A consulting engineer may seem more expensive that a full-time employee in terms of hourly rate. However, the additional costs involved in each type of contract are very important: these costs are typically much higher for an employee, and in many cases consulting services are a better option from the financial standpoint. For example, companies pay for the travel and lodging expenses of their employees, as well as the price of any measurement equipment used, but consultants must factor these expenses into their hourly rate when offering their services.
This article will provide an overview of the factors that drive up the cost of engineering consulting services, and why they are recommended in many situations.
Although employees are taxed based on their income, the company who hires them takes care of tax management and payment; the same cannot be said of consultants, who must pay their taxes personally and must therefore include them in their hourly rate. Hiring an engineer as a permanent employee may seem cheaper in terms of net hourly wage, but consider that taxes generate two additional costs for companies:
Keep in mind that the USA has tax brackets with increasing rates based on income. For example, the 2016 tax rates for single professionals start at 10% for the first $9,275 or yearly income, progressing through various tax brackets, up to 39.6% for all income exceeding $415,050. Highly experienced consultants charge higher rates due to the expertise they bring to companies, but the fact that taxes represent a higher percentage of their income also plays a role.
Applicable taxes for consulting engineers in the USA include the federal income tax, the state income tax, the social security tax and Medicare. There are also city-specific taxes; for example, New York City applies the Unincorporated Business Tax for self-employed professionals.
No engineering consultant can work effectively without a computer, as well as the measurement equipment required for his or her field of expertise. In some fields of engineering, it may also be necessary to purchase expensive software packages – MEP design and energy modeling are two clear examples.
Workstations and laptop computers are now affordable, but the same cannot be said of advanced equipment required for consulting. For example, both power quality analyzers and thermographic cameras are typically used in energy audits, and they can cost several thousand dollars each. If a company plans to carry out an energy audit with its internal staff, these expensive pieces of equipment must be either purchased or rented; with consultants, on the other hand, these costs are included in the hourly rate.
Also, consider that equipment owners assume its cost if it’s damaged by factors that can’t be attributed directly to any of the parties involved.
When consultants work with companies who have presence in multiple cities or countries, travel expenses are normally unavoidable. If an employee must travel, the firm assumes the cost of airplane tickets, lodging and meals; however, consultants must pay for these expenses by themselves, and they are added to the total project budget because they represent a necessary cost to serve the client. For this reason, hiring engineering consultants locally whenever possible is a simple and effective strategy to reduce costs.
Even when local consultants are hired, keep in mind they must still assume many expenses that are normally covered by companies in the case of employees, such as the following:
An engineer must have accumulated vast knowledge and experience to call himself or herself a consultant. Hiring a full-time employee to be trained into an internal consultant is viable, but consider the time required, as well as the risk of losing a valuable employee to the competition in the future. Consultants may seem more expensive, but they guarantee that expertise will be immediately available, and are fully loyal to their client for the entire duration of their service contract.
For core business processes that require advanced knowledge, training an expert in-house is normally justified. However, in firms where engineering is a supporting process, consultants offer expertise for the lowest cost and time commitment, even if their rates may seem higher than employee salaries at face value.
A company must pay salaries even if the workload is not high enough to keep its entire staff busy 100% of the time. On the other hand, consultants can be hired per hour, which means only the hours worked are paid; with employees, this is not always the case. Also, keep in mind that employees are paid for sick leave and vacations, while consultants must assume a temporary pause in their income in these situations. When the yearly salary of an employee is divided by the effective workhours in a year, the hourly income is higher than the nominal value.
Keep in mind that engineering consultants have legal and tax obligations, just like businesses, and these are topics outside their field of expertise, so they must hire legal and accounting services to operate effectively. In the case of employees, these costs are assumed by the company hiring them.
Consulting services allow companies to access the knowledge of experts immediately and as needed, while allowing a temporary staff augmentation if a project demands it. The hourly rates of consulting engineers may seem higher than those of employees, but consulting services are a better choice in many scenarios once all the extra costs and implications are factored in. For companies, the key is to strike just the right balance between in-house staff and external consultants.