Consulting for Dummies

In My Humble Opinion
1

I’m in the middle of being recruited for a project that sounds just awesome, and I’m really excited about it. However, it would be a contracting/consulting position. I had already signed for my first job before I graduated college, and I’ve never worked in a non-salaried environment, so I don’t know thing one about consulting or working for contract.

Standard disclaimers apply: I’m doing my “real” research elsewhere, and I’m not looking for real legal, financial, or medical advice. I’m just looking for anecdotes, horror stories, stuff that worked and stuff that didn’t when working under contract.

And this is for a software engineering & design job, for an entertainment company, so that’s most relevant. Other consulting experiences are good to hear, too. And, it would be in the US.

All that said, the stuff I’m wondering:

  1. Most people I’ve spoken to have only done contract work via a consulting firm, which handled all the billing and payment. Is this the only way to go, or is it viable to be an independent contractor?

  2. Assuming it’s hourly, how do I figure out the rate to charge when negotiating the contract? For that matter, even if it’s a lump sum type deal, how do I figure that out? I’ve seen salary calculators online, but haven’t seen that many rate calculators. I figured out how much I’m making per hour in my current job, but that didn’t do much other than depress me; I know that that’s too low.

  3. I’ve heard that some companies insist you be incorporated, even if you’re an independent contractor. If this is necessary, is starting a company of one more hassle than any job would be worth?

  4. All the tax withholding, social security and medicare, health insurance, etc. that are usually handled by a company’s HR department – are there one-stop-shopping type places that cater to the self-employed? Or is it easy enough to do on one’s own?

  5. What’s the day-to-day process like, when you’re doing billable hours? Assuming you’re not actually meeting with a client, do you just do work whenever you feel like it, and keep your own personal time clock? Or do you have to have “proof” of hours worked?

2

Hey Sol!

I have limited experience along this line, but several of my friends have done consulting.

  1. It is certainly viable to be an independent contractor, especially when you’re being actively recruited. Much of the value of a consulting firm is finding you clients, but you don’t need that. A consulting firm may help you get liability insurance and get you into a group health plan if it’s more than just a placement service. Everyone I know that’s done contract work has been hired directly by the client.

  2. If your current software job is like most, you’re working far more than 40 hours per week, so if you divide salary by actual hours worked that can be disheartening. Negotiating rates is tricky, of course, and depends heavily on your experience, the relevance of your skills to their requirements, the scarcity of those skills, etc. Typically you can figure that a typical full fringe benefits and overhead cost your employer 50 - 100% of your salary, so 2x your salary would be a good neighborhood for the lower bound on what you will accept. For a flat rate job, naturally you need them to clearly define what they want you to do and be sure both sides are in full understanding and agreement – then the old black magic of software project estimation comes in. You can ask more if they want a short deadline, etc.

  3. I haven’t run into the requirement of being incorporated, but I did some contract work for a company that required me to get my own liability insurance and proof of my auto insurance ( I to add their name to the auto policy as a party to be notified of any changes or cancellation of the policy). You’ll have to hunt around for this insurance (I imagine if you hired out under a consulting firm, the consulting firm would carry this insurance).

If it’s a great job, pays well, and lasts long enough, the hassle of incorporation and the resulting bookkeeping is probably worth it.

  1. I’ve known people who have put this together on their own. I believe in this situation you’d be making quarterly estimated tax payments rather than withholding per se.

Health insurance is one area where you need to look before you leap. Getting individual coverage when your not part of a group can be nearly impossible if you have even the slightest health history or preexisting condition. People that have been prescribed antibiotics or even high dose ibuprofen in the recent past have found it almost impossible to get coverage.

Will you be able to get COBRA coverage when you leave your current employer? California now requires companies selling health insurance to offer guaranteed issue plans to employees that have exhausted their eligibility for group health plans. That’s pretty much the only reason I have health insurance now. In my case, I had to provide evidence that I’d run through the 18 months of COBRA coverage. I don’t know how the law applies if your coming off of a group plan because the previous employer was not subject to COBRA – or if group coverage under COBRA ceased because the employer stopped offering health coverage for its current employees.

These guaranteed issue plans are significantly more expensive than underwritten individual plans – if you’re health history is good enough that you can get on an underwritten plan.

  1. There’s no hard and fast rule here – you need to work out with your client what hours and records they require. In my experience, you can work whenever you please, but it’s entirely reasonable for the client to require you to keep records of the times you worked and what you were working on, though you may normally only have to specify the number of hours worked when submitting your bill. Obviously, if you need to work on the client’s site, that will restrict which hours you can work. Some clients might require more rigid procedures for signing in and out, etc. My guess is that an entertainment company that really wants you is not going to be so anally paternalistic (ooh – that sounded incestuous). It’s of course reasonable for them to expect that you return calls promptly during normal business hours even if you actually do all your work in the middle of the night.

It sounds like you have a very exciting opportunity! My sense is that you’ll do just fine negotiating all these minor hassles. The main decision you have to make is whether to risk leaving a steady job for the independence of self employment. If it’s an exciting project and is going to last a while or pay really well, I say you’re young, go for it! Or even if it’s a smaller job but you feel confident you’ll be able to pick up others. Only someone who knows your abilities and market at least as well as you can answer that question, of course.

Good luck!

3

One of the reasons a lot of people like to work through firms is they take care of the pesky incorporation/liability stuff for you, bill for you, and often get group rates on benefits etc. On occation, the firm that wants you will have a relationship in place. You decide the salary (with or without benefits), they tell the firm to hire you, they pay the firm, you get a paycheck. They’ll charge the firm (but not you, walk if its you) a surcharge for having you as an employee. I’ve know people who have never had contact with their “home office” except the initial paperwork and a paycheck every two weeks. The other advantage is the firm will have other clients, and may be able to place you when your contract ends.

Since a lot of big companies stretch out their payables, this arrangement can be a very good thing - it isn’t unusual at my Fortune 500 to let the bills sit gathering dust for months before we bother to pay them. So what if YOU need to pay your bills faster.

4

1. There are three basic ways to rent oneself out:

  • Be a full-time employee of a service provider;
  • Be contracted to a service provider on an as-needed basis;
  • Be totally independent.

(There is a lot of overlap in the two second choices as one can be independent but subcontract to the service provider when they need one’s skills to fill a job. In that case, instead of selling oneself to the client, one has to sell oneself to the agency.)

From my experience, there is no “right” way to do this, with each person picking the way that is the best emotional fit. I was a wholly owned employee for 21 years and I was very comfortable with it. Somebody else got to worry about making sales calls and balancing the books. I got a slightly lower salary, but I got paid vacations, health, 401k, etc. and when I was between clients for a week or three, I still got paid. A friend of mine simply cannot work for another person, so he has been an independent throughout the 25 years I’ve known him. He can take home every dime he bills; he then turns around and spends a lot of it to buy insurance (including liability insurance, security bonds if demanded, etc.) at higher prices. He can take a vacation any time he can arrange it with a client, but the vacations are unpaid–and in lean times the clients arrange for him to take unpaid vacations. I’ve known several guys in the middle group, as well. Typically, their paycheck has been a couple bucks higher than mine, but their health programs have been more expensive to them, their 401k programs are either non-existent (they can still use IRAs, of course), or of lower quality than mine, and their “vacations” are taken when the agency can’t find work for them (and are unpaid).

Any statement regarding which method is “best” is really a statement regarding the comfort or enthusiasm the speaker has for that particular method.

2. The only way to know how much to charge is to find out what the client is willing to pay. That makes it rough for a beginner. This is where networking at professional associations and similar groups comes in handy, to find out what the going rates are. (No one is honest, since they don’t want to reveal their billing rates, but they will generally provide a ballpark.) Running the ads for your region will (if you read hundreds of them) give an idea of what customers are paying. Most ads are either really vague or mildly misleading, but after reading lots of them, you can begin to get a feel for the market. (Annually, trade journals and the US Bureau of Labor statistics also publish lists of median or ranges of salaries for different occupations that can provide a decent idea of what the market currently bears.)

As to hourly vs fixed price: If you know exactly what needs to be done (as in, you have done the exact job on multiple occasions), then you can figure a fixed price based on how much you need to recoup vs the time it will take you to do the work. Any system that is being designed for the first time cannot legitimately be done for a fixed price. Anyone who attempts to give a fixed price on an unknown design project is either going to charge excessively to cover the slop (and I don’t like giving my money to thieves) or they are going in with no clue how bad it will be (and I don’t want fools designing my systems). Then, of course, there was the project that was let out at my biggest client (over my protest) that was seriously overbilled, then handed to rookies (to keep down the contractor’s costs) and badly written, so they gave money to thieves in order to have fools build the system.
I’m in business programming, not games or similar tech, but as an example of the differences: My outfit used to do a lot of fixed bid projects installing upgrades on a payroll system. After the first two upgrades, we had enough experience, both with the software and with the vendor, that we could look at a new release and know just how long it would take to install it. It was never plug and play (which is why the companies were willing to bid it out), but the software was consistent from release to release. On the other hand, we also did conversion work from in-house systems to that product. We did all those on a time-and-material basis because we could never tell before we started the project whether the in-house system had enough information to allow a clean conversion, we could not tell from a couple of sales calls whether the users had any clue how their own system worked, and we could not determine how many in-house people were going to strive mightily to sabotage the project because they disagreed with the decision to do it.

3. I don’t know how it is in your industry, but in the business and back-office trade, incorporation has been a requirement for nearly 20 years. Whether it is “worth” the hassle would depend on how badly you want work and whether the same requirement is true in your industry.

4. If you are smart enough to run a business, you can do the taxes for yourself (especially with any number of software products out there for less than $100), however, the lack of good accounting knowledge and practices is a leading cause of small business failure. You might want to talk around and find a decent CPA. Similarly, you can shop for insurance on your own, but you can generally get better rates if you buy as part of a group–often offered through trade groups and professional associations. (My boss used to go it alone on the insurance, but his father was in the business and the two of them were able to find some really good deals.)

5. If you work on-site, showing up at their office establishes “when” you worked. For off-site labor, I can’t help with that aspect.

5

Thanks a lot for the detailed responses, guys! It’s very useful (and somewhat calming).

6
  1. Most people I’ve spoken to have only done contract work via a consulting firm, which handled all the billing and payment. Is this the only way to go, or is it viable to be an independent contractor?

You will probably make more cutting out the middle-man, but then again you may have to wait for 30 to 60 days for your client to pay you. Always make sure you have a weekly or biweekly time-sheet and status report signed by your supervisor, these come in handy should there be a dispute about the hours you are billing for and what you accomplished.

  1. Assuming it’s hourly, how do I figure out the rate to charge when negotiating the contract? For that matter, even if it’s a lump sum type deal, how do I figure that out? I’ve seen salary calculators online, but haven’t seen that many rate calculators. I figured out how much I’m making per hour in my current job, but that didn’t do much other than depress me; I know that that’s too low.

First of all, don’t ever do a lump-sum deal unless it’s a very small project with very well defined deliverables, otherwise they can argue forever that you haven’t completed the project. If you’re in CS or IT, I would say $50/hr. if you are very good at what you do, $75/hr. if you are an expert they would have a very hard time replacing, and $100/hr. if you are very, very good and you would rather not be working for them, otherwise, somewhere in between.

  1. I’ve heard that some companies insist you be incorporated, even if you’re an independent contractor. If this is necessary, is starting a company of one more hassle than any job would be worth?

The reason for incorporation came up back in the 1980s when engineers and computer programmers were singled out by congress as self-employed people that must be incorporated. The problem was too many independent contractors were pulling all kinds of shenanigans to dodge paying taxes. I’m not sure what the status of this law is today. But in general, I believe a large company will require that you be incorporated, it has to do with liabilities (taxes, insurance, etc.). If you plan on this being a one-shot deal and possibly going to work as their employee, I would try to avoid the incorporation hassle. If you want to work as a contractor for several years, I would incorporate. Get an accountant if you incorporate, most of the monthly/quarterly stuff is easy and you will eventually do that on your own, but the end-of-year stuff is a nightmare.

  1. All the tax withholding, social security and medicare, health insurance, etc. that are usually handled by a company’s HR department – are there one-stop-shopping type places that cater to the self-employed? Or is it easy enough to do on one’s own?

See 3.

  1. What’s the day-to-day process like, when you’re doing billable hours? Assuming you’re not actually meeting with a client, do you just do work whenever you feel like it, and keep your own personal time clock? Or do you have to have “proof” of hours worked?

See 1.