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Billing Multipliers
5

Billing Multipliers

Billing Multipliers

(OP)
small firm - 13 engineers including 2 principals

total billing multiplier = 3.87 including ONLY salary and bonus and no benefits - obtained by dividing total billings over several years by total combined salary and bonus

hourly billing multiplier = 3.34 - obtained by dividing hourly billing rate by hourly pay rate

this thread discussed billing multipliers: http://www.eng-tips.com/viewthread.cfm?qid=237582

consider a project engineer / project manager that does not manage any people for a small company with low overhead

The most accurate way to assess the value and overall profitability to the company seems to be to consider the "total billing multiplier" as shown above.  I have seen the billing multiplier be referred to in several ways from several sources, but this seems like the best way to me.  

what is a good multiple for this position?  

from what I gather, industry standard for small size firms is typically lower than that for large firms (2-3  or  2.5-3)

any information you can provide is appreciated   

RE: Billing Multipliers

It is sector-dependent as well.

I have seen municipal (i.e. "public sector") work multipliers between 2.0 and 2.4, coincident with industrial(i.e. "oil and gas private sector") work multipliers around 1.7 and down.

If you are too much over 2.0, you might not be competitive long term.

Regards,

SNORGY.

RE: Billing Multipliers

(OP)
Greg - are you talking about hourly multiplier or total multiplier?

RE: Billing Multipliers

(OP)
"If you are too much over 2.0, you might not be competitive long term."

Snorgy - the high multiplier in this case indicates that the employee is very profitable for the company.  I'm referring to the overall multiplier of total billings to total compensation.   

RE: Billing Multipliers

Fair enough.  I wasn't factoring in other overheads, disbursements, intangibles, indirects, etc.

Straight labour, though, = 2 or less.

Regards,

SNORGY.

RE: Billing Multipliers

Agree with Greg. The numbers seem familiar from my consulting days.
 

- Steve
 

RE: Billing Multipliers

structineer...somewhere between 3 and 4 is a good multiplier with the parameters you've noted.  Greg is correct...shoot for 4 on base rate.

If you are working out your own salary to see of it is reasonable then look at it in the way you are checking.  If you are wanting to set the billing rates of others, you have to look at it from the "back end", meaning if your market will allow a billing rate of $200 per hour, then you can only pay that person $50/hr.

Snorgy...if your multiplier is 2.0, you are not even breaking even if you have any reasonable benefits at all, particularly if the firm has any hard assets (lab equipment, field equipment, real estate, etc.).  

RE: Billing Multipliers

I would just like to point out that this also heavily depends on the persons billable time, if you are 85% billable the 3 to 4 is a good number, if not, then the 3 to 4 is a poor number to back work your salary.   

http://www.nceng.com.au/
"A safe structure will be the one whose weakest link is never overloaded by the greatest force to which the structure is subjected" Petroski 1992

RE: Billing Multipliers

Obviously, we're talking two different types of multipliers here, although they are intimately related.  In terms of billings/compensation, the average needs to be high enough to cover the utilities and people who cannot bill at all, like the support staff.

Conversely, there is the actual billing multiplier, oftimes called the "wrap" rate, which billable rate/compensation.  The end result is the same, to cover the utilities, nonbillables, and other overhead, including profit.  3:1 seems to be a reasonable average, and can be applied in a number of ways.  Say you hear about a company with 200 employees and $4M in revenue. $4M/200/3 = $6.6k.  THAT's a problem.  Same company with $40M revenue -> $66k, which is tolerably healthy, given that the the bulk of the employees probably have less than $66k salary.

The multiplier is a drastic function of the industry, and even the type of company within an industry.  An engineering-heavy company might have a much higher multiplier than a manufacturing company, where the gross majority of employees are factory workers.

TTFN

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RE: Billing Multipliers

Monies in – monies out = pre-tax profit.

How you wish to dress it up beyond that is up to you but not really very relevant.
 

RE: Billing Multipliers

Properly estimating monies out is the tough bit.

- Steve
 

RE: Billing Multipliers

(OP)
This is also relevant if you want to compare the profitability of two employees with the same job description.     

RE: Billing Multipliers

Well...

I know that I make $X.00 per hour, and I am billed out at less than $2X.00 per hour.  Not sure where my employer is making the rest of the money if you need to have multipliers in the 3-4 range.

Maybe things are different here.
 

Regards,

SNORGY.

RE: Billing Multipliers

Snorgy...if an engineer has duties other than just project related billable time, then his multiplier will be less than the average.  

In your case, I can't see why your employer would only bill you out at 2x.  With your level of experience, I would expect that your employer should be billing you out at no less than $150 (Cdn) per hour.  I'm guessing that your hourly billable rate is lower than this.   

RE: Billing Multipliers

Your numbers are pretty close, Ron...are you secretly one of our clients that has seen our billing revews? smile

Our rate sheets are typically reflective of approximately "2X", where X = employee pre-tax salary, across the board.

Regards,

SNORGY.

RE: Billing Multipliers

I suppose our rates reflect the huge amount of capital equipment we have to recover, not just labour. An analyst running free analysis software at his desk will cost less than a test engineer running a transient dyno.

- Steve
 

RE: Billing Multipliers

Not always.  Our wrap rates include a sizable amount for engineering R&D that's self-funded, but capital depreciation is certainly also a large chunk.  Every other company I've worked for has gotten in to a mode of chucking less utilized capital equipment, just to beef up their bottom lines.

TTFN

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RE: Billing Multipliers

I think the industry sector, industry culture - and, yes, country - has a lot to do with it as well.

You'd be hard-pressed to be a competitive EPC Company in Alberta, Canada with a multiplier higher than 2.0.

 

Regards,

SNORGY.

RE: Billing Multipliers

Snorgy...used to be a partner in a Canadian consulting firm.  They are still in business and fairly sizeable, headquartered in the Toronto area.  Our break-even was over 2.0 at the time.

RE: Billing Multipliers

(OP)
I can see hourly billing rates of 3 and up, but considering all of the time that goes to overhead (vacation, holiday, sick, down time, etc....) to get a bottom line number over 3 seems difficult.  The only way to do this is to get high unless the fee based jobs have so much room for profit or the employee is grossly underpaid.  

In this case, the employee has come in under budget on the fee based projects to where the total revenue from the billings is up as high as 3.87.    

RE: Billing Multipliers

I think you have it backwards.  It's the vacations, sick time, and bennies that drive the multiplier UP, otherwise, how does the owner pay for them?  As they say on Marketplace, let's do the numbers, say Base pay = B, and I'm just making up numbers here:

401k match = 0.06B
medical = 0.1B
2 weeks vacation = 0.0385B
2 weeks sick = 0.0385B
utilities, rent = 0.6B (400 sq. ft*$10/sq. ft)
overhead = 1.5B (this means you're feeding !1.5 heads that can't direct charge, like techs, facilities, maintenance, secretaries, capital depreciation[but that could be broken out separately]  etc.)
cost of money = 0.05B
gross profit = 0.3B

Voila! tot = 3.687B, obviously, your mileage WILL vary.

TTFN

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RE: Billing Multipliers

Ron...

All I can say is...

Stupid Low Margin Oil And Gas Sector!

Regards,

SNORGY.

RE: Billing Multipliers

(OP)
IRstuff,

Thank you very much for the breakdown!  I should go back and explain further.  Our company bottom line multipliers vary from high 2's to 4 and even sometimes higher (strictly individual multipliers).  This all depends on the projects that we have.  Some projects are much more profitable than others.  I've seen a bottom line multiplier of 6 for an employee for the entire year.  That same employee was in the 2's another year.  

The non-principal producing employees (not including administrative) range between 2.5 and +4 typically.  However, when we include the principals and administrative, the overall company multiplier is down near 2.0.  How we are able to have that low of a bottom line multiplier is unknown to me.  I believe our company distributes much of the profit and does not re-invest in the company.  Our overhead is also pretty low.  The benefits that we receive are better than standard, but we keep other overhead low.

RE: Billing Multipliers

The example given by IRstuff only highlights how much the numbers can vary.

For example I don't know how many companies make a 30% profit, not many I would guess. Especially in smaller privately owned companies where the owner/s takes a salary out of the company that could easily drop to 5%.

 Also the figure of 1.5 x to support other staff is very high, I am not saying there are not companies run like that but there are also companies that run much nearer 10 supporting 1 and usually they would be on a lower salary.

If you just make those two changes you are now looking at 2.1 not 3.7.

It is possible to run a sustainable company on a margin of 2x and it is equally possible for a company to lose money on a margin of 4x.there are just so many variables.

The ONLY way to work out if a company is profitable is monies in – monies out.
 

RE: Billing Multipliers

One thing I learnt from my accounting/law/management class at uni was that there are a bunch of different ways to decide how to break out costs like IRstuff does.

It also varies a lot based on what you sell, if it's hours, projects, products...

The obsession with fairly crude hourly multipliers always struck me as a bit odd.

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RE: Billing Multipliers

(OP)
ajack1 - you are right if you are comparing two completely different types and sizes of companies.  However, if you take two similar structural engineering consultants in the same market and compare the two, you should have similar multipliers.  

I should have probably narrowed it down in my original post.  Your replies have shed light on the fact that different sized firms offering different services are not apples to apples.  

RE: Billing Multipliers

Possibly but in the example you give where one employee came in at 6x one year and 2x another is that a good way?

I doubt anyone would fall outside those parameters, so even then are you comparing like for like?
 

RE: Billing Multipliers

(OP)
ajack1 - the exercise here is to compare two different employees with the same job description.  I'm looking at an overall average over several years between several.  I'm seeing one or two employees with higher multipliers than others.  Without going back through each employee's jobs and rating them based on the specifics, I was trying to use the multiplier as a broad brushed comparison.  Nothing is ever as easy as it originally appears to be to me.

RE: Billing Multipliers

2
Structineer I would guess you are doing this to try and "prove" why you are more valuable and should earn more money or be promoted?

If this is true I believe you are going about it in the wrong way. Again I would go back to your example of the one person who came in at 6x one yea and 2x another, did they really go from being the highest profit generator to the lowest? If not what are you "proving"?

In a company the size you describe whoever makes the decisions should have a very good idea of who does what and what they add to the bottom line. Even people with the same job description have different strengths and weaknesses and whilst you would always try and hand pick what type of project you gave to each individual this is not always possible.

Projects that go wrong are always a major drain on profits, so it might be sound business sense to put your top person on them, whilst it could be "proven" that they were the lowest profit centre as an individual they would make the company the most profit if they cleared it up the quickest and everyone else could carry on doing what they do best.

It is also not uncommon to use the top people to help with quotations and to run things past that you have a bad feeling about, again this would show a bad return for the individual but would be far better from the companies point of view than putting in a bad quotation.

Obviously these are very simple examples but in business as in sport it is not just the guy that scores the goal/ touchdown or try that wins you the match it is the people that got you there in order to be able to do so, they are just as valuable.

Sitting down and talking with your boss about how you can improve your value to the company and being seen to do so would be a much better strategy than giving them a set of figures that "prove" how much you are worth, at least in my opinion.
 

RE: Billing Multipliers

(OP)
ajack1

That is excellent advice and you are correct with your assumption.  I definitely am taking everything into consideration before I present my proposal.  I appreciate you sharing your wisdom on the business side of engineering!  I agree it is not always about the bottom line.       

RE: Billing Multipliers

(OP)
ajack1

I'm putting together a report.  You have given some good points and I was wondering if you would mind taking a look at it and commenting on it.  If so, is there a way to do that without posting it to the entire forum?
   

RE: Billing Multipliers

Structineer I am not aware of a way of doing this without falling foul of the rules of this site, however if it is possible I would have no problem in helping in any way I can.

RE: Billing Multipliers

The multipliers, I think, are RARELY tied to value to the company, other than through the basic salary, since that ostensibly is a measure of your value to the company.

What can twiddle the numbers is what is the overall skill mix, as well as what the company is willing "buy-in" as well as how well the company is doing overall, as well as what the multiplier actually represents.  To wit, a factory-heavy contract might have a substantially lower wrap than a purely engineering services contract, particularly in aerospace.  In those instances, you might see a wrap rate for material, to cover all the incidental costs of procurement/supply chain, inspection, storage, inventory, etc.  One of the reasons some defense items are expensive is that each layer of contractor adds its own wrap to material, so if the wrap is 1.3, then three layers of contracting results in 1.3^3 = 2.2.

Another reasons for drastically variable wrap would be if the company wants to keep a roughly constant contract rate, but there's a variation in skill mix.  So if the contract is mostly seniors, then the wrap might drop, while if the contract is mostly juniors, the wrap might go up to maintain constancy in the net hourly contract rate.

TTFN

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