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How Much Profit From Employees?
2

How Much Profit From Employees?

How Much Profit From Employees?

(OP)
I am looking to hire a couple employees, an engineer and a detailer.  I am in the process of determining how much I can afford to pay them and the amount I should be billing their time out at.  As part of the process I am trying to determine what amount of profit I should be looking to make off of each of them.  Does anyone have a recommendation?  I don't want to get greedy but on the other hand I don't want to manage them for free either.  I'm trying to find a reasonable balance.

RE: How Much Profit From Employees?

Your multiplier should be 2.5 to 3.0, depending on your overhead, which is more for some than others.  

The profit for the company should in the range of 15%, +- 5%.

Mike McCann
McCann Engineering

RE: How Much Profit From Employees?

Those are interesting numbers.  If you are billing a detailer at $60/hour and your multiplier is 3, then he's making $20/hr or $40k/yr.  An Engineer at $90/hr would only be grossing $60k (average starting salary for Petroleum Engineering grads last May was $72k).

So if you need to pay an experienced Structural guy $120k/yr you'd have to bill him at $180/hr with a 3.0 multiplier.  That's more than I see in my area.  At 2.5 times, you'd be billing him at $150/hr which might be more palatable to your customers.

Going less than 2.5 times is a real good recipe for bankruptcy--you have to pay him for about 2000 hr/yr, but you'll be really lucky if he can bill 1500 hrs/yr.

David

RE: How Much Profit From Employees?

Your question is really hard to answer for someone not in your area, as it depends on a lot of things.

In the end, it pretty much comes down to as much as you can charge them out to your clients, and as little as your employee will accept.

What are the typical rates in your area? What are the typical salaries/hourly rates in your area. That would be a good place to start.

Have you talked to your clients to see what they would pay? How much do you make (that may be a good starting point also)?

"Do not worry about your problems with mathematics, I assure you mine are far greater."   
Albert Einstein
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RE: How Much Profit From Employees?

As a project Engineer in a major firm of 50 engineers and support staff in Seattle, I was expected to finish the project 10 to 15% under the budget after the contract was completed.  So the employees I supervised contributed to that profit too.  

zdaso4:  The numbers may seem unreasonable, but when you factor in the employee benefits and associated costs that are tied to the employees and the support of them, that produces the multiplier factor.  

Social Security, Retirement, Vacations, Sick Leave, Medical, etc, etc, etc, plus the physical office overhead and non-billable support staff...marketing, accounting, personnel, etc.

The numbers are not unreasonable for a medium to larger size firm.  Perhaps a little lower for a smaller firm with 3 to 5 employees, but not much if they occupy an office outside the home.

Mike McCann
McCann Engineering

RE: How Much Profit From Employees?

I was told by a shill for a defunct accountancy group with pretensions towards management consultancy (guess who) that if your multiplier was less than 3 then you were walking dead.

I've been charged out at 5x.

Cheers

Greg Locock

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RE: How Much Profit From Employees?

(OP)
I think I have nailed down all the the costs associated with hiring them.  I have considered the following:

   1) Vacation
   2) Holidays
   3) Health Insurance
   4) Licensing Fees
   5) Equipment
   6) Office space rental
   7) Workman's Comp
   8) Social Security
   9) Medicare
   10) Breaks
   11) Other unbillable time

I guess the last one is a real tough one to nail down.  With my old employeer it was generally allowed that you would have 5-10% of unbillable time, what they called General Department Expense", and that if you were higher than that then you needed to start explaining yourself.  Judging by some of your comments maybe I need to look at that number closer.

Given all these costs it sounds like it wouldn't be unreasonable to then add in an additional 15% for profit.

I know what my engineer needs to make and I also know that my clients would not be willing to pay 2.5 - 3 times his salary.  That is why I am trying to get the best idea I can of costs and acceptable profit to know if this is going to be a good fit or not.

Thank you for all your comments.

waytsh

RE: How Much Profit From Employees?

Waytsh,  RE: Unbillable time

I think what you'd want out of an employee is something near 90% billable time.  But in setting your fees, it is probably reasonable to expect only 70-75% billable time.  I would think this is especially true if I read your situation right - i.e. you're currently a one-man show and you're starting to get more work than you can handle alone.  If that's the case, predicting work loading is alot tougher than if you're a large company with a steady stream.  So, to my way of thinking, if you set your fee for an employee based on 70% billable time, but they actually hover around 90%, you've made a little more money.  Likewise, if their productivity fluctuates (due to the amount of work that comes in), you've got a cushion that allows you to keep them in your employ a little longer before the need to lay them off comes up.

RE: How Much Profit From Employees?

That sounds like a much better approach than a multiplier.  Assume 70% billable time, add in the items on your list (plus his actual gross salary) and the result is the billing rate.  Then if he bills 75% of the time you make a profit, if he bills 70% then you've covered fixed costs, if he bills 90% then you make a tidy profit.

David

RE: How Much Profit From Employees?

waytsh,

Sounds to me like you may be charging too little.

Typical small firm charge outs here on the east coast are about $150/hr for a principal and $100-120 for a senior engineer. Adjust that to your locality.

RE: How Much Profit From Employees?

I aagree with csd72.  That's the range here in the Northwest too.  

I am a single man office here.  A year is 2080 billable hours, but I only am able to bill for about 45% of those hours expended with everything else I have to do to run the office.  That 45% is desk or inspection time.  Hence, simplistically, my multiplier, thinking about it in another way, is at least 2.1, not factoring in taxes.   

Mike McCann
McCann Engineering

RE: How Much Profit From Employees?

Several employee costs not on your list,

Overhead just to carry the employee, ie cost to make out payroll, correct payroll mistakes : ), send out all "end of tax year forms", every record related to employing this person, ect. Someone has to do this stuff.

Some percentage of your liability insurance cost needs to be billed out in every employees rate.


You'll be paying state/federal unemployment insurance for your employees as well.

Correct me if I'm wrong, but these cost's go into my (non engineering) rates.

JTMcC.

www.firstratefabricators.com

RE: How Much Profit From Employees?

I agree with msquared48 and GregLocock.  I work in Traffic Engineering directly for the developers, commercial and residential.  My salary base is equivelent to $38 an hour and our firm bills me out at $160 an hour.

My utilitization rate for the year is 93% billable time which for me is pretty easy to do as I am not doing the billing or accounting etc...

Our goal is to achieve 4.0 multipliers on projects but if a job runs over budget or runs into challenges, we will accept as low as a 3.0 but anything under that should raise red flags.  Additionally, you should take the overall utilization rate of every employee and see what your total is for the company.  I have always heard that a company under 80% total rate will struggle unless you are a one or two person opperation with other fires going as well.

RE: How Much Profit From Employees?

Average mutliplier for a consulting engineering firm is about 3.0.  Perhaps a little higher this past year.  But you need to understand what type of firm you are.  Do you have people that are 100% assigned to projects, or out the door, or are you providing consulting tasks on demand on a variety of projects to a variety of clients, as required.  I suggest that with a higher multiplier, and the latter case, you may be cheaper in the long run to the client.  I recall a case where my firm quoted a rate that was nearly double the hourly rate of a major EPC company, but a total cost that was 20% of what they quoted, and the eventual total cost matched our quote.  As a consulting company, it is normally difficult to get utilization up to the 90%+ range, typical is significantly lower. If you are getting rate flack, quote lump sum.   

RE: How Much Profit From Employees?

What exactly do you guys mean when you say assume 70-75% billable time?  That an employee only does work 70-75% of that pertains to a specific project for a client?  And the other 25-30% is spent on general admin tasks?  This seems pretty off  for a lot of situations to me.  If you hire a cad technician, pretty much all of his hours are going to be directly related to projects for clients.  I mean, maybe he spents 5% time max working on prototype drawings and office cad standards.  What else would he that wouldnt be billable.  Same thing with an EI.  All his or her hours should be pretty much billable.  What is the thought process behind this 70% billable time?

RE: How Much Profit From Employees?

Do you have the work to keep him at 95%?  If so, good for you.  Most of us don't have a flow of work that is that steady.

RE: How Much Profit From Employees?

You mean you have times where you dont have anything for your employees to do??

RE: How Much Profit From Employees?

Yes.  When there is not billable work we put them to work on internal projects.  We call it "overhead".

RE: How Much Profit From Employees?

Right, I understand the concept of overhead, but there are certain employees I would think that would never go under 90% billable time, such as a CAD technician or an EIT (at least where i work).  So, I don't quite understand the concept behind assuming 70% billable time.  That seems overly conservative to me.  Maybe, it is different at other places.  It seems like it would only be an issue if you were short on work.

RE: How Much Profit From Employees?

When I see 70-75% billable, that would include holidays, vacations, sick leave, training class, and other non-billable time.  Professionals would probably be closer to 75% and drafters closer to 85%.   

Don Phillips
http://worthingtonengineering.com

RE: How Much Profit From Employees?

DonPhillips, that clears its up.  I wasn't considering holidays and vacation.

RE: How Much Profit From Employees?

Actually, we have it the other way around.  A lot of our EIT's are in the low to mid 90 range and our cad people (which are very few because our EIT's do most of it) are in the 75% to 80% range.  During their downtime or in between projects, they are researching or learning the latest in the software, standards etc... and just general how to be more efficient.

When you add up all of the ranges for all of the employees and divide by the number of employees, (admins too) you get an average for your business.

But to answer the question, you take the max. hours a person can bill in a year, minus vacations, sick days, holidays and overhead admin. type tasks and that gives you a rough idea of how billable that person can be for the year.  

The last three firms I have worked for call it a utilization rate.  I have seen several different ways to calculate it but the above is the simplified version.

RE: How Much Profit From Employees?

I agree that drafters (having been one before) spend a lot of time keeping up with their software.  Some additional non-billable time for professionals would be marketing time.  The last firm I worked for I was spending like 10% of my time selling the firm.  This included attending trade shows, lunches, dropping by new offices to introduce myself (3 hours of driving for a 5 minute meeting).


 

Don Phillips
http://worthingtonengineering.com

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