Contractor's Cut of Billing Rate?

disenfranchised asks: "I've recently become aware that the company I contract through has increased my billing rate somewhere between 10 and 20%. This seemed like a logical time to ask for a raise, so I started doing my research. I've found some online salary comparisons. But I can seem to find an average contractor's take home percentage of the billing rate. Given that my company provides a benefit package worth a staggering US$100/month with no sick or vacation days but does find the clients and handle the tax end of things (as a W2 contractor), what can I expect as a reasonable percentage of the billing rate?" For those contractors out there who are privy to this information, what percentages do you get out of your work? What do you think is a fair percentage?

I will give consideration to anything above 50%

[banbeans]

I am currently working on a project that involves crating a database driven app. My cut is 50% and im happy. My boss found the job made the sale and does most of the meetings. If i had to do the above then i would want a bigger cut. Fyi im classified as an outside contractor for this and pay my own taxes on it. I would not consider anything less then 50% fair if im the only coder working on it.

Bill rate vs. pay rate link

[gentlewizard]

See the Contract Employee's Handbook, here [cehandbook.com], for a great discussion of the relationship between bill rate and pay rate, as well as how to tell fair agencies from those with fewer scruples.

Depends on the company....

[loony]

Most of it depends on the company you contract thru... I know of people that get about 80% of the money, and I know of cases where the company receives 85$/h and the contractor gets 25...
They can pretty much do whatever they want.

50% to 66% is typical

[Deep Penguin]

I've been in and out of contracting since 1982, both with W-2 terms and 1099 terms. What I've seen is that if you have in-demand skills, you can push for as much as 2/3 of the billing rate to go into your pocket, depending on a few factors. With one contracting house, I was explictly told that if I wanted the rate I was asking for, I would have to meet the 1099 criteria, otherwise, they'd pay me 12% less to cover FICA, workman's comp, etc. They only paid national holidays and no vacation. For the 12%, I decided to go 1099 because there would be deductions that I could legally claim that I would not be entitled to as a W-2 worker.

I've seen college kids get about 50% of the billable rate because their skills weren't that rare, they had no job experience and they weren't shrewd negotiators. In my own rate haggling, I've gotten a feel for how much the market will bear and wait for them to start squirming when I try to press a little bit harder. If they give in right away, you are probably selling yourself short.

I am currently an employee again, not because I became disillusioned with the contractor racket, but because a decent offer came down the pipe when I was between contracts. I'll probably go back to the 1099 circuit in a couple of years when the current market conditions blow over

Watch out for excessive agency cuts

[Tau Zero]

I've worked for a number of different outfits, and I've found that the companies which charge very high overhead tend to cause dissatisfaction at the client. Real-life examples: I was at one company being paid $47/hour (W-2) but being billed at $87/hour, and elsewhere with the same company I found they were billing over $100/hour when I was being paid $54/hour. That latter contract only lasted 4 months because the client felt they were being gouged - and they were.

I'm now working for an outfit that charges a much more reasonable cut, and everybody's happy.
--

I'm the CEO of a contractor/consulting company

[MagicMike]

...so I may have some real numbers to add. I'm also the CIO, CFO and a couple of other "C" and "O" titles - I'm pretty much just a coding nut that got into this out of necessity, but I wanted the subject to stand out :-).

First I'll say that we (h3c.com [h3c.com]) are by no means large, but several people have contracted through us so we've been through this deal.

Second, I'll say that people contracting through the company are usually friends, so its in my best interests to give them a good, fair deal. That means I keep overhead down and stuff, and so may not factor in what other people do.

Third, I don't find jobs for people, just give them direct deposit, a liability shield, direct client billing, and I do all the taxes.

All that said, you now know where I'm coming from. So what does the company take?

Its not worth my time if I can't take at least 23%. I'll lose money otherwise, much less make a profit. That's because we have a roughly 1.5% San Francisco payroll tax, Social Security, Medicare, California payroll taxes, fees our payroll service charges us, etc., etc. It works out to roughly 23% being the point where I can finally guarantee that I won't lose money.

If I were to do this all of this beauracratic work for someone that was an acquantaince, but not a close friend, I'd probably want 25-30% depending on the billing rate to pay for my time, and if I provided benefits, found jobs, etc., etc the percentage would likely be much higher.

My numbers should give you a good idea of what the floor is though - it can't really go below the 23% number and get me interested.

Whoa there!

[funkman]

If you think you are underpaid, then shop around and compare your pay/benefits for the job you do. Otherwise, ask yourself the following questions before you may dig yourself a hole:

What happens if you contract ends - are you fired from your firm or do they pay you even though you may not be billing for a day, week or month?

Does your employer still pay you while they find you a new position? At what rate?

What if your new contract doesn't pay as much? In some areas of programming - this is happening.

In a nutshell, if you expect your pay to be proportional to your charging rate - be prepared for possible consequences.

What value do you bring?

[Kefaa]

Everyone faces this dilemma. I have seen the split vary greatly depending on the skill set. If you provide a unique set of skills (say JAVA 2 years ago), your split might be as high as 80%. If however, you are new to the position and it is easier to find people (a new tester, little experience), your split may be as low as 40%

Eighty percent seems to be the magic high end if you work for someone else. Beyond bench time, healthcare, and business expenses, we need to pay half of the Social Security and Medicare taxes (~10%) and workers compensation. We then need to offer consistent retirement benefits if we want any ourselves. Finally, if the firm is of any size, they have a sales representative (or several), secretary, book keeper, etc. and a profit. All of this comes out of that other percentage.

I have seen "lost leaders", getting highly skilled (CICSO Certified Engineers) into the site paying 85%, so other consultants/contractors can be placed that actually bring in income.

So now that I have told you the percentage could be anything, how does that help? Consider:
Security - When we move into the next recession, will you still have a job even if work slow considerably? Is there a lot of work across multiple clients?
Extras - Do they treat you well? Pay for continuing education, hardware, books, etc?
Value - Can you articulate the value you bring? Can you do more than code? Do you? What would the current client say about your: Personality? Style? Knowledge? Willingness to get the job done at any cost? What would your coworkers say? Do you sell your company?

Be careful of the "I want it, because they are getting it," mentality. You are working for another company, where the owners find business, pay taxes, invoice clients, ensure your checks are paid, etc. They put themselves at risk creating the company. If you want it all, step out on your own.

If you do not want to step out on your own, then ask yourself, "what is fair compensation for me?" Keep an eye to what the market is doing, but do not drive yourself crazy wondering if you could get another 2.35% out of them.

Finally, I would offer one piece of advice. ASK. I am amazed sometimes at how a person will complain, bitch, and moan to coworkers, clients (a fatal error btw), the secretary, etc. but now ask the person who can give it. While it would be nice to think that employers are always watching the pay scale for the right reasons, sometimes the value statement just gets missed.

I'm not an employer, but...

[bgat]

... I *am* an independent consultant specializing in embedded development with open source and Free tools.

I obviously spend a lot of time watching my overhead--- the expenses that your employer covers with their "cut" of your billing rate. So while I can't answer what a reasonable cut is, I *can* tell you a little about what you're getting out of it.

Aside: always make sure your salary stays up with the going rate for people with similar skills in your GEOGRAPHIC AREA (salaries vary widely with location in the U.S.). Befriend a few salaried locals with similar job descriptions, and find out what they're getting. Factor into that what you get for benefits and security--- less paycheck security *should* translate to a higher wage, for example.

Office space runs from $10-$100 /ft2, depending on where you are. Bandwidth and other utilities are usually extra.

Then there's your computer and office furniture. They may not seem like much, but if they're leased then the lessor is paying $50-$200/mo for them, at least. (Aside: I spent $14k of my own money in 2000 for computers and related equipment.) If you really are on a W2, then your employer has to pay taxes to cover Workmans Compensation (i.e. unemployment benefits) and Social Security. These aren't deductions from your paycheck, these are deductions from their *profit*--- the tax laws are designed like this, to prevent the employer from penalizing your existence with these expenses.

You've already mentioned your benefits package. I have a wife and three kids, so mine runs about $700/mo. Young, unmarried and single will definitely get you a better rate, however.

I also have to carry additional life, property and liability insurance. I can get sued if I screw something up, just like your employer can. These policies can total a few $100's a month, depending on the nature of the work you're involved in.

And then there are the obvious costs associated with secretaries, managers, and salesmen. Without them, nobody finds you any work to do. And there's also the savings needed to pay people when they're "between jobs". And does your company cover training?

If you have a reasonable employer, and they don't think you're out to screw them over, then they'll probably be open to explaining their cost structure to you. Especially if they sense that you're trying to understand their business better, in hopes of making them (and you!) more profitable.

I'm not trying to talk sour grapes here, but you're doing *very* well if you are bringing home 80% of your billing rate. Myself, I figure my effective take-home is more like 60%. And I manage my costs *very* aggressively, because I am a company of *one*.

HTH,

b.g.