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.

 

[phamENG]

Yes. On my phone so I don't have access, but Google Engineering labor multiplier.

 

[IRstuff]

Note that the rate multiplier is highly dependent on the company and their internal practices. Some companies run lean, while others run heavy

I personally wouldn't worry too much about multiplier; your base salary is your worth, so trying to fit into some bucket may be a disservice to your long-term goals. If you're worth your salary, they'll figure out a way to deal with it, or they don't deserve you.

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[geotechguy1]

I have had everything from rate = 2xhourly pay to rate = 7xhourly pay. The former was a very small company essentially running at cost to try and stay afloat during a recession, and the later a tier 1 doing alot of hollywood accounting to try and pressure engineers to work faster (basically, bid the job with the same total budget but suppress number of hours; then end up "writing off" hours over the course of the job as "losses").

 

[CWB1]

Read the annual salary surveys for the professional organizations you belong to. They will give you a reasonable idea of how your salary falls relative to others in your field, age, location, or otherwise. Dont make the mistake of associating income with cost-of-living. Stateside, incomes vary little city-city or rural-rural area whereas cost of living varies a lot.

Labor rate varies by business model and role. Management rates are often =<1x. Large, high-volume consultancies are often 1.1-1.5x and small low-volume 2-5x+ for engineers. Understanding your employer's pricing model is helpful for project planning but irrelevant for salary negotiation. In that circumstance employers dont care how profitable you are or can be, they care if they can replace you with a cheaper alternative.

 

[glass99]

@benny12: As others have pointed out there is a wide range of multipliers, so you should try to figure out what the multiplier is at your specific firm. It probably varies a little between projects but there will be a typical value. Also at junior levels the multiplier can be wonky. The "classic" number is 3.0 (one for the salary, one for overhead, and one for the partners). If you are at a big forensic firm my guess would around 3.5. A $180k position bills at about $300/hr. You can figure it out from job listings to an extent. Forensics firms tend to have lower utilization numbers I think also, so if you have high utilization because you are in demand, that's definitely worth mentioning at a performance review.

 

[Eng16080]

3x seems to be a rather common multiplier.

With that said, I think the bigger factors are likely:

1. How much you make your company either directly or indirectly (like in assisting other engineers). This might be hard to know and likely accounts for a lot more than just your billable rate. You might have a high billable rate, for instance, but if you're often way over budget and your hours get thrown out, or if you get work done quickly but the job goes poorly and the client isn't satisfied, the billable rate might not be as meaningful as you think. The opposite can also be true. You might have a relatively low billable rate but may well be doing an exceptional job. The billable rate is to some extent arbitrary.

2. How much another company is willing to pay you. This is probably the most meaningful metric. If you can manage to get an offer from another company, you might as well consider that your true value. This might say more about your ability to interview as opposed to your skill as an engineer, but I think that's often how these things go. Understanding the true value of a good engineer is not something that is necessarily obvious to a lot of employers.

 

[benny12]

Thanks for all the responses. I don’t want to go through each, but clarify some aspects:
1. I never miss my billable target (80% I think), and actually I go over every year.
2. I am one of the few in the group that spends significant time meeting clients
(If you’re wondering why I bill more than I need to and meet clients, it’s because I am relatively driven to be at the top of the field and it takes experience to get clients)
3. I know the multiplier is 3ish.
4. I’ve read the salary surveys (AACE and ASCE), they were minimally helpful because the best one was 2020 I think and the newer one had minimal input from my field.
5. The reality is I am one of the youngest manager/doers in the office and because of that my salary does not match my billing rate (IMO).
6. The office manager/principal is old school and the overall company has their policies and procedures, due to all of the above I am the odd one out.
7. If I am paid where my beneficial hours (BD and billable) pencil out I would be paid more than the 65 year olds that are close to retirement. (They don’t do the BD hours, bill as many hours as me nor have they fought for a better salary over the years)

The reality is I should be my own boss, and intend to be soon enough. However, due to a non-compete I am stuck here (I’ll start a new thread on this subject). The reality is I am not in a good enough spot to get enough clients, so I am not going the entrepreneur route yet. There’s other dynamics that incentivize the staying put option, however I will have to swallow a lower salary.

My hope was a study/white paper would have analyzed age/role/rate/compensation and I could bring that to my next review. I got enough ammo already, I was just hoping for a little more.

 

[LittleInch]

Would be nice wouldn't it?

Far too many variables and judgement calls to apply any study to an individuals discussion or company.

The only one that really matters is what could you get paid if you worked for someone else / on your own. A non compete clause makes life difficult for the last one.

Remember - More details = better answers
Also: If you get a response it's polite to respond to it.

 

[Eng16080]

Sounds like you want some academic paper justifying a salary increase when you already have all the information you need. If you had that magic paper, I doubt it would matter much anyway.

Your points 1 and 2 are justification for asking for a higher salary. Case closed.

Points 5, 6, and 7 simply don't matter. Your salary shouldn't be handicapped by what people older than you are making. It should be based on your value to the company. In a lot of cases being "old school" just means being stuck in your ways and doing stuff that no longer makes sense for as long as you can get away with it.

 

[CWB1]

Performance metrics and job tasks like that list aren't relevant to salary, only discipline and bonuses. Salary is driven by the labor market. The population of geriatric engineers willing to change employer/location is much smaller, and their experience much greater than junior engineers/managers, hence the reason salary increases with age/experience. Whether/not you deserve a raise depends on how your salary compares to your peers - the population of other young engineers (both internal and external), not the geriatric crowd.

I am one of the youngest manager/doers in the office...If I am paid where my beneficial hours pencil out I would be paid more than the 65 year olds that are close to retirement.

 

[Brad221]

Lots of good, interesting points in this discussion.

When I started my career (about 30 yrs ago), at a fairly large regional consulting firm, the multiplier was about 2 and they were trying to work it higher. I'd agree that it is about 3 now (probably averages a little higher). All of the overhead costs have risen over the years. The one comment I would disagree with is:

The "classic" number is 3.0 (one for the salary, one for overhead, and one for the partners).

I've heard this numerous times over the years as an assumption by people who weren't familiar with the costs of running an engineering firm (obviously this will vary depending on size, niche, etc. of a firm).

When I started my career, the average profit for engineering firms was about 10%. I suspect it has creeped up to over 15% on average - maybe even 20% in a good market (I haven't kept track in recent years as I have eased out of my firm, but during the great recession it took a nose-dive). That is far from "one for the partners".

Consider the direct costs of having a full-time employee. If you are 100% billable when you are at the office, you still have vacation, holiday, sick, etc. pay, which brings you down to 90-92% billable (92% assuming only 2 weeks vacation, 8 holidays and 2 sick days used). Then if you are 80% billable on the rest (quite high %age), you end up a little over 70% billable overall. Then you have 10.5% social security and medicare (company's contribution), 3% retirement matching and a huge chunk for medical insurance (which varies a lot between companies - many provide subsidies for spouses and dependents)). You still have other benefits and costs to take care of, and that's just the direct costs (and ignoring any bonuses, which have the same taxes and matching as regular pay).

Then you have to pay for the indirect overhead costs - office rent, software licenses, insurance, etc. I'm not trying to argue that there's no money to made by owning an engineering firm. But the owners are typically not pocketing 1/3 of the gross revenue. Or, to put it another way, the owners are not making as much for every hour that you work as you are.

 

[glass99]

@Brad221: At my old firm back in the 2000's the overhead multiplier was around 125% of salary. It was a structural firm doing mostly public sector bridge design, so was heavily regulated by the state DOT's. They really crawled down your shorts to micromanage you about stuff like how much you can spend on software vs accounting vs office space etc. They then used to limit you to 10% "profit", meaning on that job only assuming zero gaps between projects. The total multiplier was about 2.5 (2.25*1.1). Folks in management at the time used to get super jazzed if you hit 2.65, and 3.0 was considered this distant luxury available only to gods and unicorns. The total profitability of the firm was way less than 10%, something like 3%, which was deeply depressing to me so I left! Or I should say they fired me because I was so checked out. There was a real soviet feel to the place.

Profit margins of big forensic firms are different story. Check out the financials of a big publicly listed firm like Exponent for an eye opener.

I now own a small practice and I don't really think in terms of multipliers because of the confusion with utilization rates vs profit vs actual contribution on projects. What matters financially is whole practice revenue minus hard costs, both of which I maintain tight control over and are much less abstract. We get paid for deliverables and ideas, and a lot of the time the process of getting to those is pretty circuitous. We have a lot of wide ranging discussions and experimentation in the office but then really bring the intensity to bust out the deliverables which can happen really quickly once you know what the right answer is. This process applies whether we are doing lump sum or time billing work.

 

[Brad805]

As an employee I do not follow how this is any of your business. I come to the table to offer this, I expect this in return. Yes, no? This seems to be a case where you need to stay in your lane.

 

[phamENG]

Brad - what? I get that if the employee in question is flipping burgers at McDonald's after school, but we're talking about an engineer here. As professional employees, it's important to understand our impact on the business. Sure, lower level employees need to stay focused on their tasks, but if I had to select between two otherwise equal junior engineers for promotion, an interest in understanding the business side of the operation would weigh heavily in that person's favor.

It's also rare for fees and budgets to remain completely confidential. When a junior engineer making $50k/year finds out that the job they just did over the course of 2 months brought in $80k, it sucks. You feel undervalued and taken advantage of. Unless, of course, you understand the cost of training you, the cost of running the business, the importance of profit for the firm, etc.

Kudos to the OP for seeking this information out. If you want to do anything other than crunch numbers in a dark corner of the office at below average pay until you're 70, you're in the right lane.

 

[Brad805]

Employees will never understand the real costs of running a business. Things like how much is the building lease, insurance, licenses, benefit programs, accountants, lawyers, and on and on. That cost structure will vary for every company and the rates they can charge will vary widely. You start a bonus plan at your business one day. I have never had an employee (regardless of their training) understand why it could be less any year than the last. If I were the manager at a large international firm and you started asking me these questions I am not sure how I would react. If you are getting to the point of partnership, sure, that is all legitimate. But that is not what this sounds like.

 

[phamENG]

Brad - I have tremendous respect for you as an engineer and I enjoy getting your take on technical topics as well as business topics, but I'm glad I never worked for you. If I'd ever had a boss/manager be that dismissive about what I can or cannot understand, I would have told him where he can shove it.

Most employees don't need to understand it, and there is a decent chunk of them that will never take the time to learn it. But The suggestion that no employee can understand it is ludicrous. Sure, you may have a better understanding once you've been pulling those strings for a while. That doesn't mean the can't grasp it at a level appropriate to what they need and grow to what they want to understand.

Were you completely ignorant of how engineering firms were run until you suddenly found yourself running one? Somehow, I doubt it.

 

[glass99]

@phamEng: I think what Brad is saying is that the overhead aspects of a consultancy can add up to more than you would think, which can be stressful for the partners. One of my favorite topics is actually diseconomies of scale in professional services. The bigger the firm the higher the overhead! If you are freelancing from your bedroom your overhead is practically zero.

 

[Brad805]

Maybe understand is not the correct word. They may understand in general terms, but few are rarely prepared to share the risk. When there is a problem, like there always will be, the buck stops on my desk. If you want to share in the risk, fine, we can get into the discussion. Presumably the OP has worked there for sometime, and is valued. Keep it simple, ask for a raise. I don't see this information being overly valuable in the negotiation. And if you do say, hey, I should make X, because you make Y, you sure better know the boss well. Some are not big fans of that. If you see the potential for long term plans, ok, maybe dig into the details. Based on the discussions I see on the forum and in practice, long term employees are not common. I seem to recall a thread where 5 to 10 jobs was not uncommon by 30 or 35.

I am actually quite reasonable to work for. We are about to give a number of raises to people without being asked. Maybe I have had too many young engineers over the years. 10 minutes out of the gate, do I get this, how about that. One young fellow was terrible.

Telling me as a manager to shove it is fine. We are running a business.

Did I know the problems before owning? Not really. Client late on payments, bills due, how do I pay type questions. Had I negotiated a lease, or insurance? Did I see the extra time someone had to spend to deal with professional association activities? Clients not wanting to pay. Small claims court, liens, lawsuits? Did I know our small business would always have about $50k tied up coming in or going out? Not really. I suppose I saw it, but did I ever say, nah, you do not need to pay me this month. The guy we bought from had went into his own pocket to cover our salaries when it was tough. That was back in the 90's, and it has never been like that since.

 

[phamENG]

glass - I'm with you on the dis-economies of scale. It's a really interesting phenomenon, and largely avoidable through good management and hiring practices. At least, you can generally flatten the curve at the bottom without the uptick and loss of profits with size. If that were not true, the big international firms wouldn't exist. I'm enjoying my low overhead right now, and planning for a future with that in mind.

Brad - fair enough. I think there's a big difference between understanding what it takes and a willingness to share the risk. And then another big difference between willingness and ability/preparedness to share that risk. As an employee, the only risk that should be on the table is the loss of a job. As business owners, we get to enjoy the profits because we take the risks. It does no harm for employees to learn what risks we're taking. Perhaps I'm an outlier, but I gained more respect for the partners in my old firm when they broke down their overall budget and explained billable rates to me. Was I going to offer to not get paid if we had a downturn? No. They were making profits in the good times, they can take a loss in the bad times. But it's a lot easier to accept that, with my $65k salary, I was responsible for completing about $220k in billing each year when I know about all the costs.