During a recent job search, I came across many contract positions that would have been attractive except for the hourly rates. When recruiting engineers, engineering staffing agencies, a.k.a., contract or job shops, often hope aspiring talent will fall into the trap of evaluating only the hourly rate. It is not always clear that it is a trap, but an astute engineer always knows what they’re worth to their employer. So it is not in the recruiters’ best interests to continue to offer unsustainable compensation. Staff Engineers—engineers who work directly for their employer without a contract shop in the middle—in the majority, work for employers who offer great benefits, e.g., 401(k), subsidized healthcare, paid vacation, paid sick time, short-term disability, and subsidized long-term disability, plus other employer-specific benefits that vary greatly from company to company. Employers in turn, charge clients an between three and five times the cost of each employee’s total compensation. However, contract engineers are typically paid as an employee not an independent contractor, i.e., they receive a W-2 not a 1099, and so the employer’s portion of benefits that are universal for all W-2 employee, e.g., the Federal Insurance Contribution Act Tax (FICA), Federal Unemployment Tax Act (FUTA), State Unemployment Tax, etc.—which are part of the employee’s total compensation—are excluded from what I call the effective contract rate.
To determine the estimated effective contract rate of an individual one must break down the value of the benefits that would otherwise be paid by an employer that a contract engineer must pay out of the hourly rate since when the contract engineer is not working, e.g., paid time off. That is to say, since staff engineers get paid their wages even while on time off a contract engineer’s rate must be uprated to compensate for not actually getting paid while on time off. Per-diem is included since engineers do not typically get per-diem when on contract even when they would otherwise be eligible for it.
Naturally, discipline, location, and experience play huge roles on compensation so I’ve used the national average from Glassdoor.com, PayScale.com, and Salary.com of an Engineer I position for Civil, Electrical, and Mechanical Engineers. Below, I’ve extrapolated the rate-equivalence of employer paid benefits using the average benefits engineers have come to expect from employers. The Federal Government maintains a record of the average “contract rate” of nearly every type of employee, this is the fully burdened hourly rate that is actually paid to the employee in TOTAL COMPENSATION, not what the client (the Government) pays for the services for that individual. As I mentioned before, the client typically pays three to five times the fully burdened labor rate.
ENGINEER I (basically a newly graduated hire) Glassdoor average rate: $69,944.75/yr = $33.63/hr Salary.com average rate: $66,426/yr = $31.94/hr PayScale.com average rate: $59,144/yr = $28.43/hr Net average rate: $65,171.58/yr = $31.33/hr (average of above) Average health insurance cost: ($18,764-$5,714)/yr = $6.27/hr Average 401(k) contribution: 3% of net rate = $0.94/hr PTO: 27 days/yr = $6,767.28/yr = $3.25/hr Short-term disability: typ. 3% = $0.94/hr Long-term subsidy: typ. 3% = $0.94/hr Per-diem: 260 days @ $144/day = $18.00/hr EFFECTIVE CONTRACT RATE: $67.84/hr FULLY BURDENED LABOR RATE: $74.00/hr
To put it simply, if they hope to obtain and retain the best talent, recruiters for a W-2 contract position should offer an average rate in the neighborhood of $70.92/hr, whereas the client would be charged between $212.76-$354.60/hr (3x-5x) for a newly graduated engineer. Sure, talent at lower rates is attainable; however, when a better offer is found/made your talent will go with it.
Staffing Agencies, what is your play? Do you want to be the best of the best or do you want to be glorified temp agencies?