Engineering Fee vs. Hourly Rate 2

[bumbler]

Hi all,
I'm just curious about what the typical ratio of engineering hourly rate charged to clients vs hourly rate that an employee receives is. My previous employer charged about 4x my hourly rate to clients, and my current employer charges just under 3x my hourly rate. The previous employer had over 100 employees and the current one has under 10. I work as a structural engineer designing almost exclusively buildings. Is this typical? Where does the money go?

 

[SteelPE]

Where does the money go???? Use your imagination

-Insurance (Health Insurance, professional liability, general liability, dental, workmans comp etc)... a crappy health insurance plan for a small family is easily $20k+/year/family...(could be $30k/year/family with no out of pocket expenses) but you may pay a % of that out of your paycheck.
-401k match
-Payroll taxes (unemployment/social security etc... employer pays 1/2of these.... if you are self employed you pay all of these)
-Office space rent
-Software licenses (these are starting to get up there)
-Vehicle reimbursement (some employees may get company vehicles or car stipends)
-Computer/software upgrades
-Phone (land and cell)/Internet ect
-Continuing education
-Professional licensure fees
-Office supplies
-Support staff (Secretaries/plan administrators)

The list is quite long

Lots of costs to run a business that people don't even realize that can eat up a ton of $.

 

[phamENG]

3x is typical. 4x isn't surprising for a really large firm - they have the heft to get the big, high margin jobs. They also have management that gets paid more, and probably share holders that want their piece of the pie. Typical firm operating costs will be about 2.6667x salary with 0.3333x salary going to profit margins.

SteelPE gave a good general list. Don't forget about profit. The owner(s) of the company are putting their capital on the line to run the business. Some clients can take 3 to 6 months to pay their bills. I'm pretty sure your employer isn't waiting 3 to 6 months to pay you. So they're paying you up front in the hope of receiving payment down the line. They don't do this out of the goodness of their hearts. They are in it to make money. After all, they could invest that money elsewhere and get a return, so they should get a return on their investment comparable to other short term investments of comparable risk that would be available to them. Same goes for other fixed costs that they pay 'up front' which are listed in SteelPE's post. There is also profit for the general risks inherent in a) running a business and b) risks inherent to engineering. While much of these can be mitigated through insurance (turning them into fixed costs), there are still risks from deductibles and loss of reputation.

 

[JedClampett]

Our company tries to get about a 3.0 multiplier, but we'll take more. Under 2.8 is likely going to lose money. Some clients cap our multiplier, which is a major pain. To mitigate that, we charge an extra below the line charge for computers and other electronic costs.
I'm guessing that if you're really getting a 4.0 multiplier, you're in a very specialized field. People doing development and curb and gutters are not getting that much.
Interestingly, the largest single cost is rent and office expenses (last I heard was 20%). Now that so many people are working from home, that might be able to be cut.

 

[skeletron]

I remember thinking this as an EIT:
"I'm making $36 an hour, yet they are charging me out at $125? I should make more..."
While I still empathize with that youthful thinking, the reality is that an engineering business costs a lot of money just to keep rolling out day-after-day. Whatever the $xxx per hour charge is, the bulk of it is already spoken for in operations, profits, fees, inefficiencies, etc. Now, 2+ years into solo work...I get it.

 

[bumbler]

Thanks for the all replies, this is just the discussion I was hoping for. I had calculated payroll taxes + software licenses for the entire office and that was about 40% of my salary. Current employer only provides health insurance and I hadn't factored that in. We have no support staff and pay no office rent because the principal owns the building so I was struggling to think of other major costs. It seems like general/professional liability insurance must be a big chunk of that. I'm definitely not trying to come off as entitled, I'm just legitimately curious and could not calc it out.

 

[phamENG]

pay no office rent because the principal owns the building

False.

The engineering firm pays rent to the owner of the building. The fact that the engineering firm and the building have the same owner is irrelevant. The owner paid (probably a lot of) money to buy that building. He/she then had a choice - move the engineering firm in or rent it to somebody else. So if they could be bringing in $17/sf/year from somebody else, why would they give it to the engineering firm for free? They wouldn't. They may choose to give the firm a 'break' on rent, but some of the revenue from the firm must go to the owner not as wages or as profit, but as rent. Simple economics - you need to read your Adam Smith.

Also - just because you don't have support staff doesn't mean that work doesn't get done. Whether they're hiring a service (there are book keeping services, payroll services, etc. that allow you to get the services of a traditionally full time support staff position without having to pay a full time employee - they still cost money) or the owner(s) are doing it at home on the evenings, whoever is doing that work deserves to get paid for it.

 

[bumbler]

The principal has owned the building for over a decade, it wasn't a new purchase. We moved offices because they could not find tenants. I don't really see how the engineering firm and owner having the same owner is irrelevant to this discussion. As stated above by Jed, rent and office expenses can be about 20% of costs. Cutting out rent by paying it to yourself saves a lot of money.

 

[TigerGuy]

Don't forget the training budget. Even seasoned veterans need to continue learning new methods and technologies. Entry-level staff take lots of guidance early in their careers. You also have non-billable hours for staff meetings, networking events, etc.

My personal record is 210 hours billed in a month with 21 work days. That included a fair amount on weekends and in the evenings to produce the deliverables and doesn't include my non-billable hours in that same month. The boss was very happy with my numbers that month

 

[bumbler]

My personal record is 210 hours billed in a month with 21 work days.

Hah! Try beating ~270 hours in 31 days at my previous company (keyword: previous). Never again.

 

[TigerGuy]

Ouch! Hopefully you were rewarded in some way for your efforts. I've been fortunate with most of the companies in my career. Some better than others for making things right when we had to go above and beyond.

That brings in another point of discussion. I've never been penalized for taking time to go to the Dr or conduct other personal business during work hours. Other engineers did not receive that same courtesy, as they tended to be real clock watchers and would ask for additional compensation if they spent an extra half hour in any given week. We were salaried exempt staff.

 

[mtu1972]

In the mid seventies the multiplier was 2.5 at my first two jobs. During a slow period in the second job, they lowered the rate to try and get work.

Third and fourth jobs I was salaried and put in lots of hours. At the end of each year, I would look at my bonus and divide by my overtime hours, and it never covered my hourly rate. I became more cynical and only worked hourly after that.

I never got to the owner/management level so I don’t have any knowledge of hidden business costs.

gjc

 

[dik]

Early in my career, I often worked 80 hour weeks... and on two projects, one about 40 years back, the other about 10 years back... started on Friday and worked straight through the weekend till Monday morning, day and night... I can't do that now... just too old, but I still sleep about 5 or 6 hours a night and have for 50 or 60 years.

So strange to see the singularity approaching while the entire planet is rapidly turning into a hellscape. -John Coates

-Dik

 

[phamENG]

The principal has owned the building for over a decade, it wasn't a new purchase. We moved offices because they could not find tenants. I don't really see how the engineering firm and owner having the same owner is irrelevant to this discussion. As stated above by Jed, rent and office expenses can be about 20% of costs. Cutting out rent by paying it to yourself saves a lot of money.

It's irrelevant because there is no savings. The timing of the purchase is also irrelevant. A person owns an asset on which they expect a return. Whether they see that return from another holding that they own from another entity owned by somebody else, that asset still needs to provide a return. The engineering firm (another asset held with the expectation of a return) needs a place to work and has a budget to pay for it. Whether or not they pay it to a the owner's real estate holdings or another real estate owner doesn't matter for the firm. Just because the owner couldn't find a tenant then doesn't mean he decided to write off his rental holdings - far from it, he did find a tenant. His engineering firm. That asset is now tied down. It's not like he has it listed for lease now with the intention of kicking the firm out if he gets a lead.

Now if you want to dig into your boss's personal finances and the total value of his various income streams - sure, these facts are very relevant. But the question in the OP was about the firm's finances. Simple fact: the firm owes rent to whomever owns the building it operates from. That is an expense, and often a large one.

 

[LittleInch]

Also don't forget that the number of chargeable hours isn't the same as what you get paid.

Take off holidays, sickness, down time etc and you lose probably 10 to 15% of the 40hrs x 52 that you actually get paid if you're salaried staff. You only get in what you can charge out.

No one seems to have mentioned the cost of bidding the work or management costs. In a 10 man company this could be 20% of all the hours available.

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

 

[SteelPE]

No support staff only means that you have engineers/owners doing the typical office staff duties.

-Accounting
-Bill collecting
-Plan admin (health insurance and anything else)
-Human Resources (yuck!)

Then there is the things everyone has to do that you don't get paid for

-Writing proposals
-Networking/Business development
-Interviewing/training new hires

The principal has owned the building for over a decade

So, I've owned my house for over a decade.... you think I should call the bank and ask them why they are still sending me bill every month for my mortgage?

-why the electric company sends me a bill every month
-or why the city is sending me a tax bill every quarter
-or why the insurance company sends a bill every year
-etc

I guess I am getting ripped off by these people.

 

[LittleInch]

The only way the rent would be low is if the actual company you do the work for owns the building outright ( not on a mortgage or loan) when it would then appear as an asset. Not many companies do this as it ties up too much capital for a consulting type business.

But even if rent is small, there are lots of other charges for power, utilities, maintence.

but ultimately the ratio of 3 is about right for decent times. Gets below 2.5 and you're probably breakeven / loosing money, > 3.5 and you're in the land of clover or getting seriously underpaid.

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

 

[TigerGuy]

To keep it in perspective, I sometimes remind myself that my employer is the one that pays me to take holidays off from work so I can sit at home and complain about what a penny pinching tyrant he/she is.

I think my job is to make the company money, for which they pay me a salary package. I have been fortunate to have employers that don't overly abuse the employees. I tend to work for smaller companies and really enjoy it, even when it gets crazy, chaotic and stressful.

 

[WinelandV]

I sometimes remind myself that my employer is the one that pays me to take holidays off from work so I can sit at home and complain about what a penny pinching tyrant he/she is.

“A poor excuse for picking a man’s pocket every twenty-fifth of December!” said Scrooge, buttoning his great-coat to the chin. “But I suppose you must have the whole day. Be here all the earlier next morning.”

Figured we could use some levity in the thread. Happy Friday!

Please note that is a "v" (as in Violin) not a "y".

 

[bumbler]

That asset is now tied down. It's not like he has it listed for lease now with the intention of kicking the firm out if he gets a lead.

Funnily enough, this is only part true. We're looking for tenants right now to take over ~75% of the space. Regardless, I do understand the point. I was conflating my boss's personal finances with the firm's. It's hard for me to mentally separate the two because it's such a small firm.

I tend to work for smaller companies and really enjoy it, even when it gets crazy, chaotic and stressful.

I had only worked at large companies previously. After moving to a small company, I don't think I could go back. Working with a small group all motivated together is just way too much fun.