Career Advice: Avoid Financial Blunders

An independent contractor must think carefully about money-related issues

By Dirk Willard, Contributing Editor

The recruiter offered me an hourly rate that, he said, included a bit extra to cover expenses while on location. That’s a bad idea. Demand a split-off per diem. It will reduce your tax liability. Say you’re hired at $60/h. If you work a typical year, i.e., 49 weeks, that’s $117,600. But, if your per diem is $20/h, your taxable income drops to $78,400 — a big difference.

This recruiter also offered bad tax advice: “Don’t worry about paying taxes in Ohio, you’ll be working in Texas, which doesn’t have a state tax.” That’s completely wrong. The recruiter either deceived himself or was deceiving me.

You must understand such issues to avoid financial blunders when doing contract work or consulting.

I am a one-engineer shop whether I work onsite for a firm, through a recruiter or independently as a limited liability company hired as a “1099” contractor (i.e., the client reports payments to me on Internal Revenue Service Form 1099 rather than a W2). I’ve had to deal with a number of other serious money-related issues.

For instance, a manager at a prospective client once pressured me to consider $35/h as a flat fee. Never let someone cut your rate.

A low rate might seem tolerable if the client can keep you busy the whole year — but that’s rarely realistic. The low fee can come back to haunt you on future work with that client and maybe even others, and can have other important impacts. For instance, at $35/h, I’d have to work 36 hours a week to meet my financial goal, leaving no time for business development and non-billable periods. Moreover, too often a client expects a contractor to spend time, not billable to a project, e.g., to review drawings.

In determining an hourly fee, it’s sensible to consider a 50/50 proposition — i.e., that you’ll spend 50% of your time working on projects and 50% developing business.

Don’t assume you can put a full eight hours into a project and eight more into business development — at least, not for long. I remember working at an engineering firm where we talked to prospective clients during the day and toiled on projects until well past midnight. This went on six days a week for six months. We won more work but were exhausted; I’m sure the clients picked up on it.

You must find a billing rate you can live on. Based on my modest cost of living, for 20 hours of work per week, that’s a billing rate of about $63/h. If I factor in up to six weeks of non-billable time each year — for example, to handle design reviews, the rate jumps to $72/h. That’s the rate I would quote new clients.

It’s also sensible to have a strategy for dealing with rate-cut pressures. I’ve found the best counter to such pressures is to price work depending upon what it involves. So, I charge about $45/h to generate straightforward computer-aided design (CAD) files but $65/h for design work. Also, consider bidding the job piecemeal. Do a preliminary study for 30–60 hours of engineering; price any CAD work required on a per drawing basis, separately from the engineering, with additional charges for more complex drawings. Consider this an FEL-1 study (see: “Don’t Flub Front-End Loading”). If the client wants an economic assessment, add a day.

Leave loopholes for unexpected over-runs. Ask if the client wants to include an item, say, insulation. If the answer is yes, add hours. If the answer is no, document that, so if the client later asks for it, you can charge extra.

An even better approach for both contractor and client is to establish a Gantt chart with deliverables and reviews, and then write a time-and-material contract.

Whatever the approach, every process-engineering contract requires certain items: a line list; a material balance; physical properties; a pipe specification or at least a list of materials of construction; and a process description or project scope. For a typical small project, allocate 20 hours for the line list — for six or fewer lines; a modest material balance can require 32–120 hours; physical properties can take from a day to a week or more; and a process description can demand a week.

For the project to succeed, either the client or the engineer must provide these items. At the very least, the client must clearly define scope or your hours could be wasted.


dirk.jpgDIRK WILLARD is a Chemical Processing contributing editor. He recently won recognition for his Field Notes column from the ASBPE. Chemical Processing is proud to have him on board. You can e-mail him at dwillard@putman.net

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