When an independent consultant works for an hourly rate, it is usually a pretty simple arrangement.  The type of relationship is defined (i.e. W2 employee, or 1099 independent contractor) in writing and then both parties sign it.

The particulars include the standard hourly rate, weekly hours cap if any, and how overtime work shall be billed (whether time and a half, straight time, etc…).  And the type of relationship carries with it implications for obligation and taxation.  W2 means that the worker is an employee, and that the employer is required to pay employment taxes on that person.  Whereas 1099 means that the worker is an independent contractor, and merely provides a service in exchange for the agreed-upon pay schema.

Many companies using consultants these days will opt for a 1099 type of relationship because it allows them greater flexibility in their staffing – they can “hire” and fire much more quickly and easily.  Also, it eliminates tons of paperwork and tax responsibilities.  (An experienced consultant will consider the ~8.2% tax implication into their rate).

Independent contractors do not receive any benefits, and therefore the integrator does not have to worry about the associated cost, time, expense, or overhead.  No vacation time, no holiday pay, no health/dental/vision insurance, no supplemental life insurance, no 401k or matching funds, no company stock for employees.  No employment anniversary, no EEOC reporting, no employee performance reviews.  No workforce relocation/distribution for those workers.  No company family picnics or Christmas parties.  Administering employees is a business of its own, so hiring contractors alleviates a lot of burden from businesses.  And that is fine and dandy with me.  We both know the rules going in, and we stick to them.

One problem that I have experienced with several of my integrator clients is that they negotiate a fixed-price deal with their client (the end client such as an online retailer), and they use contractors at an hourly rate, which can also be referred to as “time and materials”.  This can be good if there is very little uncertainty and their bid was adequately higher than their need for the time and materials service so that they could make a profit.

The integrator, also known as the solutions provider, quoted a fixed price in order to be competitive and get selected over their competition.  Unfortunately they do not account for the fact that there is great uncertainty in projects and project management, and that cost overruns are generally the norm and rarely the exception.  The expedient thing to do would be to add a contingency clause to their contract with the end client to address how certain overruns would be handled and to share some of the risk with the end client.  This makes for a win-win situation.

To add to the difficulties, project scope is often not identified at the contracting stage other than in vague terms.  And then once the engagement has begun, both the integrator and the end client continue to develop different ideas in their mind about what the scope is.  There is, and will always be, friction.

Often this friction gets pushed to the consultant.  The integrator begins to realize that they have not adequately defined the scope with the client and that they are spending more time and money than they had planned (using the word “planned” loosely).

Things will usually come to a head and there will be scoping meetings – things that should have occurred months earlier.

On one project, the engagement manager was asking the junior workers who were here in the States on H1 visas and green cards to put in lots of overtime without any overtime pay – basically saying, “You will work for free, or we revoke sponsoring your work visa”.

For W2 employees, there is a certain amount of overtime work that is expected and reasonable (remember all the benefits listed earlier?).  However, I have seen it abused many times – especially among Indian-owned companies and their workers.

In reality, regardless of the nationality of the solution provider giving the fixed-price bid without having clearly defined the scope, integrators will continue to get themselves into trouble and will continue to wonder how and why it happened.  And they will continue to look for ways to share the pain with their workers as they try to stop the bleeding.

Personally, I made it a policy long ago to clearly declare that I bill for each and every hour worked on behalf of my client and/or their client.  I do this well before I sign a contract or begin work for that client.

Recently, after the first stage of a project that was full of confusion about what was to be delivered and when (and was not defined in writing by the integrator and the client, and was stated differently verbally between the start of the project and several weeks into it), the integrator’s engagement manager said to me that he wanted to push the risk down to me.

At first it irritated me, but then as time passed, it bothered me more and more.  I responded politely but firmly that what was needed was for him to negotiate more decisively about what was in scope, and how and when it would be delivered; that I was not an employee and that I billed for each and every hour worked.  His reply was that they did not want to rock the boat with them since they (the integrator) were in there (at the client) doing another/bigger project that was going well.

So, in retail terms, my project was operating as a loss leader – when something is strategically sold at a loss to get people in the door so they will buy other stuff that contributes to profitability.

Now, if they want to do that, then that is their business. However, my contact is and has been not with the integrator directly, but with a sourcing firm that provides me to them; and it is and has been that my time is billed for each and every hour worked – time and materials – and without regard to any contractual arrangements that may be between the integrator and the client.

Two things I thought interesting:

1. A) That the integrator did not mention sharing the up-side profit potential when he said he wanted me to share the risk in their providing a fixed-price solution;  B) he did not seem to remember that he originally told me the engagement was budgeted to go through June, but instead the client regegged after two weeks and instead declared a stage 1 to end at the beginning of June – leaving me disemployed 50% earlier than agreed-upon and without him having taken on that risk for me, and
2. That even if I were willing to waive what few rights I have as an independent, I could not legally do so directly with him because my contractual agreement is with the sourcing firm that provides me to the integrator, as is his with that sourcing firm also.

In closing, my advice to you is that there will always be challenges  in the compensation areas of contracting, and for you to be like the experienced consultant who lays down the rules in the beginning, and not like the [experienced] solutions provider that realizes late in the game that scope definition is needed.

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