Monday, January 31, 2005

The Engineering Man-Hour

What happens to an engineering man-hour? I don’t mean how they get spent, although that’s a good question. I’m talking about what gets paid for, and how much….

Let’s consider a typical billing rate of $50 an hour, with a multiplier of 2.0, resulting in a billable rate of $100 per hour….although that may be optimistic these days…

A majority of this cost goes to paying the direct salary of the individual…the remainder goes to statutory benefits, taxes, corporate overhead, and finally, a profit…hopefully….

The employee’s paycheck can also be broken down…taxes, benefit costs, and finally (again) take-home pay…

What makes up the majority of this $100 rate…the answer would appear to be the employee and the benefit costs for that employee…Employer contributions to taxes, statutory benefits, employee health care costs, and 401k contributions, etc are all added to the basic pay rate.

The employee comprises the most significant cost facing the professional service company they may work for and the Clients they serve. I guess this can be considered a blinding flash of the obvious.

I am interested more in the implications that may be present here….


Profit = Revenue – Cost

Revenue is down- given the cost pressure in the industry, companies are getting less money from their Clients.

Reduce profits??? Never a popular idea…but maybe this gets tried first…though not by choice…

And some people will tell you that companies are currently bidding below costs just to stay in business…although how that works in the long run I’m not too sure.

That leaves reducing Cost- seems like the obvious solution…this probably gets tried next…

Hire employees with less experience so their hourly rate is lower?
Hire employees with fewer qualifications to do the work?
Pass cost reductions along to employees???, i.e. offer fewer benefits…skip raises…

These approaches could lead to a lot of questions about quality issues…


Or is there a “third way”???…

Maybe this is the time to invest in the best possible people…

Maybe the best people make the biggest difference in the single largest cost of doing business…

Can we afford to risk making a mistake on the single largest cost of doing business?

It’s difficult to make sure that you get what you pay for, but in the end that’s exactly what happens…

2 comments:

Babun said...

Dear Mr. J F Duffy,

I have read your topic with great interest and I have the fourth way of solution to the problem foreseen by you.

The fourth way is pretty simple! You have to hire me at a lower cost than that of other guys. And, as I have already proven, I can surpass those guys in quality, competence, knowledge and time spent to generate deliverables.

Presently, I am hired in Japan. If you are interested, you can contact me at “Yahoo+Answers+Bhatta”. Please google it.

Regards,

Bhatta

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