Billing Multipliers 6

[MRM]

Most engineering firms seem to have multipliers well over 3 for their billing purposes. I'm curious from those of you who have gone out on your own; what is your billing multiplier? Have you really had to even calculate it? I would think that once you eliminate unnecessary meetings and other wasted time, it would be fairly low.

 

[GregLocock]

Most places I have worked have been between 3 and 10

Cheers

Greg Locock

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips.

 

[JAE]

2.8 to 3

 

[TheTick]

Are you looking for a magic number that you can just plug in and make profit? How about the traditional analyze-costs-and-make-sure-they-are-covered method?

 

[prost]

I am confused by the term 'billing mulitiplier'. Is this the factor you multiply by the engineer's hourly rate to arrive at the hourly rate you charge the customer? This billing multiplier then has to account for overhead for that engineer, which would include retirement contributions, HVAC, electricity, support staff (lol--that's a joke..since you
either have no support staff at your job or you bill support staff directly now), equipment, software, etc.

 

[arunmrao]

This factor fits snugly in my steel casting business too. I calculate the cost of raw material and then factor it between 2.5-3 to arrive at the sales cost. This works fine.

 

[PEinc]

TheTick,

I agree with you. An engineer needs to calculate his own costs in order to determine his own multiplier before worrying about what someone else's multiplier is. An engineer with low overhead and a lean organization could possibly have a low multiplier and still make good money. However, an engineer should also know what the "going rate" is so that the services are not being provided too cheaply. For example, if everyone else is billing at about $100 per hour but I can live on $75 per hour, I'm probably throwing away $25 per hour! Just because an engineer can do work cheaply, it doesn't mean that he should.

 

[bvanhiel]

TheTick,

Yours is a good way to determine whether or not you should be in business, but a horrible way to calculate your actual billing rate.

The customer doesn't care what your costs are, they just what you to perform a service that is more valuable to them than the cash they're paying you. To figure that out, you need to understand what their alternatives are (other firms or hiring internal resources) and price your services accordingly.

You definitely need to understand your costs, and they will tell you what the minimum rate is that you need to survive. You can then compare that minimum rate against what the market will bear to determine whether or not you need to go back to a regular job.

-b

 

[TheTick]

Good point. But it does tell one where to start (or not start). If prevailing rates outpace costs, then life is good.

 

[zdas04]

What I did was figure how much my total overhead (including a generous salary) was for a year and then set my hourly rate to recover that in 1,000 hours/year, knowing that to expect to work 100% of the time is really naive.

That formula resulted in a rate that was about 50% higher than my competition so I rounded it up and went for it. It has been really amazing to me how many of my clients know what games people play with their hourly rate (e.g., charge $80/hour for an engineer, and then send three of them to do what one could handle for an effective rate of $240/hr) and know that there are no games in my high rate. People that don't know that don't hire me ("your hourly rate is just too high").

On company told me that and I asked if they wanted me to bid the job at a fixed price. The said "sure" and I added 30% to the hours I thought the job would take and multiplied it times my hourly rate--I was half the next lowest bid and got the job. My original hour estimate was about 10% high so I made a true killing on the job and everyone was happy.

David

 

[MRM]

Thanks everyone. zdas04, based on your response, it would seem that since you have control over your overhead costs, you can actually have a lower multiplier, while at the same time making more money than someone else working for a company could.

For example, if your multiplier is 2, and your hourly rate is $150/hr, then your wage would be about $75/hr. In contrast, if you're at a typical company and your multiplier is 3.5 or greater, your wage may be on the order of $43/hr or less. Those two examples would probably be based on the typical 2000 hours worked, with 70% of those hours being chargeable. Any comments?

 

[zdas04]

MRM,
That make sense. I've seen the 70% billable-hours number before, but that seems a bit tight to me. You have to be really hustling to keep a staff booked to 70% (and for a one-man company I don't know how you line up the next job when you have to bill 70% of the time to cover costs). I've been pretty happy with 50% of 2,000 hours being billable for budgetary analysis. That lets me spend 1-2 days per 7-day week cultivating future work (which sometimes takes months to mature to actual billable hours), 2-3 days working, and 2-4 days goofing off (time spent in eng-tips.com is in the first category). It doesn't always work out that way, billable hours keep cutting into my goofing-off time but if it did work out I'd cover my costs.

David