Here is a quick review from the 2020 IEEE Consultant Fee survey. The latest survey is 2022, which is available for a fee from IEEE. To stay away from implications of price-fixing I would defer you to these.
One of the mistakes that first-time consultants make is to undervalue themselves and consider what salary they would receive if they worked for a company versus working for themselves. There are several considerations in working for yourself that are different than working for a company:
- You bear all overheads from healthcare to 'downtime,' transportation, business insurance, etc. This can be significant, depending on the type of work that you are doing.
- Some of that overhead will be technology, tools, etc.
- Especially when starting out, the 'downtime' aspect can be daunting. If you set yourself at a value that you are used to living and considering that across 2000 hours, what happens if you are only working 500 hours?
- Business insurance can be a very significant portion of your overhead including errors and omissions, something needed in consulting. You do not have a company covering you if an error is made and some companies are known for recovering their losses associated with incorrect recommendations.
- Lots of other stuff.
One of the concerns that I get when I look at the description that you gave is that it sounds like the company wants to provide a certain amount for basically full time work. If you are tied to performing work only for that company then you can fall under a category of 'hidden worker' which is a nasty IRS term that can result in fines, etc. for both parties. As an 'independent contractor,' or consultant, one of the definitions is that you have autonomy in your business decisions including performing work for other companies. There are only a few exceptions where 'contract employee' comes into play, and that requires that they provide you with the benefits of being an employee (check with your state labor board for the limits/requirements).
Generally, I rarely see consultants under $100/hour - and only the uninitiated - or a 'prompt engineer'. $120k/year seems like a lot for someone who is a company employee where there are other unseen costs (as high as 1.6x salary, including shared employment taxes), but that is very low when it comes to consulting contracts. When I first started in consulting my annual fee for major corporations for up to 1 week/month was in the early six digits. After all expenses, travel, etc. $100k, for instance, would actually be about $30-40k profit. Basically, under $100/hr is usually what a consultant might charge their client for in-house clerical labor (see the hourly survey).
It is equally important to consider a contract. If they are providing the contract you need to review it carefully - and I mean carefully. Do not be afraid negotiate and 'red line' let alone contact a business lawyer (usually a good idea to keep one on retainer) to ensure that you are not walking into a few traps. I've walked away from a few from large corporations that implied that we would be responsible for equipment failures and lost revenue even if they did not follow our recommendations - and a few if they bought our products with no discussion of use or data interpretation by their engineers. This is especially important for the 'hold harmless' clauses, who owns any IP that results from work, let alone a few that will try to take your IP (any IP used or generated confers rights to the customer or is surrendered to the customer - yeah, we've seen that one even more recently - if it is something you consider, there should be extra costs).
In the end, however, it comes down to what the client will bear. What we will often do in a case such as what you outline above is put together a contract outlining a scope of work and then attach a fixed cost. If it takes 1 hour or 20 per week, the fee is the same - as a non-employee, the amount of time you take to perform the work for the client is NOT their business, only the result (also a common definition of hidden employee). I will usually only associate an hourly rate where the client's system requires one or where it is needed in a bid where the rate is needed in the contract. We will refuse the parts of contracts, in these cases, where the client demands a time sheet - filling out a time sheet, unless it is an open ended time and material project (ie: open purchase order), is one of the considerations for 'hidden employee.'
Which reminds me - do not perform any work until a PO is received or a contract is agreed and signed. That is your ONLY way to ensure you are paid. Also a common error that has left a few new consultants in shock. Let alone discovering that they have to carry the expenses until the NET 30, 60, 90, etc. occurs and the client still pays sometime after (we've had NET30s that have delayed up to 7 months - mind you they are usually fired as a client as a result and discover that we include a fee for late payment).
Sorry for the dissertation, a couple of us happened to be discussing the topic of entering the consulting industry recently. How you approach your billing is up to you, but the above is from 'lessons learned' from times I've been involved in being a consultant on and off since about 1996.
Of course, disclaimer - the above is my opinion and not legal advice. As mentioned above, discussing the legal impact of contracts and agreements, labor laws, etc. should be through a business lawyer. On the other hand, engineering consulting, and consulting in general by specialists in our business, generally charges more than your average lawyer... but that is my opinion.
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Howard W Penrose, Ph.D., CMRP
Random Past SMRP Chair (2018), 2019+ Govt Relations Smart Grid, Infrastructure and Cybersecurity Working Group Chair,
Chair Technical Standards wind, solar, energy storage, American Clean Power (formerly AWEA), and
President
MotorDoc LLC
Lombard, Illinois
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Original Message:
Sent: 11-01-2023 11:58 AM
From: Brian Sinclair
Subject: Setting Rates as a Contract Mechanical Engineer - Ignore post below by me
I wanted to ask the forum for advice on setting an hourly rate for myself as a contract mechanical engineer. I was interviewing for a full-time position, but the company wants to bring me on as a contractor. The position pays up to $130,000 per year. Best estimate, I likely would have come in around the $120,000 range. What would be an appropriate hourly rate to set for myself? Scope of work involves redesign/sourcing (bearings/seals/gearbox) of mechanical components for a startup company. I'd normally think about taking the annualized rate of ~$60.00/h and multiplying it by 1.5 to account for the likely cost of benefits at the company since I won't be receiving them. What does everyone think? This is my first foray into independent contracting.
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Brian Sinclair
Thornton CO
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Brian Sinclair
Thornton CO
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