I haven't run into that particular situation before...

Seems like it could get sticky unless there is a good understanding and relationship.  That being said, since he is your first, a break in fees could be a win-win situation here.  Also, depending on things, there is the old saying to keep your friends close and your enemies closer.  

What do you feel is warranted here?

Mike McCann
MMC Engineering
Motto:  KISS
Motivation:  Don't ask

2.5 to 3 times what you were getting paid and if you are providing the same services.

You will be paying higher taxes (self-employment tax), unless you are working on a W-2. You also will be paying your own medical insurance, etc. Account for any bonus, 401K matching, medical premium, profit sharing, vacations that you may have been getting on top if just $/hr salary. Who pays for office supplies, printing, etc?

Not to forget cost of professional insurance. Also assume that you will not be busy (billable) 40 hrs a week all the time and no pay for that! You really need to make a list and sit down with a good friend or acquaintance who does this in your area and filed of expertize.

Rafiq Bulsara
http://www.srengineersct.com

Agree with Rafiq.

Also, don't take your rates down so low.  It hurts the entire profession when you do.  If he was charging $70/hr for your time when you worked for him, he was undercharging.  There's a good chance that he has a reputation for providing cheap services, which attracts cheap clients.  Is that the reputation you want?

If you are a licensed engineer with the blood, sweat, and tears that entails, isn't your time worth more than the local mechanic charges for a tune-up or the plumber's assistant charges to clean your drain?

Get your rates up where you compete with strong, competent engineers with a professional reputation.  You are now a Principal in an engineering firm.  Act like it. Charge like it.  If you're not charging at least $125 to $150 per hour, you're not promoting the right image of the profession or yourself.

As for your former boss, I would tell him that my rate is $125/hr.  Because of our relationship, I will give you a 10% "professional courtesy" discount so that you can mark up my rate to your clients.  Remember, he laid you off because he couldn't keep enough work for you to do.  Is that a quirk of the economy or a statement on his management?

I calculated all of my business and personal expenses for a year.  Divided that by 12.  Divided that by 80 hours, then rounded up to the next $50.  That was my hourly rate.  Still is, seven years later.  

When I was working 300 hours per month, it seemed like I was making crazy money.  For the last 18 months I've averaged slightly less than 80 hours/month.  The company is still in business.  The family still has the same income.  Things are picking up, and it looks like I may have weathered the storm.  If I hadn't planned for slow times (and saved a fair bit during rich times), I wouldn't have made it.

In short, do not consider what you made as an employee (I paid more taxes in year 3 than my gross salary the last year I worked for someone).  Consider what it costs to buy insurance, pay office rent, replace computers every couple of years, buy wide carriage printers, pay your mortgage payment, feed your kids--base your charge rate on that.  If you end up needing $100/hour, tell them that.  They'll add 50% and pass it along anyway.  I've never discounted my charge rate (other than a deal I offer for prepayment of my fees), and I don't plan to.  I think it sets a horrible precedent.
  

David Simpson, PE
MuleShoe Engineering
www.muleshoe-eng.com
Please see FAQ731-376: Eng-Tips.com Forum Policies for tips on how to make the best use of Eng-Tips Fora.

"It is always a poor idea to ask your Bridge Club for medical advice or a collection of geek engineers for legal advice"

Wow, Srsly guys? I didn't know I was worth so much. I can't believe he's gonna go for paying me 3x my salary when he only used to charge 2x to the clients. Things have gotten slow for everyone around here, I don't think it was his fault we ran out of work. There is a guy I could ask at the company I worked for before this one...

You are an engineer, you should be reasonably good at math. Do some math from the info above and draw your own conclusion.

When employed, you got paid for 40 hrs min no matter what plus benefit. It does work that way when you are on your own.

Paying 3X of your rate for only hours as needed that you will work for him is far less than 1X rate for 52 weeks plus benefits.  

Rafiq Bulsara
http://www.srengineersct.com

Very similar situation here, except I was the instigator.  I left my previous firm, started my own business, and picked up my previous firm as my first client.  Here's how the numbers for me broke down, and what I'm doing.

I was department manager of a small (stormwater related) support department in a big civil firm.  They billed me out at $110 per hour, and my salary worked out to be right at a x3 multiplier assuming full billability, which meant about $38/hour when things were good.

When the economy tanked, I got my benefits yanked and was dialed down to about $30/hour.

Now I'm on my own, and I'm selling my services to new folks at $80/hour for simple consulting, $100/hour if they want me to stamp deliverable documents, and $150/hour if it's litigation work.  I also have taken my old firm on as my first big client, and to get them in the door as a solid source of work I've offered them hourly services (they still do the stamping and are engineer of record) for $50 per hour.  If they want me to stamp a report then it's a fixed fee job, and more.  

Doing that gives them incentive to shift me work, since they can turn around and bill me out to a client at double that, but it's also more than I was making before on an hourly wage.  Basically I'm yoinking a little bit of the multiplier, but in return they don't have to cover my overhead.  

How much you can legitimately charge is going to vary somewhat with your qualifications.  I'm a PE, have a decade of experience, a masters degree in fluid mechs, and am an adjunct fluid mechs professor as a hobby.  

A final note, take my post with a grain of salt.  I'm fairly new to independent consulting, and learning as I go, so I could be totally screwing it up for all I know.  I'm having a good time with it though.

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East - http://www.campbellcivil.com

Firstly good luck with your new venture jay156.
I have no idea about tax laws in the US but here in the UK there are some very attractive benefits to being an owner, you certainly need to factor that in, whichever way it works.
There are many debates on this forum about % mark ups, it is my personal opinion and experience that small concerns can work on much tighter margins than large ones. If I looked at 3-4 X I would never win any work, simple as that.
Whilst there are very good arguments for keeping your pricing high I have always found the company works better and is more profitable when we are busy, even if we charge out at a lower rate.
It is very sound advice to look at your costs and work back from there to come up with a charge out rate rather than coming up with a rate and hoping that will be enough. However even this only gives you a figure you need not necessarily one you can get. At the end of the day any service or product is only worth what someone will pay for it regardless of the cost of producing it.
You really need to come up with a strategy that works best for you and your company, be that pile them high, sell them cheap or a more upmarket exclusive approach, either can work or fail.
Personally I like to work with companies where we have an open and honest dialogue and I will always negotiate on price provided I feel they are open and honest.
The best advice I can offer is market forces dictate everything, be flexible enough to accommodate them.
 

There's a science to figuring out your hourly rate, you can find it in a variety of "how to be a consultant" sources:

ALL of your family expenses for the year, including retirement funding, paid time off for vacations, marketing costs, lifestyle requirements, taxes, insurances, whatever, etc.

Gross hours per year = your desired hours/wk, X # weeks/year.  Subtract your dead time / marketing-for-next job time, admin time, any time that isn't generating revenue to get net hours.  Very unlikely you will be working 40hrs/wk, very unlikely you will be working 50wks/yr.  Rate = costs/net hrs.  That's realistic hourly rate.

THEN you start negotiating:
=> give a discount to get initial business
=> give a discount for a friend
=> add a percentage for "difficult" customers
=> time+material, or flat-fee
=> rates for 'newbie-starting-out' or 'many-years-of-experience' or 'specific-skill-set'
=> etc., the goal is to secure multi-week jobs.  I have some friends who secure 6-8 wk or longer jobs and, since it is steady work for that period, their rate is lower.

Expect about 1-3 years to develop your business into something that will keep you busy more than idle.

I was recently called back to do some work for a former employer.  They treated me like dirt when I was an employee, I paid to leave the company and get away from that terrible place.  Made an effort not to burn bridges, though.  They call me every so often because I had a unique skill that they haven't been able to replace.  On this last job I charged them so much I made their ears bleed, and they were happy to pay it.   For this situation, contractor hourly rate compared to company salary rate is about +340% more.  The contract included 'penalty hours' due to their known shop inefficiencies, added a percentage-of-total due to their 60-day vs. 30-day payment policies, 'difficult' customer penalty, some other added hours for 'penalties' and it turned out all were completely valid.  Job took a couple of weekend days and a couple of evenings.  All I need is one of those a month to make a very nice living and support my family well.  If I get 3 or 4 of those a month, then it's all much nicer.

THAT is the consultant's game.

TygerDawg
Blue Technik LLC
Virtuoso Robotics Engineering
www.bluetechnik.com

Wow, there's a lot of advice here both ways. I think if I charge 3x or even 2x my old salary, he will just look to hire on someone to take my place. Today I called the old-timer whose place I sorta took when I started working there. He was working as a consultant too, and he was only charging $35 an hour because he was just working for the fun of it. I don't think I can do that either.

I just hope my boss understands that I now have to pay for E&O and higher tax and am not assured of a steady income, (not that I was anyway, seeing as I was laid off when the work dried up), so my hourly rate will have to be higher. I guess all I can do is explain it to him that way and hope he can see things from my point of view.

One thing to beware of is the tendency to drop your hourly billing rate when things are slow. The booby trap is that when things improve, you may have a load of poor paying work to get out, and are not in a position to take on the better paying jobs which then go to your competitors.
 Do not ask me how I know about this.
B.E.

Jay 156, do not go in trying to justify your charges to your old employer unless really pushed on it, you are a professional person offering a professional service. They will be fully aware of the extra costs you have to face. What they paid you previously is irrelevant all that matters is what it will cost them now to get someone in that offers the services you do.

Whilst Berkshire does have a good point about dropping prices and what he says does happen I still think he is wrong. Always look at the market, think of it like a house or shares. I might have paid £750K for a house two years ago or £250K ten years ago, but that does not matter it will only sell for what it is worth in today's market.
 

Regarding dropping rates:

Do not look cheap! There are buyers of Cadillac and Mercedes and also used cars. It is up to you what you want to sell or have a reputation of.

Worst thing with cheap rates is the same client who uses you for cheap work, when a good project comes along, he will go with a perceived better consultant, who of course would cost more but will happily pay him.  

Rafiq Bulsara
http://www.srengineersct.com

I'll repeat...dropping your rates is disastrous for you and the profession in the long run.

If you must work within your client's budget, reduce your scope of work, not your hourly rate.

ajack1 has it right!  Look at the market.  Look at where you want to be perceived in the market.  I know of no example of a professionally prominent engineer, lawyer, doctor or other professional who got by selling himself (or herself) at the lowest price.  Professional pride is contagious...make your clients catch it.

ajack1 (Automotive)
So how am I wrong on this?
 One of the things I learned the hard way, is that for every 10, lousy customers that are out there, there is one good one. Dropping your rate assures you of getting the lousy customers.
jay156 (Structural)
 For your own survival you need to quickly Identify the good customers and stay away from the bad ones.I do not know which category your ex boss falls into.
  The other thing to be aware of as a sole proprietor just starting out, there is a tendency to look at the size of a bill,  get a guilt complex and say " I can't charge them this much" and roll it back.Don't do it.

  Some 30 years ago I had a competitor who was charging more than I was and getting good work. One day at a luncheon I asked him how he did it, he said " because I ask for it" he told me to go home and get a mirror and practice asking for a price that would cover my overhead and give me a fair profit. he also said " If you do not ask, you are not going to get it."
B.E.

Berkshire whilst I agree there are good and lousy customers out there, it is not all dependant on price. Our best customer sometimes comes back to me and asks for a price reduction we do not have that much money in the budget on this project, he also sometimes comes back and says we have a good price on this one put your price up.

I am more than happy to do this for continued work and the fact we get all his work.

Why I believe you are wrong is everything has a market value, and that value fluctuates. I go back to my example of housing; no house I am aware of is worth as much today as it was two years ago, and if you refuse to budge on price it will not sell.

If someone continues to buy at over the market price they too will go out of business at sometime in the future, if you rely on customers like that I think your business plan is flawed. You might not agree, but I have been there, done that and got the tee shirt.

As I said before all types of business model can work or fail and whilst I doubt anyone brags about working for Ryan air (a budget brand Air carrier) they are making large profits whilst many of the "prestigious" carriers are losing money hand over fist.
 

ajack1 (Automotive)
your quote " Why I believe you are wrong is everything has a market value, and that value fluctuates."
 I agree with that statement, and the point I was trying to make was that you should not go below that market value.
 Getting a good customer base and their subsequent referrals is paramount to success.
 Many years ago I low balled several jobs to keep work in the shop rather than laying off employees. In England you refer to them as Hospital jobs. It was the kiss of death, it took me five years to work out from under the reputation of doing good quality jobs at below market prices and get the business back to profitability.
We are going through tight times in the States now.
 And the old wisecrack about wanting jobs good, quick, and cheap. Pick any two out of the three. Does not apply here anymore, customers now demand all three.
 I have enough capital now, that I do not have to play that game, I can sit on the side line and pick off the jobs that I want to do at a fair price.
B.E.

Hi

I went solo 3 years ago, I haven't regretted it. I use a tiered rate based on the level of engineering design required. I worked out my base hourly rate on (old salary/52)/40)x2). I then offer discounts ranging from 5% to 15% depending on the length of the project.

The first obstacle to overcome is the fear of no work or no money. Ignore thoughts of a weekly or monthly income, as I have found it balances out. Luckily for us my wife works fulltime. So I may not have any cash for 8-12 weeks then a big payout. Clients will push the limits with paying 90 days being the norm, regardless of conditions.

Try to avoid ex-employers. Keeping the enemy close was the opposite for me, my ex-employer offered lots of work which I readily snapped up at a "cheap do us a favour rate".
As my company grew and the word was out, that I was now solo. I was offered tenders by ex-clients from my old company, this began a tricky ride. My ex-employer began trying to load me with cr@p menial work, i.e. keeping me busy, but I tendered for a rather large project which the ex-company was also in the running for (although we didn't know) but the client did and they began a Dutch auction, which I noticed and bailed out quickly, but my ex-employer won at a greatly reduced price.
By the "grapevine" they realised that I was the one of the other players and the nasties started, Lawyers, arbitration etc. I won technically as I hadn't breached any contract laws, but my ex-employer has a large ego and is waging a hidden vendetta. All good fun, but the legal costs and stress is to be avoided as a one man band.

Be cautious of Ex-employers.
 

Wow they are tight margins. If I was looking at a x2 mark up at the very least I would factor in holidays, seven weeks a year in the UK and the fact whilst you may work 40 hours a week (or more) it is highly unlikely that all of those hours are billable. The lowest I think I would go is old salary/42/30x2, but if it works for you good luck.

Personally I would have no problems working for ex employers, as I think you have an edge there in that they know you and you know them, their standards, expectations and even how quickly they pay and you don't have to put much effort into getting your foot in the door.

Of course some people will have good experiences and some will have bad, but you could equally apply that to companies beginning with the letter A or owned by a bloke called John. At least you should have a better idea about a company you have worked for.
 

Well, I opted at this time to go back to my old job full time. We're about to buy a house and have another baby, and the steady income is too important. Thanks to everyone who gave their advice. I still hope to come back to this in the future.  

ajack1, I agree they're tight, but the lifestyle I have far out ways any deficit or perceived deficit. Going solo was not an effort to get rich, but to enrich.

A 3X multiplier is the number I would expect for an established firms, not someone working out of their basement.  It's the number I would expect your former boss's company to be charging their clients.

If he's selling you're services for $70/hr you will obviously not get him to pay you more.  He should also expect more than $34/hr.  I would start with the $34/hr, add the value of any benefits (including paying the hidden half of your taxes), add the overhead costs of software/hardware tools and insurance, and that should give you an idea of what you were costing him.  He should be willing to pay a premium over that.  How big a premium depends on the length of the job.  $50-$60 doesn't sound unreasonable.  

In the end he'll only want to pay what he wants to pay, and you'll be left with two choices: take it or leave it.  Your goal as a new business owner should be to find more costomers so that you have more choices.

I have one client that has bought over a thousand hours a year for 10 years. His rate is $80/hr, others pay 120/hr, but I seldom get more then 100 hours a year from them.

Once you get below $40 you might as well become a math tutor, $25/hr. I can work as an electrician for $40 or 50.

The lower rate opens up a lot of jobs, when I first started contract engineering I took alot of wiring work for #28/hour.

If you can bill a variety of customers a variety of rates. If you only make half the money your family requires doing lower paying jobs you can last twice as long between good jobs.

 

If this is purely an ethical issue I can only say a couple of things:

Are you feeling guilty for overcharging because even though he laid you off (perhaps for reasons outside his control) that he was good to you before and you owe him now?  Admirable but this is BUSINESS.  Unless you owe him money or there is something in a severance contract I am not aware of, I would treat him like any other client.  You could give him a break you would give any other client (i.e. you are just starting out).  Of course, if you are undercharging in the beginning, you could always say it is because of your relationship.  This kind of white lie can be used in any business relationship (don't take that the wrong way, I don't justify deception only basic marketing rules that every company needs to get used to).

Remember, he laid you off.  I don't know the full circumstances, but if there was nothing else going on and you never got much more from him than you put in and deserved, I wouldn't say you owe him.

Kalen Smith
Engineer-a-Business
http://www.engineer-a-business.com