Billable rate question 9

[benny12]

Does anyone know of any studies or white papers written on billable rate calculations? I’m in an negotiation regarding my salary and since we use studies in my forensic based job, I figure that may help me get my salary alignment discussion progressed favorably. Or I may learn that I should drop it.

 

[Brad805]

Pham, I think you are a different kettle of fish based on what I see of the modern employee. I guess I have to admit I have never been presented that type of breakdown.

I think the human side of the equation is more important in these cases. Am I the go to guy? Does the boss keep bringing me the better projects? Am I the problem solver? Knowing if you are negotiating from a side of strength makes it easier. You can always ask. Pick a % raise and give it a try. So long as you are not a total tool about it, it will be fine.

 

[Eng16080]

I think there's value in an employee having some idea of the company's costs, but I would never ask for a breakdown from them. I figured it was just natural for an engineer to be curious about this. In terms of using this information to try to justify a raise, I would just assume it's pointless. If you really care about making more, the best way is to get a better offer from a competitor. Then, you either just quit outright and take the better offer, or you tell your employer what it would take to keep you there. There are no games, and your employer will understand that you're not messing around.

When I quit my job with the intention to eventually start my own company, I was a little shocked when I got an offer from another firm for nearly double what I was making. I wasn't even looking for employment. I said no to the offer, and they were willing to go even higher. Crazy stuff. I doubt I'll ever work for an employer again, but if I did, I think I might just make it a policy to quit every 3 or 4 years.

 

[Eng16080]

diseconomies of scale

This is definitely interesting and something I've never fully understood. I've always assumed it had to do with larger companies being inefficient. "We can't compete with the little guy working out of his house" is a common saying. I always thought, why can't you? Shouldn't a larger company be more efficient? You have people dedicated to specific tasks, as opposed to one person doing it all.

 

[phamENG]

Eng16080 - for consulting firms, diseconomies of scale are usually avoidable. Here's a decent break down: Link. We only really fall victim to the internal ones. But there is something of a cap on the scalability of an engineering venture. So while there's a big boost between maybe 3 employees and 15 employees in maximizing margins, it gets harder to squeeze extra blood from each turnip as you add more people. The goal is to make sure the margin earned on employee n is as big or bigger than that earned on employee n-1.

 

[TigerGuy]

Most engineers more than a year out of school are performing some level of project management. They need to know the costs, billings, resource commitments and more that go along with those duties.

The worst approach for management is to try and keep all the worker-bees completely in the dark. Make sure they know you don't trust them and then expect them to soar to new heights

I personally don't want to be the boss. I understand enough about that role that my risk tolerance says, "NOPE!" I also understand, and have tried to educate others about, the cost of non-billable hours, different project rates, and more.

"Yes, we are billing you out at a higher rate on this project for reasons X, Y, and Z. That doesn't mean you get paid more, it just means they want other costs hidden in the flat hourly rate we charge them. If you want to discuss overhead, let's talk about the truck you are provided for site visits, the unemployment and worker's compensation paid by the firm, the rent, the utilities, the insurance, the training and marketing budgets, the time you are paid that is not charged to any client such as equipment maintenance, cleaning, and rain days."

I can bury the hourly staff with facts like that.

It sounds to me like Brad is hiring the wrong people.

 

[Brad805]

Tigerguy, there could be some truth to that. We are in a very small market, and engineers must move to our location. There are around 30 professional engineers in our region and a good portion of those are mech/elec engs working for industrial companies. Our location leads to many challenges. We gave up trying and adjusted the amount of work, but that leads to a different problem. Unless you keep growing, a consultant firm has little value at the end of time when you need to sell. Geotechs collect assets in the form of equipment, labs and the likes. We structural guys have computers and software licenses. You better be a good size with a great list of clients when it comes time to sell.

 

[TigerGuy]

That would definitely be a challenge. You've probably already looked at an exit strategy, but I would envision you mentoring and training 2 or 3 promising individuals to buy you out when retirement time comes.

If you can have a gradual transition of power, your last year of work can be focused on owners meetings and tee times.

 

[benny12]

Thanks for the info, well most of it at least.

In general I wanted to learn some of the nuance from a study and see if I could apply it to my own situation. Or possibly have it tell me I’m not doing bad in the consulting world.

I think someone should do a study on billable rates, there’s plenty of data and I’m certain it could be done. Getting the data would be the hardest part.

 

[CWB1]

"We can't compete with the little guy working out of his house" is a common saying. I always thought, why can't you?

Bc the little guy only needs to pay himself as an employee. Larger companies have to pay the employee, management, and shareholders separately. The little guy is also notorious for doing work outside his competence, not considering efficiency or manufacturing cost, and not having fresh-eyes review among other unethical/illegal shortcuts which larger companies cant get away with. Thankfully once a business gets large enough to outgrow the local market economies of scale generally favor bigger businesses, even tho it forces them to spend a ton of time/$$$ training employees on everything from engineering/design skills to regulatory and project management issues.

As Tiger alluded, its generally only the smallest, most mismanaged firms where junior staff dont have access to the company's financials (salaries excluded). Large companies share everything and usually have an all-hands meeting quarterly to review details along with safety, training, and other major initiatives. They also have mid-senior engineers marketing and quoting projects, and everybody junior-up managing them so hiding costs is impossible.

Arguing income vs labor rate is like arguing income vs profitability - a silly but common junior's mistake. As careers progress more of our time becomes overhead - managing, training, mentoring, etc and less profit. Moreover, roles that are entirely overhead (admin, accountants, support, etc) are unavoidable. The only correct response when juniors make either argument is to point out that its both ignorant and belittling colleagues to do so.

Its easy to build a decently valuable business despite little/no profit. Buy the real-estate you're located on, hire skilled employees, set up a management structure without owners as "key men," and keep the ownership anonymous. There's tangible value in the real estate and office furniture and intangible value in the business being an existing independent entity with an office and skilled workforce. If the company is named after an owner or the owner introduces themself as such then you've killed the intangible value bc its no longer independent.

 

[NorthCivil]

The little guy is also notorious for doing work outside his competence, not considering efficiency or manufacturing cost, and not having fresh-eyes review among other unethical/illegal shortcuts which larger companies cant get away with.

I'm not sure what industry you operate in. But in my industry, there is probably more of those things happening amongst the big outfits.

Sole proprietors are usually the more competent engineers with deep industry experience, who can survive riding their own carpets.

Less experienced engineers flock to the big companies, chasing a salary and benefits package. The big companies have too many juniors and not enough seniors giving oversight, and nobody has any real skin in the game.

 

[geotechguy1]

3 to 3.3 seems to be the norm but I have had 1.75 - 2 (small company making profit on testing rather than reporting, during a gigantic recession) to 7.5 (very poorly managed consulting firm with ~80k employees that sets high rates with artificially suppressed hours to win jobs and then does hollywood accounting on every project that essentially results in an effective 2.75 - 3.3 multiplier like that rest of the industry).

 

[Eng16080]

Definitely agree with NorthCivil's post above. Was going to write something similar, but figured I'm biased, since I am in fact the "little guy" we're being warned about.

FWIW, I seem to be getting a lot of work from people who are sick of dealing with these larger engineering companies who seemingly don't give a shit about anything besides billable hours.

 

[MTNClimber]

This is the closest thing that I’ve seen to white paper research. Review the first comment for raw data and the previous year's surveys. The questions are pretty thorough, but anyone can lie.

Also, note that the subreddit is filled with whiny engineers who want to get paid $120,000 for 1-3 years of experience and get a $30,000 raise for passing the PE.

 

[gte447f]

MTNClimber, your second paragraph above sounds exactly like when I was getting started 20 or so years ago. The salary and bonus $$ amounts were lower, but all of my rookie peers with 1-3 years experience thought they should be "project managers" instead of engineers. None of them knew $hit about structural analysis and design but they were ready to be managers.

 

[Aesur]

@MTNCLimber - That data is interesting, seems industry average for structural is 60k to 70k until you get into PM which maybe goes up to 80k to 90k and then principal/associate 90k to 120k. Sad that it doesn't seem like our industry adjusts to inflation at all as these rates are about the same as they were 10+ years ago.

 

[TigerGuy]

Rates also seem to be fairly consistent, no matter the market where we work, despite the great differences in cost of living. Engineers in Arkansas seem to make about as much as engineers in Hawaii, but the housing is about 10 times more expensive in one of those markets compared to the other.