The Burdens Associated with Expense Reimbursement
It is very easy for prospective consultants to speculate about the financial benefits of a career in consulting but it is much more difficult to see the costs that are associated. If a person considers the benefits without considering the costs, they will be making a career decision based solely on the positives. In that case, the result can never be as good as expected.
The financial costs vary to a degree based upon the consulting model but there are some generalities that are always true. If the consulting has expenses that are reimbursed, the employee can still have costs associated with the expenses. In most cases, the consultant uses personal credit cards to cover their reimbursable expenses. That means that they must have enough credit worthiness to be able to get a card with a high enough limit to cover expenses until a reimbursement occurs.
Most companies that reimburse for expenses do so only after the travel that the expene covers. Since airline tickets are purchased at the time the ticket is booked, there can be a significant amount of time between the actual charge to the card and the reimbursement. Since airline tickets are routinely booked 3-4 weeks before a trip and expenses are filed at the end of the trip. There is already a delay even before considering the time between the completion of the expense statement and the time that the expense reimbursement actually occurs.
It is possible that the consultant will receive a bill from the credit card company before they have been reimbursed. This can be a severe burden.
if the consultant travels every week, they could have charges on the card that cover 6-8 weeks of travel before they are reimbursed. From my experience, the expenses associated with travel can easily be $2,000 per week. That means that the consultant could have a credit card balance of $16,000 before receiving any sort of reimbursement and that is just for expenses. This potential problem exists for consultants who work in any of the consulting models.
The Burdens Associated with Income Timing
Consulting income is strong but there can be a delay between the time that work is performed and the time when income is received. Consultants working under Models I & II, will typically have an income schedule that is consistent from week to week or month to month. Once the person is in the income stream, they can count on a steady income. Consultants who work under any of the other models, may face timing issues. They go from one client to the next, each client may have different payment schedules and policies.
This fluctuation in payment timing can be a serious burden for consultants. The combination of ongoing household expenses while travel expenses are increasing indebtedness and while income and expense reimbursements are delayed can be a very serious consideration for consultants.
In all consulting models except I & II, the costs of health insurance should be considered. In models I & II, the employer is likely to provide some level of support for health insurance. At the least, they are likely to provide access to health insurance coverage at group rates. In all other consulting models, the consultant does not get any support for health insurance coverage. The lack of access to health insurance is a serious consideration for people who are considering changing from a model I or II company to any other consulting model.
One way to prevent this from being a factor is to take advantage of a spouse’s insurance. In my case, I elected to be covered under my wife’s insurance plan. That gives me the benefit of lower rates that are subsidized by her employer while allowing me to work as a model III consultant.
Professional Liability Insurance
When working in Model I or II, the employee is unlikely to need any professional liability insurance because their employer assumes the risk. In all other consulting models, the consultant has the risk. The consultant may decide to carry professional liability insurance simply for the protection that it provides. It is also possible that their clients will require that the consultant is covered. Either way, the cost of this insurance could be several thousand dollars a year.
Liability for Social Security and Medicare Payments
The obligation for Social Security and Medicare payments are shared by employees and their employers. Each is required to pay half of the cost. When a consultant is working in any model other than I or II, they are effectively serving as both the employee as well as the employer. That means that they are obligated to pay both halves of these payments.