Based on the information you provided me, I am paying the employee a salary of $70K per year. I'm paying them that amount whether they are working on the project or on proposals, or general filing. Non-billable hours go into the G&A account and get charged back to projects based on the firm's General Accounting Standards. So the direct wage cost is the $70K divided by the total hours the employee gets paid to get to their hourly wage. Then we get to add the fringes, G&A, and profit markups to get to the employee's actual cost plus markup to the firm.

If the project is solely for the firm and being done by firm employees, there is a tendency to not consider profit in the cost of the employee in this analysis. That would turn the employee on this task into an administrative cost, not a profit producing cost, and the admin cost would then be spread out over all the firms profit making enterprises. In the project that is the subject of this discussion topic, the prompt leads us to believe that this is a consultant offering to do 1500 hours of work by an environmental specialist. That said, we must consider that this work needs to produce a profit for the firm and a product for the client.

SO, do we do it with our $70K staffer or subcontract it out to a $100/hr vendor? Which produces the best return for our firm?

Information you provided me for the bottom question:

A frequent mistake made by project managers and/or their organizational sponsors is not appropriately valuing the cost and time requirements for personnel necessary to complete project work. If personnel time is not appropriately valued, either the PM or the sponsor can grossly underestimate the budget required for personnel needs throughout the project. Along the same vein, a frequent source of conflict is that one or the other of the sponsor or project manager will greatly undervalue personnel time. Often, consultants will estimate that a full-time employee will only have approximately 1300 to 1600 hours available for billing (billable hours), although the full-time employee must be paid for 2080. Similarly, consultant labor costs need to account for benefit costs, overhead, profit, and downtime. In part because of these differences, project managers can often be surprised by the cost/hour charged by a consultant for labor.

Assume that the project has a need for 1500 hours of environmental specialist time. If you hired someone onto your team, you believe you could hire a reasonably qualified applicant by offering approximately $70K base annual salary.

First, set up and explain a calculation and associated inputs which you could use to get to an appropriate hourly rate for estimating the cost of this internal environmental specialists time. Assume that the project duration is one year, and the required environmental specialist time can be spread evenly throughout the year. That is, assume you dont need to worry about resource-leveling.

Second, if a contractor could provide a qualified ES and would charge you $100/hour for those 1500 hours, would you recommend bringing on someone as an employee within the project team, or would you prefer to seek contractor-provided personnel support for ES tasks?

Explain factors you might consider. Feel free to create reasonable situations at your hypothetical organization which might justify one approach or another. As you might have guessed, this isnt a one-size-fits-all consideration with a definitive answer, and different project managers and/or organizations will arrive at different conclusions with regard to whether to hire or use contractor support.

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Explanation:

You would typically consider various factors to calculate an appropriate hourly rate for estimating the cost of an internal environmental specialist's time.

1. Annual Salary: As you mentioned, the base annual salary for a reasonably qualified environmental specialist is $70,000.

2. Working Hours: A full-time employee is typically expected to work 2080 hours a year. However, consultants often bill fewer hours because of factors like non-billable time (such as meetings, training, etc.). In your case, you estimate around 1300 to 1600 billable hours per year. Let's consider the 1450-hour midpoint as a conservative estimate for billable time.

3. Direct Labor Costs: To calculate the direct labor cost per hour, divide the annual salary by the number of billable hours.

Direct Labor Cost per Hour = Annual Salary / Billable Hours

Direct Labor Cost per Hour = $70,000 /1,450 hours

Direct Labor Cost per Hour $48.28 per hour

4. Indirect Costs: You also need to consider indirect costs, which include benefits, overhead, profit, and downtime. These could vary significantly between organizations, but for the sake of this example, let's assume an additional 30% for these indirect costs.

Indirect Costs = 30% of Direct Labor Costs

Indirect Costs =0.30$48.28 per hour

Indirect Costs $14.48 per hour

5. Total Hourly Rate: Sum up the direct labor cost and indirect costs to get the total hourly rate for your internal environmental specialist.

Total Hourly Rate = Direct Labor Cost per Hour + Indirect Costs

Total Hourly Rate $48.28 per hour +$14.48 per hour

Total Hourly Rate $62.76 per hour

Now, regarding whether to hire an employee or use a contractor, there are several factors to consider:

1. Flexibility: Contractors provide flexibility in terms of scaling up or down as project needs change. Hiring an employee is a long-term commitment.

2. Expertise: Consider the level of expertise required. A contractor might be more suitable if the project requires specialized knowledge or short-term assistance.

3. Control: Employees can be more closely managed and integrated into the team, which can be necessary for specific projects. Contractors may work more independently.

4. Cost: Compare the calculated hourly rate for an employee with the contractor's rate. In this case, $62.76 per hour for an internal specialist versus $100 per hour for a contractor.

5. Administrative Overhead: Consider the administrative tasks associated with hiring an employee, like benefits, HR, and taxes.

Think about the project's duration. If it's a short-term project, contracting might be more cost-effective. For longer-term or ongoing needs, hiring an employee could make sense. Also, we must consider that the organization's policies and financial constraints may influence the decision.

Ultimately, choosing between hiring an employee or using a contractor will depend on the specific project, its requirements, and the resources available within your organization. There's no one-size-fits-all answer, and carefully evaluating these factors will help you make the best decision for your situation.