Business Owners Toolbox Blog Discussions and articles to help the small business owner solve the challenges they face as they grow their business.

April 26, 2010

How Much to Pay Your Sub

Filed under: For Coaches & Consultants,Growth Management — Tags: , , — Mike Van Horn @ 5:28 pm
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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