Facts Behind the Figures of
Consulting Engineers Costs
Editors Note: This is one in a series of articles prepared by
the Consulting Engineers of Alberta on topics relating to the consulting
Many will be familiar with televisions longest-running game show,
The Price is Right, which has contestants guess the value of various consumer
products. Engineering consultants sometimes feel theyre part of
an ongoing version of the same game when called upon to explain billing
Several methods are used in costing consulting engineering services.
The more common include fixed fees, percentage of the capital cost of
a project (usually about 10 per cent) and time-based fees. The latter
typically rely on information gathered through surveys by industry and
professional associations, such as APEGGA, of hourly rates paid for specific
Hourly rates that form the basis for billing also reflect the experience
and responsibility required for specific engineering tasks. Despite extensive
use within the consulting sector, such
time-based billing systems arent always well understood by those
So, consulting firms are left fielding questions such as: If an
engineer is paid $30, $40 or $50 an hour, why dont I pay that multiplied
by however many hours have been spent on a project?
Hourly Rates Only a Start
Such questions generally do not come from managers who themselves oversee
payrolls. They should appreciate that employee hourly rates are a starting
point, not the finish line for costing services.
Employee benefits including provisions for pensions, sick leave, statutory
holidays and vacation; premiums for medical, dental, life and employment
insurance, as well as for workers compensation insurance typically
add a further 20-to-30 per cent to firms employee-benefit costs.
This value (1.2 to 1.3 times the salary cost) is often referred to as
the payroll cost.
Besides paying for office space and furnishings, engineering consultants
face many other expenditures. For instance, its hard to imagine
consulting firms getting by without computer-based design and IT systems,
and often websites and other elements of internal and external communication.
In common with other businesses, engineering firms must cover overhead
costs for utilities, printing and stationery.
Add to that outlays for administrative, executive and support staff salaries
that arent directly billable to clients. Then factor in bank charges;
the cost of legal, accounting and other professional services plus liability
insurance premiums. Theres the cost of professional licensing.
With increased emphasis placed on continuing education and staying attuned
to new development, consulting firms are expected to support employees
attendance at courses and seminars. Word of mouth may once have sufficed,
but increasingly proactive marketing is needed to get into business, to
stay there and to grow.
Unlike, say, EPC teams assembled for specific projects, most consulting
firms retain staff ready to move on relatively short notice. Such battle-readiness
also adds to consultants costs.
Dont Forget Overhead
Overhead costs will varyfrom one firm to another but generally they equal
or exceed payroll costs. That means that payroll and overhead costs combined
are generally in excess of 2.5 times the hourly rates. And this multiplier
doesnt recognize any profit for the risk and initiative
taken by firms shareholders. Professional associations tend to acknowledge
the multiplier effect in their various consultant fee guidelines. In APEGGAs
case, some of these guidelines date back to the early 1990s, and call
for a payroll multiplier in the 2.0-to-2.5 range which
corresponds to a multiplier of 2.5 to 3.125 based on hourly salary rates.
the past year, Professional Engineers of Ontario has updated its Schedule
of Fees for Engineering Services Guideline. That guideline suggests a
multiplier factor of 3.25 be applied to the hourly rate in setting fees.
This is a more realistic multiplier that takes into account that new
systems andtechnology improve employee efficiency. Acquiring and running
these systems result in added costs, but it also means employees spend
fewer hours on given tasks than they might have a decade ago.
So, is the price right when it comes to consulting engineering services?
In the vast majority of cases, excellent value is delivered for the price
paid. Ultimately, to stay in business, engineering consultants must be
able to recover their costs and receive a reasonable return
for the knowledge and organizational skills they bring to projects. A
strong, financially stable consulting industry is an important component
in our growing provincial economy.