Independent contractors allow your business to tap into in-demand skill sets, gain specialized expertise, provide an external perspective, and support work needs all while keeping your employees focused on your core business. But what does it cost to engage independent contractors and how do you plan this category spend?
When preparing your budget for independent contractors, you will need to do so within the overall scope of your project cost. Keep in mind that your project rate may contain a variety of costs and resources such as a managed service fee, materials, licenses, and expenses, in addition to the rate of the independent contractor.
Because of all the factors and parameters, it can be difficult to benchmark or categorize the labor costs of a project into a rate card. Engaging independent contractors does not always fit into a compartmentalized service spend, as each project or service has unique variables. Those variables are—in many cases—why you are engaging an independent contractor with a specific expertise, ability, or experience in the first place.
While creating a budget is critical, it is equally important not to minimize the intangible value that an independent contractor brings to the project.
There are nearly 41 million independent workers in the United States. This diversity of talent, expertise, and rates that will vary by industry, region, and experience. As such, you may receive a wide range of rates for consultants being considered for the same project.
As part of the engagement process, the independent contractor will typically provide a Statement of Work (SOW) that will identify tangible value points such as certifications, accomplishments, and experience levels that support their proposed project cost. It will be up to the hiring manager to justify the value identified in the consultant’s SOW document to make the final decision.
If you engage project-based independent contractors, you may be able to roughly compare rates to that of a W-2 employee. For example, if you have a marketing department and are engaging an independent writer to support a short-term project, you may be able to develop a rate card based on a similar employee rate.
If you are comparing prospective consultants and trying to determine if their rates are in line, you can use the full-time equivalent (FTE) as a base. At the low-end of the skill level, take an FTE hourly rate and add 30%. At the high end, where you might need a skilled expert, multiply that hourly rate by 2.5. The consultant’s rate should fall somewhere in between the FTE equivalent and 2.5 pay rate. Keep in mind that this is a rough guideline that can provide a basis for comparison.
Ideally, you will want to identify independent contractors who are the best fit for your project, and then have that person justify their rate within their SOW. A consultant should be able to articulate the value of their services to you. This is a common and preferred process for many clients.
Keep in mind that it is not always possible to compare independent contractor rates to your hourly or salaried employees. In fact, independent consultant rates may be higher than a W-2 employee. With employees, you bear the burden of taxes, benefits, and insurances. Independent contractors are solely responsible for these expenses as well as for their own operational expenses. They have to cover their non-billable time at their rate, so expect that a short-term project will be more expensive by the hour than a long-term project. More important than the rate, however, is the value in hiring an independent contractor for the tangible benefits of your business.
If your business plans on regularly engaging independent contractors, be sure to have a way of memorializing these project costs as well as the consultants themselves. Re-engagement, as well as sharing consultants across departments, can make a big difference in both quality and time to productivity. Building a curated group of known independent talent can be just as valuable as having a strong staff of regular employees.
To learn more about independent contractor engagement or creating your own Preferred Talent Network, contact us today.
News and notes for independent contractors and their clients. This is the January 16, 2017 edition of The Weekly Independent from MBO Partners.
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