IT Consulting: Is the rate fair?


DISCLAIMER: This post uses very general and rough figures. The true rate has to be calculated individually to determine whether an opportunity is good or not. It is good to use rough figures, however, to determine if the contract is even in the ballpark where it makes sense. Taking this approach, you will not knee jerk towards an opportunity that is obviously a bad choice. You need to work in real figures to determine if a deal is good or bad for you.

NOTE: This post is written largely because so many people I know have taken contracts that they felt were good deals, only to find they were not nearly as rosy as they appeared. Generally, the reason for this is the individual did not calculate in his true earnings (including benefits) when he saw the hourly figure. Hopefully this post will help you make a better decision.

One of the questions I often get asked is “do you think X dollars an hour is a fair rate?” This is a hard question to answer, as I am not always sure what the person is worth, especially if I just met them. But I can, and do, answer how to determine if a rate is fair for you.

Let’s get a profile of the person who normally asks this type of question. They are generally a full time employee making in the mid 80s per year. In most cases, they have a $50 an hour contract dangling in front of them. I can generally probe to determine what other goodies there are.

Calculating Contract Hourly

First, let’s break down a full time gig at $85,000 per year. To determine the hourly, you take the yearly salary and divide by the number of hours worked in a year. If you want to calculate 40 hours per week, the number of hours is 2080. This yields an hourly of $40.87. You may actually average more than 40 hours per week and desire to adjust this.

This is where most people stop. The problem is the true hourly is a bit more complicated. First, the average person in the United States gets 7 holiday days per year, 10 vacation days (first year, rising to 3 or more after a few years) and a number of sick days. I generally don’t include sick days in calculations, as I don’t generally use any of them. You may be different on this front. Just taking the vacation and holiday days, a full timer is paid for at least 136 hours he does not have to work (a bit more than 3 weeks). With these hours, the rate goes to $43.77 for 40 hours a week.

You also, to be fair to yourself, have to start calculating what you receive based on 1944 hours instead of 2080. The reason is you are not going to paid for these hours as a contractor, unless the contracting company baked it in. if you do not use 1944 in your calculations, you are leaving these hours out, which means you will have to make up for them in “overtime” hours (mostly paid at 1 times rate rather than 1.5 (unless it is in the contract, which is rare)). I will include both the optimistic 2080 hours and the more realistic 1944 hours in the calculations below.

Now you have to calculate in your benefits. The normal company pays over $9500 per year for medical benefits. If you go on COBRA, you eat 100% of this cost. If you calculate this by 2080 (use this figure when figuring expenses, as this is how you are paid as a full time employee), this is another $4.57 per hour.at 2080 hours and $4.89 at 1944 hours.. If you use the adjustment of what you actually work,  You might reduce the cost by buying insurance through the contracting company (if they offer it, although it will probably be worse coverage than your current employer’s plans) or by buying your own insurance. We are now at $48.29 per hour for 2080 hours a year ($48.61 at 1944 hours).

NOTE: If you have a consultant benefits package, use real figures here for the costs you pay today and what you will pay for insurance as a consultant. It will yield an accurate figure. The above is a ballpark figure.

What about other benefits? Does your company offer health club benefits that you take advantage of? Child care? Education, including being sent to conferences? Certification? All of these have to be calculated in, unless you are willing to lose them without compensation. As an example, a week at a conference like TechEd or VSLive generally rack up at least $5000 in cost, or another $2.40 in hourly benefits ($2.57 if you calculated at 1944).

And what about retirement? If your company offers a match on 401-K, and you max it out (usually 3% of salary), you have another $2550 per year at $85K, which is another $1.27 per hour ($1.31 at 1944 hours).

At this point, you are at as much as $51.96 per hour, which is a $1.96 per hour loss when you look at the whole picture ($52.49 if you used 1944 hours for a $2.49 per hour loss). Now, the loss may not mean as much to you because you are not interested in retirement, for example. And, for the short term, I don’t see a problem with this. To pay off current debt, the extra hourly may be a better situation for now. If so, that is fine, but realize the situation.

If you have run the calculations, moving to a contract positions, without benefits, you should make 20% more per hour to break even. This is true regardless of your salary. While you might end up with more “overtime” with the contract, consider that a bonus for taking the position rather than a guarantee.

The takeaways here:

  • You need to figure out your true hourly worth
  • You should make at least 20% more on a W2 contract to break even.
  • You can add overtime in as a reason to move to a contract, but don’t count it in your calculations of whether or not the contract is a fiscally sound decision.

NOTE: For each $5000 you make above $85,000, you need to add between $2 and $2.50 per hour to determine a good rate.

1099 and Corporation to Corporation (Corp 2 Corp or C2C)

In the above example, I assumed the contract was still W2. Some contracts are either 1099 or Corp to Corp. Of the two, C2C will be the more financially rewarding, as you can easily write a lot more expenses off your taxes. It is also the more time consuming to set up.

With each of these models, the rate should go up approximately 10% to cover your self-employment tax, as the tax write offs will vary by individual. The addition of your personal share of FICA (social security) and Medicare do not vary, you have to add these to your calculations. To cover yourself, the 10% is added on the total of the W2 calculation, as you will be paying for every dollar you are paid from the consulting company.

If we take our previous example, the hourly should be between $57 and $58 per hour to break even. Count the items you can write off (need a new computer for work?) as a bonus.

With C2C, you will have a few additional expenses, like errors and omissions insurance. Even at the worst, a few extra dollars per hour is sufficient to cover these expenses. Be sure to include expenses of an accountant, as he will be worth his weight in gold determining how much of the corporate dollars are paid to you in salary and how many simply pass through to you at the end of the year.

Travel

Okay, this is the big one. You see what you think is a good rate in another town and want to know if it really is good. Or you have heard about someone being paid $100 per hour on a traveling gig and think that sounds great. But wonder if it is really is a good rate.

The way to calculate this is determine the costs of various expenses. If you travel, you will incur the following expenses: Flight, car/taxi (include fuel if you rent a car), hotel and meals. To calculate these you need to determine a low, average and high for expenses. Start with a travel sight and do the research.

For my work in Austin, the T&E (Travel and Expenses) averaged the following

    • Flight – $500
    • Hotel – $650
  • Auto – $ 285
  • Gas – $40
  • Food – $200

Added together, the cost was $1675 per week average. A top figure is more like $2000 per week. This means $42 to $50 per hour. If we add this cost to the hourly we calculated before, we get the following rough figures.

  • W2    – $102/hour
  • 1099/C2C – $110/hour

Now, you can certainly save on travel if the contract is long term. There are extended stays places and even most hotels will offer a monthly rate. In some states, like Texas, once you rent more than a month, you get the hotel tourism taxes taken off the rate, saving you even more. Booking flights out far into the future yields further savings, but this can burn you on many airlines (not as much on Southwest, where you can use the unused flight dollars without penalty for a year, but you will also never auto-upgrade to first class). You can also save on food in the correct hotel, by cooking for yourself or taking advantage of meals in the hotel. Don’t count these in on your initial calculations, however; consider them a bonus.

Summary

To determine whether or not a deal is good, you have to monetize everything. One good way to do this is start with a 40 hour week (2080 hours per year) and subtract hours for holidays and vacations (and possibly sick leave if you use it up every year). Use this figure to determine your true hourly salary. Then determine the difference between benefits (most likely most go from something to nothing) and determine the hourly value of those benefits.

What is often shocking is many people thought they were getting a great deal in a consulting gig and find that they were winning slightly in the gross take home, but losing in the game. It is quite easy, when looking at $50 per hour, to see it as a $15,000 increase over $85,000 and then realize it was actually a loss (or very slight increase) once all benefits were taken into account.

Peace and Grace,
Greg

Twitter: @gbworld

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