I've heard 3x-4x normal hourly rate used as an example of what one should be paid if being hired back as a contractor...what are you folks seeing out there?

Just curious. Thanks.

figure that you'll bill half your hours.

50 weeks in a year
40 hours in a week
2000 hours in a year

$50k/year is about $25/hour

...but you'll also have expenses such as healthcare so figure that into your hourly rate.

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mattkime
figure that you'll bill half your hours.

Figure you'll bill 20% of your hours.

A 3x multiplier used to be common in the consulting biz but that is extremely rare these days. Figure you need to have at least a 1.5x multiplier to compensate for fringe benefits you now have to pay for (vacations, holidays, jury duty pay, unemployment insurance, health, life and disability insurance), then you need 7.5% of your billings to cover the extra employer FICA share that you'll now have to pay, then you will need to cover the cost of marketing your services, continuous education costs, office overhead, client default costs, and the time you spend not working while doing all that. For most consulting companies that comes out to about a total multiplier of about 2.2x. That is the absolute minimum you need to break even.

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"So be proud to be a decent American instead of just a w'anker whipping up fear!" - Michael D. Higgins, President of Ireland

Ok, so do you start with a "net salary desired" and then work backwards to figure out all the taxes you're now responsible for, based on a 20% utilization rate, and all other benefits? Or....if you're making let's say $25/hr now, you could just assume a 3x rate would put you in roughly the same ballpark after all is said and done?

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davester
A 3x multiplier used to be common in the consulting biz but that is extremely rare these days. Figure you need to have at least a 1.5x multiplier to compensate for fringe benefits you now have to pay for (vacations, holidays, jury duty pay, unemployment insurance, health, life and disability insurance), then you need 7.5% of your billings to cover the extra employer FICA share that you'll now have to pay, then you will need to cover the cost of marketing your services, continuous education costs, office overhead, client default costs, and the time you spend not working while doing all that. For most consulting companies that comes out to about a total multiplier of about 2.2x. That is the absolute minimum you need to break even.

thanks, davester. this is helpful.

Now, let's say that a person is currently making $25/hr, so with a 2.2x multiplier that pegs this person at $55/hr. Let's say that the only local competition charges $100/hr for the same service...this seems like a situation when that $55/hr is under market pricing, and that a 3x multiplier might be more appropriate, at $75/hr. Or maybe even more, if you wanted to get closer to the other local competition...say a 3.5x multiplier.

How does that sound? How much of this should be market based?

If you can only bill 20% of your hours then you're in the wrong business. No client is ever going to pay someone who has to take that into account in their billing rates. In my field (scientific consulting), overhead should typically take up no more than about 20% of your time. The only extra taxes should be 7.5% of your net receipts.

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"So be proud to be a decent American instead of just a w'anker whipping up fear!" - Michael D. Higgins, President of Ireland

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davester
If you can only bill 20% of your hours then you're in the wrong business.

If the company doesn't find you valuable enough to employ full time, they're not gonna employ you full-time as a contractor.

And then you'll have to find work elsewhere to make up the difference, which takes time and money. You might have the time, but you won't have the money after paying for your own insurance.

Start with the assumption that you'll only be billing for 20% of the hours and you'll be priced in the same ballpark as non-former-employee contractors (who also charge a travel-fee for the commute, BTW) and you'll also be motivated to find that extra work before you're broke and begging in the street.

Welcome to the world of contracting.

If you're a contract worker on-site, then you bill the time you're there. If they only keep you busy 20% of the time, that's their problem, not yours.

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Maybe not exactly what your are asking...

I figure whatever I want to "take home" the add 30% for taxes.

So $50 an hour take home = $65 an hour. or if they are offering to pay me $50 an hour I know my take home is only going to be $35.

Kinda backwards maybe, but helps me.

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The Secret Diary of Steve Jobs [www.fakesteve.net]

I guess contracting as an engineer in the aerospace world is different (as I may be finding out in a few months...my company's declared Chapter 11 bankruptcy and the conventional wisdom says most of us may be out of a job soon).

For example, a structural analyst (stress engineer) with about 15-20 years of experience makes on average $100K (with full benefits) as a direct, I think. However, the going rate for a stress engineer as a contractor, with 10 years or more of experience is $70-$77/hr (and they usually work 40 regular hours a week and 8-16 hours of overtime a week at time and a half). Using the 2.2x multiplier someone suggested means this rate should be a little over $100/hr.

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Carnos Jax
However, the going rate for a stress engineer as a contractor, with 10 years or more of experience is $70-$77/hr (and they usually work 40 regular hours a week and 8-16 hours of overtime a week at time and a half). Using the 2.2x multiplier someone suggested means this rate should be a little over $100/hr.

I'm surprised that contract rates for a stress engineer are so low. $70/hour in the fields I work in would get you a fairly junior level engineer or scientist. $100/hr gets you a mid level eng/sci, and senior level is up in the $130 to $170 level, depending on degrees, specialties and experience. Howeer, this is for California where the cost of living and tax rates are vastly higher than most other states and $100/hr only has the buying power of $50/hr in much of the country.

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"So be proud to be a decent American instead of just a w'anker whipping up fear!" - Michael D. Higgins, President of Ireland



Edited 1 time(s). Last edit at 06/22/2012 01:24AM by davester.

3-4x still holds true. The overhead rate where I contract sometimes runs about 400%, so I can justify my hourly rates, and they feel like they are coming out ahead.

My wife did this several years ago. She was a paid employee for 15 years, at the end earning $17+ per hr. The company relocated and she took a severance package.

Anyway, a month after her last day the company asked if she would consider working remotely for 9 more months to help create a large trade show that was planned. She did, as a contractor. They agreed to pay her $55 per hr.

Now before at $17, she has great health coverage, vacation pay, 401k etc.

At $55 pr hr, there was nothing, we had to pay a lot more in taxes, had less health coverage for more money, no benefits at all.

clay, ultimately it depends on what your customers are willing to pay. Your best research is to identify what the going rates are for people with your abilities in the area you are going to be working. THEN plan your negotiations accordingly. Knowing what you need to live on is a good thing, but it's more useful to ask the question "Should I work as a consultant or not ? ".

Also, it's critical to remember that you will *not* be working all the time. That's a big factor.

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cbelt3
clay, ultimately it depends on what your customers are willing to pay. Your best research is to identify what the going rates are for people with your abilities in the area you are going to be working. THEN plan your negotiations accordingly. Knowing what you need to live on is a good thing, but it's more useful to ask the question "Should I work as a consultant or not ? ".

Also, it's critical to remember that you will *not* be working all the time. That's a big factor.

thanks, cbelt3, those are all good things to consider.