The Unfortunate Math Behind Consulting Companies

With these new expenses it’s not unusual to see that so-called $300k in profits came back to $150k. Consulting can be a great way to fund a startup or make a bunch of cash. It’s easy to start; Just pick an hourly rate and jump in. Everyone is always worried about what employees cost but no one is nit picking the gazillion dollars executives make regardless of performance and company success. At FullStack, we regularly have clients approach us looking for help fixing their app that was developed offshore.

My fear is that this will pierce the contractor /employer relationship I have with them. All other aspects of the contractor definition used by the IRS are maintained in this arrangement. Since they use their own equipment and the quality of their work has never been in question I am afraid I’m going to get pushback from my contractors regarding the new requirements for what equipment is allowed.

The project was managed by having one of the developers be the project lead. When she was working, she’d spend a couple hours a week managing the product. It was good for contractors like me, because it meant i wasn’t constantly getting new health insurance, and so on. It was good for the company, because they got their product put together on the cheap, and didn’t have to find me again for some next contract.

Cost Of Employee Benefits? Youre Paying For More Than Benefits

Expenses attributable to running your business in general such as salaries for corporate executives and administrative personnel, legal fees, accounting fees, and so on. While this may seem perfectly reasonable at first blush (and it is certainly much better than not factoring in these costs at all!), one quickly realizes that it is still way oversimplifying the problem. This calculator is based on the cost accounting methodology detailed in the article below. Toptal handpicks top freelance developers to suit your needs.

Tell me where you consider leverage in your calculations. Tell me where the $73 Billion in worldwide revenue came from, if this is such a losing business. Explain to me how services saved IBM from the grave if consulting is such a loser. Teach me about the non-exploitative firms where project managers are overhead instead of billable revenue generators. Show me the “hundreds if not thousands” of firms that waste their time on pet projects ( a number you pulled out of the air, or I’ll eat my car).

Software Development Price Guide & Hourly Rate Comparison

Which is why companies are not fully staffed with consultants. The overtime billable cost also extents into non-IT roles like accounting, engineering, and marketing. Companies that don’t outsources will have a mix of salary employees and contractors. With the contractor restricted to no overtime cutting them out of a lot normal salary employees activities. The salary employees give companies the opportunity to treat salary employees like a rented mule because there is no over time and hence no billable overtime hours. Also the offshore companies that were jobbers for IBM, HP and Dell coming onshore to directly compete with the local outsource companies.

You haven’t eliminated those effects, you’ve just moved them to someone else’s profit-and-loss report. If you hired that same employee as a consultant she would charge you $60/hour instead of $30/hour and your profits are still the same. Often, though, charging more pushes away your existing client base, and you’ll have to find a new breed of folks willing to spend the big bucks. These are generally bigger, more dysfunctional companies with 25-page Master Service Agreements and complex, ever-changing requirements (though no acceptance of “agile” or “lean”). It’s a living, it’s just a different living than being a Cool Cat HTML/CSS whiz doing fun projects for other entrepreneurs who appreciate what it means for you to be a master of Sass. A person who comes in and works just like Pete for 40 hours a week isn’t really a consultant at all.

  • Permanent employees might write the code poorly because they have incentive to “create work” for later to ensure their job creating inbreeding.
  • Key point in this whole discussion is that consulting, in my experience, is a value business and not a rate business – if the client percieves high value the rates will take care of themselves, as will the profitability.
  • So you “put it out there” hoping that the magical world of “social media word of mouth marketing” will bestow eager users upon your sign-up form.
  • I have no idea if they had a plan for product updates or bug maintenance.
  • In fact, if a consultant can’t bring in 3 times their annual salary in revenue, the model really doesn’t work well because there is even more overhead than the great examples you gave.
  • I also don’t think this implies that you are in constant hiring mode, by the way – a pretty good metric for turnover is 15 – 20% per year, which means if you have 10 consultants, you are hiring 1 to 2 a year.
  • The true cost of an employee is double the nominal cost.

You can expect to pay between $110 to $220 an hour for projects ranging in size from $50,000 to $5 million. We have vast experience crafting healthcare software development solutions, including UI/UX Design, Application Development, Legacy Healthcare Systems, and Team Augmentation. Our development services help the healthcare industry by enhancing accessibility, productivity, portability, and scalability.

Responses To the Unfortunate Math Behind Consulting Companies

And if you find the right company, you can achieve excellent results for a fraction of what you would pay a Big Business or Enterprise Class software development company. View examples of the process we use to build custom software solutions for our clients. They’d hook up developers with companies that needed them. So, you’d think that they’d be able to sell the product once it was finished. It was based on a new paradigm in how to do their main business.

average consulting rates by industry

I have worked as a sole proprietor and I have had employees and from my experience I’m significantly more profitable working as a sole proprietor. For all of the reasons you outlined in coming up with the true cost of an employee and the additional daunting task of finding people who actually know what they are doing and don’t need constant supervision. For me I’m not only more profitable working alone but far more content with no headaches. Very interesting post, and I love the discussion here.

Ramp up time on a new codebase, new tools, and new software is very significant, and if you likely have work for this employee in the future, that time will not be ‘wasted’ the same way it is with a consultant/contractor. Having worked in a consultant role for 3 or 4 companies, I can tell you I was able to be much less effective than full-time employees. The real comparison here is pay for amount of productive work. In my experience long-term employees are more committed to a maintainable, quality code base, and other developers are much more likely to help a new hire get up to speed and do things right than to help a consultant. I think the above article is very applicable to some fields, but slightly less applicable to software development, at least on a long-term product or codebase that the company owns and maintains. One discussion that I did not see in solution section was using project rates when applicable instead of hourly rates to hedge your bets.

In a company, you usually have to treat all employees the same for benefits. I only took about 1/3 of my revenues in salary last year, but haven’t reduced my lifestyle dramatically. I took only what I needed to live on , and kept the rest of the money in the business. That has helped me keep my overhead low and profit margins higher.

@carol I know many high end consultants that only bill per project, but I also know successful ones who only bill hourly . The product is given a budget, even to the point of a separate bank account (and corporation?) so it’s clear how much you’ve can and have spent on it, and the project pays consulting fees (perhaps at cost instead of full-rate). The true cost of an employee is double the nominal cost.

enterprise Class Custom Software Development Companies

I know I’m a little late to the discussion, but I have to point out something important. I have seen more often than not consultants utilize overhead resources. If you factor those costs, the consultant and employee cost difference changes dramatically. I have to add that in countries like Brazil, with strong labor regulations for both the employer and employee, this difference tends to be much bigger. In the normal form of hiring someone in Brazil, the company always spends almost twice the employee’s compensation, every month.

Once the $30/hour person realizes you are charging $100/hr for them, their confidence soars and they begin to wonder why they can’t charge maybe, $80/hour on their own? So the only contractors you can hire and pay $30/hr while charging $100/hr for, are ones who aren’t really worth the $100/hr, or who have yet to realize they are worth that much. Either way, not a great long term solution and one that will come back to bite you.

average consulting rates by industry

Thank you for great article and I wish you to be heard by community of heads of IT companies. However, the amount of infrastructure that a consultant uses is significantly less than that of an employee (not to mention the fact that the consultant doesn’t receive any benefits from the company). As a result, the actual cost of a consultant is affected by G&A (General & Administrative) costs only; Fringe (i.e., benefits) and Overhead are irrelevant to the cost of a consultant. The question then becomes how to intelligently distribute the company’s indirect costs across all employees. The generally accepted practice is to use salary as an approximation of seniority, which in turn serves as an approximation of the portion of corporate infrastructure and resources used. Find a team with a US-based technical lead developer who manages a team of nearshore developers.

Social Security and accounting costs run over and above the $7.25 per hour? Will I be required to pay for their health insurance if they are full-time workers like that? What can I expect in other costs such as recruitment when based on an hourly add on to minimum wage? You wrote this up about a much higher salaried position.

Toptal Developers

That way, we can account for the hours that we think it will take us to complete the project, mark up the subcontractors based on what they’ve submitted, and build that profit into the overall project rate for the client. The trick is to negotiate your rates down only if you can negotiate up the length of the engagement. It just means that the market has to be there with the stomach for those kinds of rates. If your competitor is charging $125 and you are charging $1,000, you are going to have a tough time winning as much consulting as the lower priced competitor. I own a small (1.4 million annual sales) janitorial company that cleans movie theaters. Several of the theaters that I currently work for are beginning to dictate what equipment they will or will not allow in there auditoriums.

Dont Be Fooled: Calculate The Real Cost Of Employees And Consultants

However, since they’re smaller businesses, you need to make sure they can handle a project of your size. Double check their references and ask them to provide examples of successful projects that are similar in size and scope to yours. Also try to get a sense of the financial stability of the company. We’ve seen several of these small consultancies go out of business in the middle of projects, run out of money and have to lay people off, or fail to complete projects and be unable to repay deposits since the money has already been spent.

The Six Different Types Of Custom Software Development Companies

An overly simplistic way of doing this calculation would be to just add up all indirect costs, divide by the number of employees, and then add that portion of the total to each employee’s annual compensation. OK, that’s closer to accurate but still a long way from representing Pete’s full https://globalcloudteam.com/ cost to Andre’s company. Benefits are frankly only the tip of the iceberg when it comes to figuring out how much an employee is really costing your company. We design and develop websites, iPhone and Android apps, and custom software solutions that are as beautiful as they are functional.

Correct you need to be super careful about that, and people do hire consultants treated as employees and get real penalties. Everyone assumes it won’t happen to them, but it happens all the time. I have – once in 12 years – invoiced by the hour, because it was a legal requirement. Yes, we take risk when we do that, but if you’re good enough at scope you can make quite good money ($1000/hr or more) lending very high level skills and subject matter expertise to your clients. A powerful and meaningful brand can enable the pricing, relationships, clients, recruitment and retention you highlight as avenues to success for a services business model, as well as put your company on the radar of well-matched acquirers. I feel like I could have written this article myself.

If you charge on a project basis, (i.e. a result-oriented basis, not time oriented) it becomes more profitable, as you can give your people incentives to get it done in less time than what is built into the project. The customer pays when he gets the results stated in the project, whether it takes 10 days or 10 months. This requires you to value-price the project, and is a slightly different selling model.

So a very effective model and you don’t have to worry about the biggest problem with salaried staff – the fact that you have to pay them when there’s no billable work to do. There are additional potential financial average consulting rates by industry risks with an employee that are less likely in the case of a consultant. A prime example is the fact that companies tend to make hire/fire decisions much more rapidly with consultants than with employees.

Since that is not the case, the single biggest gap in this analysis is a discussion of the relative BENEFITS of FTE and contract employees. You can’t have a meaningful discussion of cost without benefits. Consultants are generally more experienced than full-time staff. They’ve been around the block as opposed to being ‘inbred’. Top notch consultants, have seen more code bases and generally can adapt much faster than any full-timer. The consultant also has as much incentive if not more that a permanent staff to write maintainable code cleanly because it will affect his reputation for his/her next gig.

It is not uncommon for underperforming employees to be kept on the payroll for multiple months, throughout various stages of probation, to minimize the potential for an employee-filed lawsuit. The resulting cost to the company can be quite substantial. In contrast, companies tend to dismiss consultants with minimal, if any, notice when in any way dissatisfied with their performance.

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