How Much to Pay Your Sub

April 26, 2010 · 4 comments

in Growth Management,For Coaches & Consultants

As a consultant or other professional, if you hire a skilled person to help you on a client project, how much should you pay them? How should you bill your client for their time on the project?  Here are my two rules:
— If the person is an employee of yours, bill them out at three times what you pay them. That is, if you pay them $30 per hour, you should bill them at $90. Looking at it the other way, if you can bill your client $90 for a skilled associate you assign to the project, you can pay that person no more than $30/hr.

— If they are a subcontractor, bill them at twice what you pay them. Thus if you can bill the client $90 for their billable time, you can pay your sub no more than $45.

Why must you have this much mark up? You are taking the entrepreneurial risk, doing the marketing, taking project responsibility, overseeing their work. You have to pay them whether or not you get paid. If there’s a glitch, you are responsible. If there’s a do-over or wasted time for which you cannot bill the client, you must still pay your associate. You’ve got to cover your overhead, contribute to your own salary, AND make a profit.

Why the difference between employee and sub? With an employee, you must cover payroll taxes, workers comp, etc. You may be paying them for hours that are not billable to any project.

You may respond, “I can bill my client at $120 per hour, but my sub wants $100. So I only make $20.” If you do this, you’re losing money every hour they work for you. You notice this via your feeling of  burnout: “I’m working my tail off on this project and I’m not making any money!” You’re tempted to do more of the billable work yourself–on evenings and weekends–rather than handing it off to your sub.

Instead, say, “I have this project ready to go. I need some help, and I can pay $60 per hour. Interested?” I’m betting you can find someone really qualified who will step up and shout “Yes!” Don’t let your overpriced sub call the shots. If you really need someone whose market rate (not their personal inflated rate) is $100/hr, then you must bill your client at $200.

If you don’t do this, I guarantee your business will stay in the cycle of smallness. Owners who adopt this pay policy free up their time to bring in new business, grow their business, hire and train more associates, and take more time off. Which do you want to be?

Do you have a situation where you can’t figure out how to make this work? Get back to me; give me some details. I can talk you through it.

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{ 4 comments… read them below or add one }

Peter Stansbury April 30, 2010 at 4:24 am

Good simple formula Mike. Not easy but really important. Also sensible to focus on this now, in the current climate with customers squeezing hard on rates – mustn’t let the margin be squeezed too much.

A couple of options you do have in cases where you cannot make the sums add up is to use risk share for a sub-contractor, pay them when and only if you get paid for example. Another is to offer some of your time for free – e.g. subbie at full rate plus you free for x% of the assignment. The customer gets extra but the day rate remains intact and you are naturally onsite to manage, to help, to build relationships and close up to spot new opportunities.

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mvh April 30, 2010 at 12:16 pm

Thanks for your input, Peter

I agree that we may have to give these kinds of discounts in some special situations. But it should be a big red flag, and if you keep it up you will definitely damage your business. Clients demanding such discounts can mean several things:

— You haven’t properly conveyed the value you bring to them. If they replace you with another consultant doing the same thing, how much will they have to pay? It may be more, in which case they are playing a game with you to get you to work for less than you are worth. It may be less, in which case you should either assign the work to a lower-price colleague, or not keep them as a client. (You can’t sell a Lexus to someone who only wants to pay for a Corolla.)

— You are going after the wrong kind of clients. You want those that value what you provide, see your unique qualities, and see your price as a bargain.

— You’re running scared and are unwilling to ask for what you are worth. This is a near universal characteristic of small operators, who under-price themselves compared to larger competitors that do poorer-quality work. This often happens to a consultant who has one large dominant client (I call them a “boulder”) that they fear losing if they ask for more.

One of my sermons is “Never subsidize anyone wealthier than you are.” But many of us end up doing so, unless some hard-headed nag like me keeps on them.

mvh

Peter Stansbury May 1, 2010 at 5:06 pm

Thanks Mike, excellent thoughts, well articulated and I really like your sermon. Agreed these are red flags and two situations I have seen recently that support this (but probably no others):

Some trusted UK public sector clients who are really finding themselves in a new world of budget cuts, elections looming (only a week to go now), the first lay-offs they can remember: without the right sweetener indecision reigns. If this is a short-term Corolla position that is sustainable, but you are right that action is needed if they become long-term Corolla buyers.

The other relates to a new client who paid for the Lexus but the sub managed to deliver Corolla service (well actually a random selection of Lexus and Trabant in a recent case). In this case the free extra resource (non-sub) plus the sub used to help restore the confidence but without dropping price or developing dependence on the principal.

You might have other better techniques for these specifics.

Actually I have just remembered a third, we had an opportunity to fill a Lexus role for Corolla price, prospect could not get authorisation for the right price and could not find the right resource. We offered to do it for the discount as there was exposure to many third parties who were unaware of the rate. We received a gold plated testimonial and several leads for business at full price.

Peter

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mvh May 3, 2010 at 12:52 pm

Peter, a few responses
First, it reminds me why I stopped going after work from govt. agencies!

“First layoffs they can remember; clients insisting on Corolla prices.”

Many consultants discover that when their clients start laying off staffers, very soon more consultants must be hired. The org making the cutbacks discovers that key tasks must still be done by competent people! I’m talking about top level people, not contract workers who are labeled consultants.

Companies and organizations eventually learn one of two things: a) You can’t get Lexus work for Corolla prices, or b) Truly they only need a Corolla consultant. Lesson for Lexus consultant: Go after A, fire B. Doing Corolla jobs absorbs all your time and energy you need to pursue Lexus clients.

“Sub delivered Corolla service, so consultant had to clean up for free afterward.”
Yeah, this is where you earn the 100% mark-up on your sub’s work. If this consultant was one of my clients, I’d make sure they had project management systems in place for subs, just as they would with employees, to track performance as often as needed to assure quality, schedule, budget, etc. Easier said than done sometimes. But too many consultants are terrible managers of subs, and just turn them loose with little oversight.

“Do Lexus work at discounted Corolla price as a one-time intro.”
Bill the full rate on the invoice, but show the discount, thereby preserving your baseline rate.

I enjoy our interchange!
Mike

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