Evaluating a contract rate 1

[30osk]

Good day,

I've been a direct employee my entire career. If the interview goes well, I'll be considering taking a contract position. I've been quoted a rate. I've constructed a model like a good analyst, and I wish to ask those who have experience as contractors for some information to help me plug in reasonable values for the variables.

Is per diem generally included in a quoted rate or is it negotiated? If it is reasonable to ask for per diem, would I bargain with the company or the agent? I realize anything is negotiable, but is a request for per diem unexpected?

I've included lack of benefits, vacation, unemployment after the contract ends, and the cost of housing in my calculations. Are there any other large expenses I have not considered?

Thanks for any advice.

Kevin

 

[zdas04]

The way I approached setting my rate was:
1. Put EVERY household expense into a spreadsheet
2. Add any expenses specific to the business (need new computer, car payments, extra phone line?)
3. Annualize all of the expenses and divide by 12
4. Add it all up to get an average monthly expense.
5. Add 30% to the total for income and self-employment tax (since most of your list will not be deductable).
6. Divide the new total by 80 hours. The result is your hourly rate. If it is an odd number (e.g., $93.64) then round it up to something more memorable (like $110 in that case).

With this technique you'll cover your expenses if you work half time, and make some money if you are more booked than that. Assuming that you'll work more than half time month-in-month-out is just stupid. You will need to take family vacations, time off during the holidays, time off for dentist appointments, car repairs, continuing education, etc.

David

 

[GregLamberson]

Good approach by zdas04. A few things to add.

You will need to factor in taxes (taxes should be a apart of EVERY financial decision). You will need to pay these quarterly, both State & Federal, so you need a "bucket" for them monthly.

Also, on benefits, did you include long term disability insurance? Most people forget that one. What about General Liability? Will you need to buy any equipment (laptop, printer, digital camera, etc.)?

What about cost of a CPA - will you use one or any other kind of legal/accounting support?

For health insurance, look into HSA's, they may be right for you and save a bundle on premiums (these are a case by case, not for everyone, and depends soley on your situation).

Are there any guarantees on hours worked? Limitations? What does the termination clause look like? Although you are just now potentially getting your 1st contract work, you need to already be thinking about a strategy for lining up your next contract.

Good luck, if you need any help as you go along, throw it on the forum.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[30osk]

Thank you zdas04 and GregLamberson for your replies.

Perhaps I was misleading in my original post. I am considering becoming a job shopper as opposed to a direct employee. I am going through an agent to get work at the client's site. I'm told the contract is for 1 year (though I'm prepared to be let go at any time).

I may be mistaken in some of the terminology I've been using. I don't consider job shopping as consultanting, though there are similarities and some of your suggestions are certainly applicable.

Thanks

Kevin

 

[MikeHalloran]

Some places treat shoppers like consultants. Some treat them like slaves. Whatever the climate, you know that when the contract is over, you can leave that particular slave ship, with a little coin in your pocket, and you can smile, and be nice to even the worst ogre.

In the US, your income can be reported on a 1099, which means you have to file quarterly self- employment tax, etc., or it can be reported on a W2, in which case you are effectively an employee of the job shop, and they take care of the paperwork. Some shops offer benefits, too. Most seem to prefer the W2 these days. I do, too. I think the IRS' radar may be extra sensitive to a big 1099.

The rate for a given job depends on the job, and the market. There may be room for some negotiation, depending on how badly the customer needs you in particular. There also may be some latitude in how much of the gross rate is paid as 'per diem', nominally compensation for living expenses, and treated differently for tax purposes.



Mike Halloran
Pembroke Pines, FL, USA

 

[CFSEng]

I would look at a contract rate similar to how pricing is set for a product.

As discussed above, you can figure your costs and get a rate to ensure you make a profit.

You can also look at what it costs an employer to hire and work with a new employee. They have overhead costs, direct pay, benefits etc. linked to each employee. If someone with similar abilities as you would cost a company $150 an hour, you could easily justify $125 an hour since this would save them money.

The final thing to consider is what are other contract engineers making. If the typical person is only getting $90 an hour, you would have to provide better value to the company in order to get a higher premium. If they are getting $200 an hour, then you could price yourself closer to that range.

In the end, I would look at all three and pick what seems reasonable. As for a per diem cost, sounds like it could be a good way to get more money with a reason for it. But as stated above, if you are already in the 'expensive' range, the per diem could push you over the limit.

 

[bvanhiel]

You set your rate by what the market will bear. Calculating expenses is only to see if you can bear being in the market.

I think what you really want is the ability to make an apples to apples comparison between a job-shopping and the regular salary that you're familiar with. Take your salary and add in the value of any benefits (401k matching, bonuses, medical, etc) add 7.5% for self-employment tax and divide by the number of hours you work in a year. That should get you in the ballpark of the equivilent hourly rate if you had two jobs, one salaried and one hourly, with the same security.

In the real world the rate will be higher, because the perception is that job-shopping is less secure and more time will be spent out of work.

-b

 

[civilperson]

Find the highest rate the job will pay from the employing company. This rate can have a per diem split out of it for a favorable tax basis on the remainder. The shop which provides the contract worker takes a 35% to 40% override on the contract workers pay. Thus your 60/hr rate is billed at 84/hr to the company! This override can be made to provide a modest benefits package. Five paid holidays, one weeks vacation per 1800 hours billed, $45/week health insurance, 401k plan, etc. Shoppers are the mercenary worker in any situation and make 30-80% more than the direct employees. The best deals are in Anchorage ,Alaska, wher the quoted rate is 75/hr with bonuses and overtime.

 

[30osk]

Thanks to all for the advice. I was not including the 7.5%.

civilperson and/or MikeHalloran, who determines how much of the rate is considered per diem?

I used to live in Alaska. My background is in shipbuilding and aerospace, and I assume the Alaska jobs are oil or industrial related. What would my chances be of getting employment there?

Thanks again to all for the helpful information.

Kevin

 

[MikeHalloran]

You work out the per diem split, if any, with your shop. They will probably suggest something that the IRS is likely to accept.

My friends in Alaska say they have only two seasons: "Winter" and "Construction". It appears that a good proportion of oil money goes toward infrastructure improvement and replacement.







Mike Halloran
Pembroke Pines, FL, USA

 

[civilperson]

The IRS will accept the CONUS per diem rates for each city listed in the US without debate. Any rate greater than CONUS will require volumous receipts and proof of expenses. The shop pays the 7.65% for employer half of FICA and Medicare as part of their 35% markup as well as the unemployment tax,(2.5% -4% of gross payroll). The shops all try the Alaska offer as a first and best situation for contract people. Shop and compare shops just like any purchase! The employer will accept almost any shop so do not hesitate to switch shops if negociations stall.

 

[csd72]

What exactly do you mean by per diem I have never heard that used before regarding contract rates.

Looking at it from the other point of view, the maximum rate you can charge depend on their charge out rate for you to their client. This is usually in the range of 2.5 to 3 times what they pay you, but may be less for a short term fixed contract.

By all means try for a higher rate if you think you can get it but these help to give you a more realistic idea on what they will be willing to pay.

 

[IRstuff]

a "per diem" is compensation for expenses incurred in a city that you're doing the job in, if it's not your home city, i.e., not within 60 miles or so.

It's supposed to cover hotel and meals. Car rental is usually separate.

TTFN

FAQ731-376

 

[civilperson]

Companies that use "job shoppers" for filling gaps in their permanent direct payroll often have fixed rate per hour for all employees. Thus, the higher compensated engineers are a loss compared to the billing rate and the loss is made up by a larger number of lower paid technical designers and administrative clerks. When you are told your rate is more than their billing rate, that is the truth and they make money with that arrangement.

 

[RDK]

People value something based in large part by what they pay for it.

If you set your rate too low then people think that you don’t value yourself very much and they will not value you at all.

I once doubled my rates and also doubled my work load. I went from thinking like a small timer to charging near what a large firm would charge out for someone of my background, education and experience. Clients went from thinking I was a small timer to looking at me as a valid competitor to large firms when they only wanted my services and not the full range of a big company.

Typical charge out rates are 2.5 to 3 times salary costs. (take the expected salary add in employer taxes, benefits etc and divide by working hours in a year subtracting vacation, statutory holidays, sick time etc. That is your hourly salary cost. Then multiply this by 2.5 to 3 for a charge out rate.)



Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[Ashereng]

Typical chargeout rate where I am is roughly around 2x salary. It varies. This includes your per diem, expenses, etc.

Most contracts only include a single hourly rate - so you do the calculations and roll it all up into a single number.

Some peopel will pay mileage, and less will pay parking. In that case, you submit an invoice with these broken out.

"Do not worry about your problems with mathematics, I assure you mine are far greater."
Albert Einstein
Have you read FAQ731-376 to make the best use of Eng-Tips Forums?

 

[jetmaker]

If you are a contractor in the same sense that I am, then you are simply a temporary hired gun, brought in to fill a short term need (months to years). You are not employed by "the Company", rather you are employed by a staffing agency that handles your billing to the company, and then they send you a check weekly/biweekly/monthly.

I have found that in the Aerospace industry, the typical go/no-go number between direct and contract tends to be around 1.3 - 1.4 times the direct salary for the same work. Anything above the 1.4 mark makes it better. Where the ral money is made is by getting a per-diem which is tax free, but is only applicable under certain conditions.

jetmaker