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So I have been working with an engineer as a 1099 IC for the past six months, offering architectural drafting. I didn't have much work experience, having graduated two years ago. At the beginning, we worked out an hourly rate that I was satisfied with (keeping in mind 30% will go to taxes). So far he has been billing my services at 2.5x my hourly rate.
But we just got a large project with the city and I just found out that he is billing all my hours on this project at 3.75x my rate! This is all work (drafting + modeling) that I have done with little involvement from him. So, basically on the work that I did, he is making way more profit than my hourly rate.
I have a great working relationship with him and I'm surprised that he would try to sneak in so much profit without giving me a cut! As I said, I'm new to this whole independent contractor deal and I didn't event think that he might up his billing rate for a bigger project (which now that I think about it, makes sense).
My question is: how should I discuss this with him? I saw his billing invoice by accident actually, and I'm not eager to tell him upfront about my discovery (wouldn't want him to deliberately start hiding his invoices from me). How do I bring up the conversation and how do I negotiate for a higher rate on this project?
I would appreciate any input/suggestions, especially from those of you with experience as independent contractors.
I'm under the impression that 3x hourly rate is standard to cover overhead and soft costs. Also, licensed engineers and architects have liabilities. They can be sued, or worse, lose their license. Those seem to be the main reasons. At least from what I remember from pro-practice class.
Kyle, as far as I know, 3x is standard if you are an *employee*...He has liability insurance that covers him fully, which he'd have to have whether I was working with him or not. since I am an independent contractor, he is not paying benefits, reimbursing me for expenses or anything of the sort - I'm basically operating as a consultant offering drafting services to him.
Demand a partnership or quit. It's clear his business would collapse without you.
Start your own firm, get those job, hire people then you can make profit on them!
You must be new to the field because obviously you don't know why he is billing at that rate! It is not pure profit and many other things are covered in that fee as previous posts state. What about office rent? Supplies? Computers?
I love how when we hire new, fresh out of school people, they come in and they think they know how things should run. Well, when your name is on the company's logo, THEN you can contribute!
you're not an employee. you're being paid a wage. this guy is not paying you any bennies and he is able to pass your work off to his client at a higher rate. this is exactly what i would do also. why have employees and all the associative issues that accompany it if you can hire someone to do the work as a consultant or contractor do it and take the cash. he's the one with the liability and should be compensated accordingly.
Are you including the cost of health insurance into your hourly rate? Are you deducting anything and everything associated with your "contracting" business? Are you accounting for any taxes you have to pay to the city where you are working?
Make sure all of these expenses are factored into your hourly rate. If not, then be a self-employed contractor is not worth the hassle and you would be better of as an employee at another firm.
Everyone is right that most firms have a multiple of your hourly to cover their overhead (office, computers, software, liability insurance, etc.). In LA 3x is the standard for well known firms. 3.75x seems high to me but I don't have a lot of experience with governmental work.
As others have mentioned, as soon as you become an IC, you are essentially a business owner and have to incorporate all of your expenses into your fee. What you negotiate is independent of the rate your work is being billed out at. The challenge for you is that your service, drafting, is relatively common As I'm sure you are aware, recent grads or students will do it for next to nothing. Your challenge will be how do you differentiate yourself and grow your business into something where you can charge a reasonable rate. If you do not approach your work this way, you may as well look for an office job, because you are thinking like an employee and not like a business owner.
Next time, negotiate your rate higher. Forget about the multiplier, just focus on making your rate attractive to your client while still looking really good to you. Hint: this number is approximately half of whatever they bill you out at, or more if you can get it.
Every office bills out their employees at ~2.5 to 3.5 times the employees hourly rate. So stop feeling that you got stiffed and negotiate a higher rate next time.
Everyone, thanks for all the comments. I appreciate those who gave me helpful information, but I do not appreciate the sarcasm. As I mentioned in my original post, I am relatively fresh out of school and I KNOW that I don't know everything, which is why I chose to ask for comments on this forum. I just want to make sure I'm billing him for what I'm worth, which I'm starting to think is more than my current hourly rate. As a recent grad, it's confusing to have to be an "independent contractor" because of all the unknowns. FYI, I am 100% sure that legally I should be an EMPLOYEE but he is getting away with calling me an IC.
Also, I know that his business would get cut in half if he didn't have me helping him. I set up his AutoCAD system, and I've done all his 3-D models for him (he has no 3D modeling knowledge). He RELIES on me every single day (as you would on an employee). I've been happy to just have work but at the same time I want to make sure I'm setting my rates accordingly. Therefore, if he thinks that my 3D models are worth that much, then I should be charging him more for it - I don't see why this should sound absurd to anyone.
Lesson learned: I can (and SHOULD) charge different rates for different projects depending on size and scope.
Establish your contract rate, and bill accordingly for all projects. For some projects, your employer will be billing at 10% of construction cost, while s/he may be billing around 3% for others. Neither is really any of your concern. You can see how s/he may make money off of you if he's billing at a high rate, but if the next job is 4%, maybe he even loses money (and he may do it on purpose in order to gain a big client). The point is, you should have a rate, and if your employer can't make money (or gain some advantage) off of your work, he won't hire you for that project. Very simple.
Are you using his computers and software, or is it your laptop and software? Do you have set hours, or do you work whenever you want? Are you drafting work sketched by him, or do you work independently and exercise discretion and judgement? Do you have to work at his office rather than work anywhere you want?
If you are answering yes to the first question in these pairs, you are not an independent contractor - you are an employee, and and he needs has responsibility to pay a portion of your social security contributions and withhold taxes.
Janosh, I'm using his computers in his office; though we never established set-in-stone work hours, it's implied that I get in sometime between 8-10am and usually leave after 5pm. I am drafting work sketched by him. So, yes, I am aware that I *should* be an employee.
But I think the bigger question is: How do 20 person firms get away with hiring everybody as a 1099? Because I have interviewed at such places and I am shocked.
with so many out there working as consultants or independent contractors this discussion is quite important. we often just think in terms of a dollar per hour number that does not include the overhead or profit. the reason for being in business is to make a profit.
I'm in a similar situation, only not at a firm. I guess audits are rare enough that people can get away with this.. obviously the big motivation is that they don't have to pay for your health insurance. As others have said, you're only supposed to be doing work that the office can't typically do. If it seems like you're doing the same thing as everyone else, than it's very illegal.
However, if you're like me you need a job, and it's fine for now, so you won't say anything and just ride it out. I went back and forth for a long time about it, but now there is a finish line in sight for me, and the money is good enough, so I'm just going to finish and take my money.
magentasky, I'm afraid that they get away with illegally using all independent contractors because no one ever complains. At least in California, the DOL doesn't have the resources to launch wage investigations on their own.
I do however happen to know that once someone is caught, the penalties are significant. In my first internship after school I was in this situation, and due to a misleading offer letter and pay stubs (it showed estimated tax and vacation days - I was hourly and these were earned, but not paid) I didn't find out until after I had left, did my taxes and asked around. It was a significant amount of money I didn't expect to have to pay - on advice from one of my parents friends I called the DOL, who told me to file my state and federal taxes first as an independent contractor, file a complaint with the DOL. I had to do a phone interview, and then sign an affadavit they prepared. About a month later the investigation closed in my favor, and I filed an amended return and got back a big check. As a consequence, three of my colleagues who were still working there received checks covering self-employment contributions that they should never had to pay...