Breakdown of an Independent Contractor Rate Calculation
Procurement and supply chain professionals often develop a fairly accurate understanding of their vendors’ costs because often they are buying the same or similar products from competing providers. When it comes to contingent labor purchasing, Procurement pros rely on VMS systems to provide that cost visibility into the respective pay rates of a organization’s staff augmentation contractors (as we explained in detail in this recent post). With this information on hand, organizations can regulate mark-ups within acceptable budgetary restrictions while still allowing for their staffing partners to make profit above their operating costs. However, understanding the costs of doing business incurred by ICs is a much more variable proposition. This piece will examine how a Procurement pro can arrive at educated estimates of their ICs costs so they may strike mutually beneficial agreements with ICs too.
Like staffing suppliers, ICs also have an overhead or cost of doing business that is included in their rates. These costs may include common business expenses like travel costs, rent, utilities, insurance, employee pay, training costs, costs for maintaining licensing or certifications and any other expenses incurred to run their business in general as well as in the performance of work being for clients. Each of these costs can be significant and add to the rates an IC must charge in order to be profitable.
Business insurance is one of the larger expenses for an IC. Most organizations will require ICs to carry insurance. The types of insurance required often vary according to the business rules of the hiring organization. Commonly required coverage types include General Liability, Auto Liability, Excess Umbrella, Workers Comp, Employers Liability and Professional Liability (often called E&O or errors and omissions).Technology organizations sometimes require cyber insurance as well. Just like homeowners or car insurance, varying factors can influence the cost of these coverage options and prices can range from $2,000 to as much as $7,000 annually. ICs are forced to calculate their asking rates with this uncertainty in mind. Remember also that an under the ACA, all workers must have some form of health care coverage or they face tax penalty. As an independent, these costs are not shared with an employer. The IC must source and pay for his own health, dental, vision insurances. Any retirement planning such as 401K, IRAs or others are the sole responsibility of the contractor and add to his rate.
Professional association and organization fees or licenses are another cost facing ICs who wish to remain relevant in terms of their skills and thought leadership. Participating in these groups adds to their subject matter expertise and helps them be more attractive to hiring agents. Professional development, ongoing education and certification classes are not free.
Additionally, business licenses, registrations and permits – including those required to operate a business under federal, state or local laws, add cost to the ICs operation, as do any industry or profession-specific licensing, registration or permits. Examples of the latter are CPA certification for finance workers, CDL licenses for transportation contractors and cosmetology licensing for beauticians. These types of certifications/licenses can cost between $1,000 and $3,000 annually or more.
Then there are the more mundane, typical expenses incurred by being one’s own boss. Office equipment, rent on business office space, communication devices including cell phones, broadband access and even computer hardware/software all add to the IC’s operational cost burden. Other typical operational costs include marketing and sales-based expenses. Costs to build and maintain a website, printed collateral like business cards, product/service literature and other sales and marketing efforts add to the IC’s liabilities as does business-related travel, meals and entertainment in pursuit of new business.
The IC must also separate their billable from non-billable hours, which cuts into the volume of time an IC can be at work earning. Billable hours, the time in a year that an IC will be able to devote to client work are hours that drive revenue. Non Billable hours includes the time required to complete sales activities, review contracts, handle business operations such as expense tracking, Invoicing and any administrative tasks. Non-billable hours typically range 10% to 33% of the ICs available hours depending on the complexity of the offering or in obtaining new clients.
Like any other labor type, ICs are entitled to earn a profit margin. All organizations wish to be profitable to grow and even expand, offering greater services to customers. The same is true of Independent Contractors. Over and above their costs, they would like to make profit to support their ongoing consulting lifestyle. They must then, calculate their break-even costs. To break even, the typical IC must allocate between 15% and 25% of their hourly rate to cover overhead and costs of being in business. To be profitable, ICs will mark up their hourly rate between 40% and 65%. Understanding the dynamics behind IC pricing helps hiring agents manage their own expectations when in negotiations with ICs.
