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Contract to Hire Discount (andrewmcwatters.org)
34 points by andrewmcwatters on Sept 26, 2022 | hide | past | favorite | 46 comments

Take your expected salary per annum, pre deductions. Divide that by 200. This is your BASE line break even contracting rate per day. Any thing less, and you're going to have issues financially.

@ $50,000 per annum

50,000 / 200 => 250 per day.

On average, you'd realistically want to be charging closer to Base + 40%. Im my example, this would be $350

just to give yourself time off, $$ for equipment, marketing, growth, insurance, accounting, other general business costs.

Contractors are expensive because we're the business. We take on the risk. We do the HR, taxes, insurance, office rentals, equipment costs/hire. Everything.

Agreed. I usually tell people to charge close to 2x their salaried rate. You can negotiate if you're hungry for business, but I've found the price tag is usually not the biggest blocker to getting clients.

So Senior engineers on contract at a big tech company could command ~3,000 USD per day? Or does this math break down when you get into salaries in the 400+k range?

I know solutions architects who are billed out to companies at that rate. They only take home half of it though.

Usually as a contractor you should charge a lot more than the 3% plus $8/hr. You don’t bill 2080 hours per year, and have to pay for many other incidentals. I think a 50% premium is more appropriate.

this is correct. direct contractors without agencies typically pull 1.5x-2x annualized base salary in hourly rate form. this is because contractors are estimated to spend 40% of their working hours in a non-billable state (like waiting on contract negotiation delays, for example).

additional overheads like accountancy professional services, insurance brokers, insurance and equipment as well as the time spent dealing with them are significant.

if a contractor converts to fte, or a long term contract (12+ months) then these figures adjust down. but for short term contracts, the per hour rates can appear quite high (although actual gross totals tend to not be much in the scheme of things).

this is why the mean rate from the last hn contractor salary poll was $100-$150/hr.

This is for Contract-to-Hire though. Which is a little different.

You aren't going to be billing this company anyway. You are essentially setting a fixed rate for a fixed amount of time with the expectation of full-time employment after that time.

So it does make sense to essentially contract yourself at that rate. But he's saying when you do, add in the 3% plus $8/hr to cover the things not being covered by your employer during that time. It'll make the transition a little smoother. You won't feel as if you're shafting yourself.

I'd also add that if I were Contract-to-Hire, I'd also stipulate that once I'm hired, I'm a full employee. My contract period is my probationary period and after I should be treated as a full employee with all the benefits that entitles me to: health care, 401k matching, etc.

Correct. The funny thing is W-2 contract to hire agreements are employee agreements the whole time.

1099-NEC would be the appropriate way to report non-employee compensation but many businesses do not do this.

As long as they have the right to not hire you, you should pad in cost for downtime.

Correct. This article is regarding W-2 contract to hire (or temp to hire) agreements, and not consultancies.

I'm spitting into the wind here, because the norms of temp-to-hire are simply not the norms of contracting and probably never will be, but, broken record: your contracting rate is wildly higher than your FTE salary. 2x would be a lowball.

I agree with you. Contracting is an entirely different ballgame to me. Temp-to-hire is the subject of this article. The terms are conflated, unfortunately.

2-3x base pay is a rule of thumb I've heard. Generally speaking however, most small software development companies are around $150/hr+ in practice.

So if your contracting rate is 2x your FTE salary, and the company has offered you to be converted full time at 1x FTE salary, should you do it? It is true that the employer will now pay for things on your behalf like health insurance, paid time off, taxes, etc., but I find it unlikely that all of those things add up to the wages you are giving up.

If you want a full-time job, yes? If you can get something resembling 2x your current FTE as a full-timer, than your contracting rate is ~2x that.

If the question is "should I freelance or take a full time job", that's a much bigger, more involved question.

and a key point regarding the two: contract/freelance rates are higher because there's no commitment from the employer regarding a stable stream of future work. also they're short term, so the actual gross difference is typically quite small.

where there's a general expectation that a w-2 earner will be budgeted for years into the future.

Yep. If you're hustling and pretty good at sales, a 60-70% utilization would be a good year. So, right off the bat, you can see you need to be making a lot more money per billable day than you would with an FTE salary: at 50% utilization, you need more than 2x just to be in the black (after tax and benefits overhead).

A 2x hourly rate (on a contract basis) only nets out to ~1x FTE over a typical year. (I'm speaking generally of course).

The 2x doesn't come for free nor is it just for PTO & health - it's paying for all the non billable time generally spent marketing, prospecting, qualifying leads, creating proposals, paying for time to proposals that never result in paid work, etc.

A typical independent consultant or freelancer only does billable work 50% of the time.

To answer your question as to "should you?" - it depends on your goals. Contracting versus standard employment is not just a financial, but a lifestyle decision.

C2H discounts and distorts more than your pay.

As an employee, you are taking on a 6 month contract can be terminated at any time, basically. And you are stuck performing "for your job".

From what I've seen with C2H employees, they are either what you see, and you like it, Or it changes, when they become employees. The latter is a real problem. Because the whole point of C2H is "try before you buy." But, really that try isn't under realistic conditions. If they are what the company likes, buying out the "C" can be a pain, and cause instability and unhappiness for the employee.

C2H employers, use it for various reasons, but I've seen mainly instability in some form, cause them to use C2H. Be it that they can't hire perm because of internal malfunctions, or they aren't sure if they'll be around for you to go perm, etc. In one case I think they did it to make sure the contracting agency found people for them, because the profit is higher.

As far as rates: I'd bill it as a 3-6 month contract, that I assume would not renew. Remember, you can decide to walk away also, and see the above... you just might.

If you do C2H:

It's strange out there, stay interviewing my friends.

Interestingly enough, most employees can also be terminated at any time. At least in the US, as far as I know.

To my knowledge there is no special legal protection for full time (or "direct hire") employees versus contract to hire employees. They are both just W-2 employees.

Even in ""well-protected"" Germany you usually have the 6 month probation period in the contract that makes termination easy?

(Genuinely curious) How does that work? If you want to fire someone for performance problems, how do you do it?

In the US no explanation is required. Anyone can be terminated at any time with no justification (unless you negotiated special employment terms, which is rare outside C-Suite or VP level)

Within the probation period, you dont need a reason, its fire-at-will. After those 6 months, it will be almost impossible to fire anyone for "performance reasons" (or any other reason). Have you ever heard of a large german Software company that makes quality software? There is your reason :)

I’ve been thinking about C2H to resolve the “performance reasons” issue. In NZ the situation is reversed. Even during probation, performance issues require managing, not firing.

In this environment it would be preferable to hire on contract as a ‘probation period’ in order to determine fit.

Usually there's some excuses needed for perm employees from all I've seen.

Certainly more painful than ending a contract for a large company.

Don't forget that when you're hourly you're usually limited to 40 hrs/week because they don't want to pay time and a half. After you go permanent salaried there will be no such limitation and oftimes you'll be expected to go over 40 hrs/week.

I'm currently contracting in a startup where it seems that most all of the permanent employees work weekends. I was recently asked if I'd be interested in going permanent and my reply was "not just yet" because I really don't want to work weekends.

Contractors in Tech are generally not given time and a half in my experience. You don't qualify.

I'm paid an hourly rate on W2 through an agency so I'm pretty sure I do qualify.

If you are in a Tech job then you most likely don't.


Ok, it looks like you're right. When did that change? Because I can remember times in the past where I was specifically told not to go over 40 hours so as to avoid overtime and it doesn't seem that long ago.

Not sure, it's been like that as long as I've been working. You can still get paid for more than 40 hours but not time and a half. Orgs usually have a hard cap on Contractor expenses so it's not easy to get approved to go over those 40 hours per week.

I have seen similar calculations discussed many times on HN. Usually the suggestion is to charge 2x your salary. So if you would usually make 150K per year, then charge 150$/hr to make up for the self-employment taxes, health insurance expenses and other things.

But does this really work in practise. What I have usually seen is that the client usually pays in that range 125-150 /hr. But then a huge chunk of that is eaten up by the middlemen - companies like Randstad, KForce, Adecco, Robert-Half et. al.

In the end, you are barely left with 70-85$/hr at which point consulting makes no sense and it is better to go full-time becase you get better health insurance from the company rather than buying it from the marketplace.

I think something I should clarify here, and perhaps in the article itself, for HN readers is that this is specifically with respect to contract to hire, non-private business 1099-NEC or W2. The latter of which is already specifically for employees.

If you are a single-member LLC or an agency, your rates are business rates.

For example, my agency charges $175/hr per resource.[1]

That is to say, contract to hire employment is not contracting a software development firm.

[1]: https://www.andrewmcwatters.com/services

what is the difference between contract to hire and business services in the time before the contract is up?

It is a widespread practice in tech that employers will give employees contract to hire agreements, pay them by W-2 with only base pay and no benefits.

When the conversion period ends, base pay is cut, and that allocation goes into employee benefits.

You're an employee to the IRS the whole time.

ok. for passthrough agency or other W-2 co-employment/peo arrangements, what you say makes some sense.

for business to business billing it's basically offensive.

i'll also note that those passthrough agencies, peos and co-employers can charge up to a 100% markup though.

...and, contract to hire is still just contract, until hire.

There is also the contract-to-hire full time compensation penalty. I can't prove this with data, but I know from friends, former colleagues and old bosses that contractors transitioning to full time get lowballed/bottom of band offers most of the time. The only way around this is to bring other active offers to the table.

C2H is generally shit and people should stay away from it, if only because a lot of the spammy/body shop recruiting firms often use it (and still put you through a tech interview)

Yep many decades ago I did C2H when I didn't know any better. Its almost always a bad deal. No reason to leave a full time gig for C2H and you can make more money as a straight contractor. Its the worse of both worlds.

I just wanted to commend how clear the Privacy Policy for the website is: https://blog.andrewmcwatters.org/index.php/privacy-policy/

It's just clear!

Thank you! The Privacy Policy is the stock language from Wordpress 6.0.2. So hats off to Automattic for sensible recommended text.

Should also add your half of FICA (7.65%), so should be closer to 20% of pay

Yes, this depends on the manner in which you are hired. In W-2 contract to hire positions, an employer would be paying this already.

What about time off? a few weeks off should be worth a few percent also. Some contractors get this, some do not.

This article and many of the commenters are talking about “cost plus” pricing strategy, is perhaps it is more like a comparative-plus-cost strategy.

Consider instead a “value” strategy, specifically you can price yourself high and see if you can get engagements. If not, lower your price until you can. Or start low and raise until you can’t get engagements. Either way you are letting the market set your rate.

The truth is there is a variety of factors that control your pricing power… marketing, supply/demand, availability, quality perception, risk, fire-ability, and so on.

I just did a contract to hire, I charged about 3.5x my base salary on an hourly basis, but limited to 20hrs/week. I think you you need to get at least 2x for it to make sense.

Here's a handy spreadsheet to calculate your hourly contracting rate:


It factors in PTO, FICA, 401K match, equipment, etc. It's made by my company, https://www.facet.net

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