The PEGG

January 2002

Facts Behind the Figures of
Consulting Engineers’ Costs

Editor’s Note: This is one in a series of articles prepared by the Consulting Engineers of Alberta on topics relating to the consulting sector.

Many will be familiar with television’s longest-running game show, The Price is Right, which has contestants guess the value of various consumer products. Engineering consultants sometimes feel they’re part of an ongoing version of the same game when called upon to explain billing rates.

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 engineering skills.

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 aren’t always well understood by those purchasing services.
So, consulting firms are left fielding questions such as: “If an engineer is paid $30, $40 or $50 an hour, why don’t 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, it’s 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 aren’t directly billable to clients. Then factor in bank charges; the cost of legal, accounting and other professional services plus liability insurance premiums. There’s 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.

Don’t 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 doesn’t 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 APEGGA’s 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. Significantly, in
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.