that I have as a contractor is that I buy my own hardware and software (with pre-tax dollars). I do not have to put up with junk or corporate budget constraints. As an employee, I could do that, but that would come out of my own after tax dollars (normally).

 

I learn long ago that I am a challenge junkie – when I was an employee, I would join a group to solve a problem, get things built or fix and then it slipped into maintenance mode --- which drove me crazy!  The life of a consultant means more learning and challenges then that of an employee. I also get to pick what I work on;  if it is interesting, I do it. If it gets boring, or the politics are bad, then I wait until the end of the commitment and do not renew.

 

Being a consultant is running a business

Business survives by reputation and promotion. I have seen several awesome developers bounce back and forth between being an employee and a consultant every 2-3 years. What typically happens is they get a sweet gig for a few years and when it ends, they cannot locate the next contracting gig easily; a hungry stomach drives them back to being an employee. They did not work on advertising or “good-will” development.

 

You need to keep several clients going at most times. Not for the extra money, but for the contacts that may lead to the next gig.

 

That’s it for my random thoughts tonight, bed beckons…

2 comments:

  1. Excellent Blog. Very very good start - but the analysis could be more complex. I wonder if there's a good workbook out there in Excel to do this?

    Hidden benefits of contracting:
    Tax Deductions for up to 35% of your housing costs - including all maintenance & bills
    Tax Deductions for 100% of an automobile - it could even be a very nice one - if you have 2 of them
    Tax Deductions for your hardware, goodie purchases
    Tax Deductions for all of your phone, etc.. costs & the joy of not having this stuff under the control of the Employer
    Ability as a Contractor to "leverage" or market your demand - e.g. have a light side contract, where you charge more or make a commission for engagement advice, etc... (This is hard to justify, or participate in as an employee)
    Freedom - I've had a couple years where I needed time off from my "main" contract - with a daughter who needed much medical intervention. As an Employee - I would eventually run into not being paid for this leave - but as a Contractor - with multiple clients - I've been able to do remote work, WebEx support, etc...and still have a strong income during these times. Having this ability usually doesn't go well when an employee with the other team members either - it eventually strains your team relationships - but I've found as a contractor - they sort of don't respond to this sort of stuff - because they understand you're not being paid.

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