The Cost of an Engineer-Hour

As all good project managers know, there are three dimensions to any engineering effort:

  • The features of the product: What does the product do and how does it look? (For sake of simplicity, let’s include “quality” as a product feature.)
  • The schedule on which the product is produced: How fast does it get to market?
  • The cost of producing the product: How much money does your company have to invest in bringing the product to market?

Before we started Cardinal Peak, my partners and I had all spent many years as engineering managers inside of various companies. To me, it always seemed that I was most visibly measured on the first two dimensions: features and schedule.

To the extent that I was measured on the cost axis, the companies I worked for would normally use “number of heads” as a loose proxy for “dollars spent to bring this product to market.” But I had a lot less control over the number of heads assigned to my team than I did over the other two dimensions, and as a result, I believe that perceptions of my success were influenced almost entirely by how my team met our goals in the first two dimensions.

So I guess it’s not surprising that back then I only had a vague idea about how to assign a dollar value to any engineering team’s most precious resource: the engineer-hour.

The somewhat embarrassing truth is that previously I didn’t think about dollar costs too much. I had heard from other managers that an engineer cost my company about $220,000 per year, once you accounted for all the indirect costs like benefits, IT, rent, HR and administrative support. (This specific example comes from Silicon Valley in about 1998, in a relatively high-benefit, high-support environment.)

But I couldn’t really derive the annual engineer cost from any hard data because I wasn’t directly responsible for any of those expenditures. (I did have a degree of influence over a new hire’s starting base salary. After that, however, everything was relatively programmed: Raises were given within parameters set by the HR department and company management, as was the bonus program.)

I don’t want to make the mistake of projecting my own personal naïveté onto others! But this conversation comes up occasionally, usually from engineering managers for whom it is self-evident that the cost of internal hiring is so much lower than the cost of hiring a firm like Cardinal Peak.

So on an airplane flight recently, I pulled together this spreadsheet, which you can use to compute your own internal cost for an engineer-hour.

I have prefilled certain cells with reasonable values for a relatively low-overhead, mid-benefit engineering team located in Colorado. I’ve tried to model the compensation package given to a competent senior engineer who has 8-12 years of experience. This isn’t your team lead, but neither is it the young gal you just hired with a Master’s degree. Instead, I’m trying to model the engineer who will form the backbone of your team — the workhorse who will show up on time, focus on work and reliably crank out features.

Your situation may be different, so feel free to play around with the cell values to see what your own costs are.

Howdy Pierce is a managing partner of Cardinal Peak, with a technical background in multimedia systems, software engineering and operating systems.