Salary negotiation coming up - ideas/comments?

[SecondCor521]

Hi all,

For the last seven or eight months I have been working as a contract software engineer. I am physically located at company A, but get paid by company B. Company A has indicated that they want to hire me on directly.

Any idea on how much a contract engineering company marks up their engineers? If company B pays me $X per hour, do they turn around
and bill company A at a rate of 1.1X, 2X, ...? Any way of finding out? Any data points out there?

I'm thinking a pay raise is certainly reasonable because (a) they want me, and (b) they've got the overhead of company B that they'd save. I just am not sure what the range is.

2Cor521

 

[Spanky]

I work with contract houses. We pay them $75/hour, and they pay their employee about $55 /hour.

 

[SecondCor521]

I work with contract houses. We pay them $75/hour, and they pay their employee about $55 /hour.

Spanky,

Thank you for the data point!

If I may ask, what would you pay for a similar person in-house?

2Cor521

 

[Spanky]

2Cor521,

If we hire a person for a direct position, it will be based on the position available. The salary will be based on the grade level. We like to offer the candidate in the middle of the salary range. We actually offered a contract software engineer a salary of $90K per year. This equates to about $43 per hour based on 52 weeks (and 40 hours per week). However, if we include a bonus of 15%, medical/dental benefits, 401K match, and vacations, the total compensation will be $123,500 or $59.375 per hour. My suggestion is to find out the market rate for your skill level since what you are getting as a contract engineer does not matter to the hiring manager.

Spanky

 

[ExtinctBird]

My hiring experience in converting contractors is very much inline with what Spanky says. More often than not, the base salary that we offer a contractor is going to be somewhat less than what the person is making as a contractor. You are probably getting much better benefits as an employee, and it is much more likely that your position is at risk as a contractor. This results in a fair number of our contractors not accepting permanent positions, but they often end up getting cut when a work slowdown happens or we ramp up our offshore teams.

 

[SecondCor521]

Maybe "contract" was a misleading term...

"contract" was a misleading term.

Around here they have two different flavors of non-permanent engineers:

1. Contract engineers who are hired for a specific project and a specific term, usually less than three years. I think these folk get paid above the rate that full time permanent engineers, because they have to go find another job in a few years and there may be a period of a few months in between jobs.

2. Managed service engineering, where for whatever reason a company decides they need additional workforce for an indefinite period of time, but they don't want to or can't hire FT permanent folks. So they hire another company to provide "manpower" but not (in theory) specific individuals. These folks get treated a bit like second class citizens around here and get paid less salary and benefits than a FT permanent person. I think this pay deficiency exists because there is the impression that the people filling these jobs are less talented/qualified and/or should be grateful they have a job, because there aren't really "jobs" available at the company...just some work that needs to get done -- although the work usually expands to fill everyone's plate and then some.

I am in the latter category. The company is relatively small (but very successful) and the CEO personally reviews all hires, so it's difficult to get additional people on.

2Cor521

 

[sailor]

Another data point for you:
Company DW is working for pays employee $65 per hour and bills customers at $130-$165.

 

[perinova]

I very much depends on both: contract length and if there is an intermediary.
An employee salaried on a W2 at $60/hr with benefits could be worth 2.2times=$130 -no benefits- corp to corp short term. Longer term contracts could be valued less, super-short contracts more.

Intermediaries take anywhere between 5% (if they didn't find the contract and are used only as a go-between, you receive most of the money) and 50% (in this case the [-]slave[/-] contractor receives a W2, some benefits (holidays, sick pay...) from the "agency").

There is a nice niche providing contract services directly and charging slightly less than 2.2times. No contracting companies can compete with you since they would not find [-]legal[/-] employees willing to work for less.
With no intermediaries both parties can win.

 

[SecondCor521]

Intermediaries take anywhere between 5% (if they didn't find the contract and are used only as a go-between, you receive most of the money) and 50% (in this case the [-]slave[/-] contractor receives a W2, some benefits (holidays, sick pay...) from the "agency").

Benefit-wise, my intermediary pays 80% of my medical/dental/vision premiums, 50% of my dependents' medical/dental/vision, 18 days paid vacation annually, direct deposit, and a 401(k) with no company match.

There are about 8 of us in this managed service situation where we all work at company A and paid by company B. I originally interviewed for a FT job at this company right before they asked me to come on through the contract agency. They take care of the payroll and all the HR administrivia, but 99% of the day-to-day management is done by managers at company A.

My gut feel is that they are charging somewhere around 1.5X. There is a FT employee at company A who used to work with me at a different company C where we were both FT. He says that company A pays FT's better than company C. Since I know what I was making at company C and know what I make now at company B, I can roughly triangulate.

2Cor521

 

[Spanky]

Another data point for you:
Company DW is working for pays employee $65 per hour and bills customers at $130-$165.

Wow - nice profits! We will never pay that kind of rate for a contract engineer. Is this in California? What kind of services are they offering to their clients? What are the benefits for the employees?

 

[NinjaPigeon]

Another data point for you: $67 and $55.

Just keep in mind you won't get the same in salary if you break it down on a per hour basis. So factor in benefits you did not receive as a contractor: paid vacation, sick time, 401k matching or profit sharing, bonuses, etc.

 

[sailor]

Wow - nice profits! We will never pay that kind of rate for a contract engineer. Is this in California? What kind of services are they offering to their clients? What are the benefits for the employees?

Everywhere in the country. PeopleSoft consultants. I think benefits are 6% match in 401k and health insurance.

 

[fluffy]

I work with contract houses. We pay them $75/hour, and they pay their employee about $55 /hour.

That was my exact situation a few years back. I got $55, while my vendor billed the customer $75. I did get health insurance from them and was W-2.

From what I understand the difference with "generic" software engineering/programming jobs is usually not very big -- probably around $10/hr on average for 1099. When you get into specialized products like SAP the difference skyrockets.

Edit: Note that when I converted to full-time from that $55/hr gig the company gave me ~$88K/yr. I think it's very typical for full-time salaries to be lower than hourly contract comp. Bonus, 401k match, pension (if lucky enough), health insurance, and vacation time can still make the conversion worthwhile.

 

[vvsonikvv]

So what is "slave" labor and what's fair?

How about $29/hr and billing rate is $84/hr. That's 2.9x. Is that too big a gap?

 

[Spanky]

So what is "slave" labor and what's fair?

How about $29/hr and billing rate is $84/hr. That's 2.9x. Is that too big a gap?

Anyone getting paid only $29/hour but is aware of the $84/hr billing rate should ask for a higher rate with his/her contract house.

 

[Spanky]

Edit: Note that when I converted to full-time from that $55/hr gig the company gave me ~$88K/yr. I think it's very typical for full-time salaries to be lower than hourly contract comp. Bonus, 401k match, pension (if lucky enough), health insurance, and vacation time can still make the conversion worthwhile.

The main reason for converting a contract position to direct is an effort to reduce labor cost. I know a few people who would never take a direct position since they have medical coverage from their spouse's work or buy high-deductible medical insurance.

 

[vvsonikvv]

Anyone getting paid only $29/hour but is aware of the $84/hr billing rate should ask for a higher rate with his/her contract house.

What if it's a direct position for a consulting company?

 

[Spanky]

What if it's a direct position for a consulting company?

The bottom line is that if anyone is not satisfied with his/her rate should ask for a higher rate or seek employment elsewhere. It does not matter what the billing rate is.

 

[NinjaPigeon]

What if it's a direct position for a consulting company?

The ratio is closer to what you are saying in consulting companies. Remember the reason they can bill you higher to a client than you can bill yourself is because they have a name and an infrastructure. I know what I'm billed out to our clients at, and there's no way I could ever pull that off on my own.

 

[vvsonikvv]

The bottom line is that if anyone is not satisfied with his/her rate should ask for a higher rate or seek employment elsewhere. It does not matter what the billing rate is.

You're right. I dont think the rate is satisfactory. But I wonder if I am just dreaming or if I have any justification.

The ratio is closer to what you are saying in consulting companies. Remember the reason they can bill you higher to a client than you can bill yourself is because they have a name and an infrastructure. I know what I'm billed out to our clients at, and there's no way I could ever pull that off on my own.

That makes sense as well.

So is there any leg room? It seems like a huge gap. Or do I keep dreaming? Or perhaps approach another consulting company?

 

[BigBob]

I used to be in a very similar situation in software development. I was paid $58 an hour with 401K(no match), direct deposit, no vacation/sick leave, and medical that I could purchase(but didn't because of my wife's benes). The bill rate was $95 an hour.

I would suggest comparing the benefits, approximating what is plus/minus to an annual rate with what you are making right now. Add 10% (you need a raise when you change jobs) and lobby for 18 days vacation.

Sounds like you are in the driver's seat. Just be realistic tho.

 

[SecondCor521]

Thanks, BigBob.

2Cor521

 

[vvsonikvv]

2Cor521 - So what is your analysis on your situation? Have you made any decision yet? Any action?

 

[SecondCor521]

2Cor521 - So what is your analysis on your situation? Have you made any decision yet? Any action?

The hiring manager at company A told me a few days ago that the management at company A decided to take a step back and take a comprehensive look at their hiring and come up with a comprehensive plan. The bad news is that that has accounted for some delay in the process; the good news is that my position with the company is in that plan that they came up with.

I think that the market rate for the job in question is probably about $5K to $15K more than what I am making. The benefits are roughly comparable from what I can tell except for medical, which is both better and cheaper at company A.

I am not sure what to expect in terms of what they will offer me. However, I would prefer to go full time permanent, and I strongly suspect that they will offer me more than what I make at company B.

I will look at the benefit package and the salary. If it's less than what I make now, I'll obviously counter with that explanation. If it's more, I'll accept. How happy I will be and how long I will stay at company A and how hard I will look for other jobs will depend on the compensation package they offer.

2Cor521