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Contract Engineering: Cost Savings

Contract Engineering leverages value over cost.

Let us say that an engineer costs $100,000 a year (50 weeks X 40 hrs), her direct, notional cost per hour is $50. If she operates at 40% efficiency, her real cost is $125 per hour. The following table shows real cost versus notional cost for a spectrum of direct costs and efficiencies:



We can conclude in this example that contracting out engineering at $100 per hour is no more expensive than doing it in-house, if in-house efficiencies are as high as 50%*. We have not taken into account other indirect costs, like infrastructure costs. Indirect costs easily justify a higher price. Fully loaded real costs tend to be closer to 3X.

Therefore, there exist reasons to pay anywhere from $60 to $200 per hour, or even more -- which is admittedly a lot more than the internal notional direct + indirect cost -- and still come out ahead. This is very similar to the theory of quality guru, Deming, who said, “…build quality into your manufacturing process starting from design and it will reduce your cost.”

*In house efficiencies sound too low? You'd be surprised! Else, you've found a way to not pay engineering salaries in between projects.




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