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The current economics of Consulting
On a mailing list, one contributor asked about negotiating position for a project and was curious what the members felt about the current economics of contracting. David Rosenstrauch put together this response, edited to make it more general with his permission, which most consultants would probably agree with.
From the consultant's perspective, rates definitely do "need to be" higher than employee salaries - otherwise it's not worth it to do the work. That's because a consultant has to cover numerous additional expenses out of their revenue that employees don't have, such as:- pay for their own insurances:
- health
- disability
- property (for any equipment you use in your work)
- corporate/errors and omissions
- pay the employer's share of the payroll tax, in addition to the employee's share
- pay for their own retirement plan
And, if a corporation:- bank fees for the business bank account
- accountant fees
- legal fees
- state corporation tax
- payroll company fees (assuming that you don't want the aggravation of doing your own payroll, thereby giving yourself loads of extra paperwork to file with various local, state, and national government entities)
- etc.
In addition, though the following things might be looked at as "perks," they are actually business expenses, and so you need to make enough revenue to cover paying for these out of the business:- ISP bill (also, domain registrations, hosting, etc.)
- hardware
- software
- books, magazines, subscriptions to online sites, etc.
- cell phone bill
- travel
- etc.
Plus, you need to calculate vacations and holidays into your revenue. As a consultant, if you don't work you don't get paid. You need to make enough when you *do* work to offset that. So I think I used to use 1840 (46 weeks * 40 hours) - not 2080 - multiplied by the rate to estimate my yearly revenue.
So your rates need to take all of these things into account, and so need to be pretty hefty just to keep you on par with an equivalent employee spot.
However, though, since the dot-com bomb the market drove down consulting rates considerably, leaving consultants in a bad predicament. Yes, you need to charge a pretty solid rate to cover all your expenses, but you can only charge what the market will bear. And so in recent years that's meant that consulting wasn't really a viable way to make a decent living. (At least IMO.)
The general impression that I get lately though from friends, headhunter emails, etc. is that the market has finally improved a great deal by this summer, and that rates have been starting to coming back to competitive levels.
As far as "pass through" rates as you call them, it can be tough to find out the info you're asking about. It's very hard to know how much the middle man is billing you out for. But generally you can combat this by:- Get to know *really* well what the going rates are in your geographic area, industry, etc. - you must network with other consultant peers, headhunters, etc. to do this.
- Try to position yourself at the high end of the market (assuming that you've got the requisite senior-level lead-developer or team-leader experience and/or are very confident that you can quickly "up your game" to perform that level). If you're in a senior level spot, then you can demand a rate that's near the top of the market. And if you're at the top of the market, and are being paid accordingly, then there's not really that much more that they can be padding on to your rate when they bill the client.
- Check out Dice and some of the other job boards. I believe they have links to other sites that track the current salary and rate ranges in the market.
If you're curious, by the way, here's my general take on consulting as a career path:
I used to be think it was better than being an employee for a number of reasons:- better pay
- choose your own direction, technologies, etc.
- choose your own benefits plans
- lots of financial, travel, meal, and gadget perks via "business expenses"
- you wind up putting up with way less employee B.S. like politics, etc.
But in recent years, I'm not as keen on it, and I don't think I'd do it again anytime soon (barring some opportunity I couldn't refuse):- It can be very hard to make a steady living at it. Consulting work can (and does) end on very short notice, and so you're always looking for the next thing. And in recent years, consulting work practically dried up altogether here in NYC. And since I'm now a parent (and sole breadwinner) that's too risky for me these days.
- You can often wind up having to take somewhat boring assignments, at which you're not learning much - but which you have to take anyway because you need to keep racking up those billable hours.
- I used to think that you wound up in a better career position down the road as a consultant, but I no longer think so. You rarely get promotions, you rarely work somewhere long enough to have any seniority, and even if you do employees always have seniority over you.
What do you think of David's position on the economics of consulting?
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Message #215676
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The Model is changing
I was an independent doing quite well. Switched to a consulting firm .
Consider this:
1. Dollar rate being pushed downwords by offshore consulting companies for generic horizontal skills.
2. The model going towords Fixed price and dis-associating the dollar to hour. Associating Dollar to Work.
3. Model going towords outsourcing any non core function.
SO ... Find a company that does what you like , It will probably pay you more.
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Message #215679
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Re: The current economics of Consulting
I have been consulting for over an year now after having been an employee previously.
My thoughts:
1) If you are in a niche area as I am, its hard to find a gig. However, if you do find one, the rates are generally good and much more better than what I would get as an employee. But I have to balance that with the fact that I spend time unemployed as well. Luckily, I have been working without a break for over an year now.
2) Mostly consultants are brought in because they already know about the work. Hence, not much learning...
3) Hard to break out of a technology mould.
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Message #215680
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Re: The current economics of Consulting
You can also take sabbaticals when you like, as long as you build up a 'warchest' of reserves first. Yes you have breaks, but you earn enough to put money aside.
If you're rubbish (or not required of course) you're not renewed, if you're good you stay, if you're very good your rate goes up. No employee reviews etc. or bullshit, if you're good you stay if you're not you go (most of the time).
Contracts can last as long (sometimes longer!) than 'permanent' jobs.
Most employers are not equipped today to provide a true social contract with their employees so you end up with some pseudo socialist distopian nightmare instead which is the modern working arrangement (where no-one is fired but many are made 'redundant', where the minimum review is 'good' etc.) - or you can enter the raw capitalist world of contracting. In my very humble opinion :-) ;-)
I've found the raw capitalism more acceptable than the pseudo-socialist distopia so far :-)
I have been fortunate that my past employers have not treated me as 'contractor scum' but in fact have been very fair and reasonable towards me. As have most colleagues.
It's definitely not all roses and contracting I think is partly a matter of taste.
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Message #215682
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Re: The current economics of Consulting
I think it is important to remember that if you are an independent consultant you are really growing a company brand, namely you. Most companies aren't successful out of the shoot but need a lot of work. I know for myself it was a challenge to get into the habit of entering in receipts and doing the other HR work properly. You have to account for at least a few hours a week in just taking care of your business.
I think if you jump into independent consulting without some kind of business plan you are setting yourself up for failure - or at least disillusionment. Besides figuring out your own benefits you need to decide on some kind of educational track to keep yourself marketable. You also should be looking into expanding your area of expertise so you can take more kinds of work as it comes along.
On consulting vs full-time? I'd say who cares? Get the job that pays the best and will keep you interested. I'd take a full-time job tomorrow if it was interesting and paid well. But I would treat it as an extended consulting gig since that is how you are viewed as an employee.
One of the best books I read on consulting was written in 1985. It is still a suggested read since it also helps you look at your career and how you approach each job differently.
http://www.amazon.com/gp/product/0932633013/sr=8-1/qid=1155566070/ref=pd_bbs_1/103-1277299-7039042?ie=UTF8
PS: Not trying to advertise for Amazon here - just a convenient link.
______________
George Coller
DevilElephant
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Message #215707
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Re: The current economics of Consulting
There are basically three types of work one can perform:
1. Hand-eye coordination
2. Gray hair
3. Brain power
Of the three, it would only make sense to consult using one's gray hair or one's brain power. Hand-eye coordination simply cannot pay well enough to be worth considering.
Of the two (i.e. gray hair and brain power), gray hair is much riskier. If you're doing gray hair consulting, you're basically selling your past expertise. That means that you won't be given an opportunity to gain any new experience and expertise. Kiss of death.
So brain power is realistically the only way to go. You get hired for your ability to do the research and master new approaches and new technologies/methodologies and then apply them to the problem area at hand. You get paid handsomely for doing that (because not too many people have the guts to do it) and plus you keep your leading edge skills fresh and crisp. Consequently, there will always be work for you, and downsizing/offshoring will never affect you.
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Message #215712
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There's more than overhead
I'm pretty successful as a consultant off and mostly on for the past 20 years, but dread and am lousy at all the business busywork that's required on top of the client work.
Dealing with the government for taxes alone means all kinds of extra work. I've got what's supposed to be a comprehensive accounting service, but even dealing with them all kinds of extra communications and surprises crop up. A few times I've almost thrown up my hands on the paperwork and followed up on a full time opportunity. Then I remember the joys of working from home and working when I want.. (although I'm a bit hesitant about extended leaves, since it's hard to walk away when the going is good. Independents tend to overwork as well.. regulars just.. work regulary.. and get abused in other ways. including by self righteous consultants).
Just one side comment in response to another comment, in Canada at least general labourers are in short supply and earn a decent living. Though I couldn't take the constant physical toil. ;)
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Message #215715
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Re: The current economics of Consulting
It's true what the author of this article says. I've been working as a consultant for 2 years and I can't complain.
I'll just comment on the following points
* It can be very hard to make a steady living at it. Consulting work can (and does) end on very short notice, and so you're always looking for the next thing. And in recent years, consulting work practically dried up altogether here in NYC. And since I'm now a parent (and sole breadwinner) that's too risky for me these days.
yep, it can be very hard to make a steady living, and I believe one of the keys to have a constant flow of contracts (economy permitting) is to have a nice network of headhunters or peers. send a nice postcard for Christmas to the headhunters you have done business with...
* I used to think that you wound up in a better career position down the road as a consultant, but I no longer think so. You rarely get promotions, you rarely work somewhere long enough to have any seniority, and even if you do employees always have seniority over you.
Well, if i work as a consultant, i wouldn't expect any promotions. I don't think it is fair to the permanent employees, but maybe that's me being naive.
My expectations are to be paid well enough so that I can take some holidays whenever I want to with my family.
then, again, I admit contracting is not for everybody.
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Message #215720
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Re: The current economics of Consulting
Money:
A good accountant is a must. They will show you how to do things like equity distributions and paying yourself rent for your companies office located in your home. You can also tax deduct a lot of your life especially if you drive to the gig. Doing this will offset the rest of the costs.
I would highly recommend incorporation then w2 or 1099 so you get all the above. Also lot of places will not do 1099 now due to tax liability.
Health Insurance:
Must people I know who are independent have working spouses who cover their health insurance.
Personal:
I have worked long and hard as an FTE. Sometimes over holidays and vacations and all for not much more then a pat of the back and worthless bits of stock options paper. Life feels a lot better running my own company.
Work:
I see the line between contractors and FTE's very blurd in most places. I spent one contract being the groups dev manager for 8 months. They only hired an FTE when I said enough was enough with the management stuff.
Skills:
If you are not a self learning geek with good communication skills consulting is going to be more difficult for you than being an FTE. However the market is better and firms are finding it hard to find FTE's again.
Rate:
Not as good as the dotcom days but it is starting to head north again. I just switched gigs and got back into a three figured hourly rate for the bay area (I have 13 years of experience). Fix rate gigs are more common now but unless you are landed with a hell of a project you can do 40-45 hours a week and still look good.
Also be willing to do a short term contract with a company which is busy with lots of $$. Often they will renew once you are in the door.
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Message #215740
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Strategic vs Tactical roles
I agree with David, and also with what Alex B posted.
With 6 years full-time, 3 years consulting and 2 years independent consulting experience I've pretty much nailed down what I like and don't like about contracting. But it is something you need to qualify for yourself in the field, and it's very dependent on the clientelle you have.
At the end of the day, I left most contracts with what I call the "Yeah but..." scenario. You can see the forest from the trees, but you've been hired to worry about the trees and not the forest. So off you go to another contract to worry about another company's trees. Having light at the end of the tunnel for a project can be enticing. But at some point it didn't hold the same appeal for me anymore. I wanted my time to have a bigger strategic impact on the company.
Tactical decision making by contractors seems to be acceptable to most companies. But when it comes to long term strategic planning, it's not always a given. Especially when that strategic planning requires extensive knowledge of the business in addition to tactical savvy.
I finally landed at a company as a full-time architect which is a role that has a good mix of both requirements.
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Message #215760
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Re: The current economics of Consulting
Pros:
If you have no responsibilities (ie out-of-college, no kids) consulting is a trip. Where else can you get the depth and breadth of knowledge across industries, systems, cultures, and methodologies. You learn to communicate and market yourself and get the referral which you need to get to the next gig. I liked knowing that I could get let go at anytime because it made me think about how I could add value and up-sell in a given situation. It rounds you out that will pay off in spades later. It builds your game-face. Consulting is about roles and projects not titles.
Cons:
Getting let go at anytime whether you have control over the project or environment. This never happened to me. You get a sense when a project is losing value to the client or a death march, or things just don't click. You tend to jump ship before the end. It the client finds out that they don't have good specifications they tend to not want consultants on the clock waitng for them.
Looking busy - You always have to look like you are adding value. Some clients want you to wait for the next project. Time to weave baskets.
Consulting-stigma: One of the cons my current employer saw in me was my consulting mindset. I look at projects as a consultant. This usually means fixed price, bad requirements, loose scope, and firm date. I need to remove the risk to make money or at least break even and get the referral. It fits with an agile approach it tell myself.
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Message #215784
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Tough choice
The post is very good and mirrors my thoughts these days.
Consulting is perfect for young kids out of university because shorter 1-2 year assignments allow for rapid expansion of one's knowledge and experience in different tek. You are not stuck in the same job for 10+ years and specializing in a single tek. When I started I often had to fight to be able to use new technology (and I don't mean using the latest just for my own sake, but matching client's needs). You generally find a couple of new tools/libraries/frameworks/languages to learn, then simply move on. Depending on the rates, you can put away a nice chunk of money, "risk insurance" for sudden termination.
I agree that usually you can see the end coming, but not always. During dotcom period I just renewed when my client lost its major client and all consultants were fired. Didn't see it coming as I wasn't in the management.
Overall consulting can be very rewarding and interesting. Besides many startups these days don't have big benfit packages and have few perks, so not much better than consultants.
That being said, consulting has a lot of problems as mentioned above. In particular, I worked a lot for government clients and have seen it all :(:(:( My current work is one of the worst. No organization, no process, harly any management, no direction, guessing and assuming all the time, no docs .... (and believe me I am not big on structure at all) Often the work is the most mundane IT type stuff that employees find to boring. Indeed, often employees dump all the real work onto consultants while they have their "meetings". So you can be a garbage basket for the organization which really sucks. In general it is very difficult for consultants to find interesting enjoyable work as FTEs will grab it for themsleves.
Rates and availability of work can be all over the place. In my time I haven't really seen a good solid recession and don't know how consulting would be at that time. I don't want to find out either. When you look at all the companies bulding stuff and realize just how much overlap there is, the same software widget being re-developer X times, you realize that when the economy slows down a lot of developers can be eliminated with no real harm, and of course consultants are 1st on the firing line.
Having acquired a lot of expirience I am now looking for full-time. Another big advantage of FT is being able to take ownership of your work as you know you'll be there for a while. Consultants can be kicked out at any time and have little voice in overall design/architecture, so when you have a prticularly bad leadership consultant suffers, while FT can fight without the same type of fear.
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Message #215854
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The looks greener over there
Having done both, the grass always seems to be greener on the other side.
I think alot of what people experience has to do with timing, location, skills, etc. So for some, contracting/consulting can be great. For others FTE can be. I would say for most everyone else, it is, at best, so-so.
Unfortunately, being an FTE is tenuous at best. There is no security anymore. The sooner we all realize it, the better. And most don't get to help make decisions like they think they will. So for those of you going to become FTEs, let me know when when you move on. Again. I'll let you all know when I do.
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Message #215857
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Re: The looks greener over there
"Unfortunately, being an FTE is tenuous at best. There is no security anymore."
Well said!
Anyone who thinks being an FTE is much safer in markets like the Bay Area are kidding themselves. The sooner we just get over it and we get paid for services the better. If you are good you will be in demand. That is of course unless they finally do get case tools to work so any old idiot can build this stuff :-)
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Message #215883
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Re: The looks greener over there
Even though layoffs are now commonplace, FTE's _are_ safer than consultants. Most companies going through contractions will get rid of consultants first: it's easier, and they're more expensive. Also, many companies, especially large ones, have lots of hoops to jump through before they can lay off employees, but not so for consultants.
I agree that the grass always seems greener. When I'm an employee, I envy the consultants for their pay, their flexibility, their ability to stay out of office politics. When I'm a consultant, I envy the employees for getting to take the most interesting projects, and give the consultants the scraps.
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Message #215895
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Re: The looks greener over there
"Unfortunately, being an FTE is tenuous at best."
++
When there's a downturn, FTE is not much safer than consulting. When companies have to reduce costs, they lay off people whatever their status.
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Message #215922
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Re: The current economics of Consulting
I don't know what kind of "extra" flexibility for contractors you guys are talking about. As an FT I could resign at anytime, the most I will have to do is 2 weeks notice and even that only if I need to get "really" good references from this company. And then I could get another FT or contract job right away.
This is not to mean that I think contract or FT is better, they both have pluses and minuses, I've worked as a consultant before, and now an FT just because I have a family and got tired of the required travel.
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