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Employee salary grows every year but does project cost grows

Employee salary versus Project revenue

12:46 pm on Feb 28, 2007 (gmt 0)

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I am in the middle of developing a business model. Suddenly this situation came from somewhere in the middle of my mind.

Situation is as follows:

Normally when a firm takes up some clients project then it would charge out some X amount to the client for that project. On the other hand employee will be paid a salary say Y which is 1/4 X.

Project cost per month = X
Employee cost per month = Y (X/4)

So the firm makes a profit of (3X/4) every month.

So when a year end comes every employee will be given an increment and/or bonus. So now the employee salary will increase per month and hence cost to company will also increase per month.

So the situation becomes like this

Project cost per month = X
Employee cost per month = 2Y (X/2)

So the question is does the firm also increases the cost of the project in the next year (say Z instead of X, which will be higher then the past cost) or will it be at the same old X.

Let me know your thoughts for the same.


11:07 pm on Feb 28, 2007 (gmt 0)

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I had to face that difficult decision when I had my photo studio.

I'd had assistants. The last one was with me for six years. His pay and benefits grew, but not the amount of profit that he was making for me.

In the end, I ran the numbers and decided that I'd make more money without him, so I let him go (which was not an easy thing to do).

It's very difficult to raise prices to clients beyond the rate of inflation. And, sometimes, even that's hard.

I know some business owners who take a very cold hearted approach to this problem: when the employees want more money, they fire them and hire new ones.

1:26 am on Mar 1, 2007 (gmt 0)

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DB's comments are harsh, but true. Always remember that the only purpose your employees serve is to help make you money. If they are not serving that purpose, get rid of them.

Now, "helping you make money" can have many definitions. The case of the salesman who goes out and brings in new clients is obvious. Or the programmer who does most of the work on the site.

Other positions are not quite so obvious, like the bookkeeper, secretary, etc. But they do the work that you would have to do if they weren't there. So you put a price on your time and pay accordingly. For example, if you have to answer your own phones all day long, you're not going to get very much work done. Or maybe you're terrible with numbers, and keeping your own books would take hours every week- so much better to pay someone to do that.

Alternaively, some employees take over your work so you can work on other projects or just do less work and relax more. Each function has a corresponding value. You just have to determine what it's worth to you.

In some cases, it's better to get rid of the employee and do it yourself. In other cases, even though it seems expensive, there is more cost benefit to continuing to outsource the work.

Cold and heartless? Perhaps. But you are running a business, not a charity. Lose sight of that fact, and you may find yourself out of business and looking for charity yourself some day.

4:34 am on Mar 1, 2007 (gmt 0)

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You are absolutely correct with your suggestion. But that is when i need to make a decision whether an employee is worth or not with regards to what an employee is drawing and the work he is doing.

But i would like to know in general whether the firms keep on increasing the cost of a project to client every year or they are confined to keep it constant through out the term of the project.

Or do a firm should go into a contract wherein they mention that in case of a project spanning more than a 1 year then the price to a project will be X+20% or something like that from the second year onwards.

Thanks guys

4:28 pm on Mar 1, 2007 (gmt 0)

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The same logic you apply to the employee decision should be the same logic your client applies to your contract. So you just need to work it in reverse.

First thing to consider: are you adding any additional value to the work after the first year (or can you)? For example, getting the work out faster than before. If so, increasing the price should be okay.

Second thing to consider: look at your competition- are they raising their prices for the same type of service? Can your client go elsewhere for the same service if you raise your prices?

In the end, you need to look at things on a case-by-case or client-by-client basis. FOr some industries/services, raising prices every year is a given. In others, lowering prices may be required.

8:15 pm on Mar 1, 2007 (gmt 0)

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I am kind of interpreting from your post that you are looking at one employee being assigned to one company/project. In general, as long as you have a fixed price, and your cost are not fixed, then you can eventually run into this problem, and it is not a problem limited to employee pay or the development business - just ask the truckers that parked their rigs when the price they could charge per mile did not cover the cost of fuel.

One way to handle this, and I have seen work for some big consulting firms, is that you have the project clearly defined, and then you provide incentives to your employee to look for and present new project ideas to your client (i.e., expanding billable hours). In general, you could potentially end up with several projects (say you go in with a web design project, but also pick up a print design project, an e-mail marketing project, a SEO project, etc., etc.). You could also establish a bonus program for the employee - keep the client happy to where they renew the contract, and the 'raise' they receive is actually based on revenue sharing from that client.

Another thing to examine in basing your analysis on 1 project per employee (dependent on your business model) is as your employee gains experience they may also be capable of expanding to multiple clients/projects. Or you may be able able to allocate some of their time to portions of new projects, new client proposals, technology research projects, and so forth.

Also, in my past experience as a contractor there were times I worked 2-3 years at the same rate, but still at the market rate. Other times I worked for below market because the project did not involve travel, was close to home, etc. - so money is not the only motivation for a worker. The overall challenge will be to keep your employee interested in their work, believing they are gaining in experience and knowledge (not losing their marketable skills or missing out on the latest technology trends), and being payed a fair rate (all while you are also benefiting from their overall productivity).


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