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There’s no doubt that hiring independent contractors (ICs) can give your company a leg up. But what does it cost to hire them? And how do you plan this category spend?
Consider the Total Costs
In preparing your budget for ICs, you will need to do so within the overall scope of costing the project. A project rate may contain different costs and resources (such as a managed service fee, materials, licenses and expenses, in addition to the IC’s rate), so it can be difficult to benchmark or categorize a project’s labor costs into a rate card. Hiring ICs does not always fit into a compartmentalized service spend, as each project has unique variables.
If you hire project-based ICs, you may be able to roughly compare rates to that of a W-2 employee. Keep in mind that the employee rate will need to include taxes, expenses, insurance and the other inherent costs of doing business – usually 18% to 30% on top of the rate.
One solution is to put in place “guardrails” that define the cost of using similar resources from a temporary staffing agency. The IC would fill out a Scope of Work (SOW) form that would also identify tangible value points that justified their proposed project cost. As long as the consultant’s cost was in between these “guardrails,” then purchasing has done their due diligence and it’s up to the engagement manager to justify the value identified in the SOW document to make the final buy decision.
You may receive a wide range of rates for the same project. If you are comparing prospective consultants and trying to determine if the rate is in line, you can use the FTE equivalent as a rough basis for comparison. At the low end of the skill level, you can take a comparable FTE hourly rate and add 30%. At the high end, it is common that the hourly rate would be multiplied by 2.5 (this assumes you are getting management oversight and some direction for the resource). The consultant’s rate should fall in the middle.
It is not always possible to compare an independent contractor to your hourly or salary employees. With employees you are also bearing the burden of taxes, benefits and insurances. ICs are responsible for these expenses as well as their operational expenses. They also have to cover their non-billable time in their rate, so expect that a short-term project will be more expensive by the hour than a long-term project. More important than the rate is the value of hiring an IC and the tangible benefits for your business.
If you plan on using consultants often, be sure to have a way of memorializing these project costs and the consultants themselves. Reengagement can make a big difference in both quality and speed to productivity. Some tools such as MBO Connect allow clients to build a “virtual bench,” so you can get access to known talent when you need them.