How a software consultancy makes money: from your payslip to EBITDA

We all know what lands in our bank account each month. Almost nobody knows what a client is billed for that same work, or why those two figures are so far apart.

JOSÉ A. DORADO
CRO Orbitant

You can spend years billing software projects without ever learning how a software consultancy makes money: what your work actually costs the company, or why a rate that sounds high barely leaves any margin. That gap between what you see on your payslip and what a client gets invoiced is why so many everyday technical decisions — which project to take on, how many people to assign, when a salary can go up — get made without anyone understanding their real impact on the business.

At Orbitant, we’ve identified three pillars in our value proposition (engineering, innovation, and business), and we give all three the same weight. So that the business pillar had the same depth as the other two, I ran an internal session on the economics of a consultancy: understanding it changes how anyone on a technical team sees their own work.

The question that opened the session was simple: do you know how much a client is billed for your work? Nobody had a clear answer. So here’s the full path, from what an employee costs the company to the two metrics (gross margin and EBITDA) that decide whether a project is profitable.

What you see on your payslip isn’t what your work costs the company

To explain it, we started from a concrete case: someone on a gross salary of €45,000 a year, working on a one-year project. It’s a made-up number for the session, neither especially high nor especially low, picked so that anyone could get a rough sense of their own situation.

On top of that gross figure there’s a series of monthly deductions that come straight off the payslip:

• IRPF, Spain’s income tax withholding, which on average (it actually works in brackets) sits around 21.5% at this salary level.
• Unemployment contributions, a flat 1.55%.
• Training contributions, a flat 0.10%.
• General social security contributions (contingencias comunes), a flat 4.70%.

Added up, these deductions take close to a third of the gross figure you negotiated. Of the €45,000 a year (€3,750 gross a month), around €32,400 a year actually reaches your account: roughly €2,700 net a month.

That much any employee knows about their own salary. But the company keeps paying something far less visible: on that same gross figure, it pays an additional 33% into social security, with one caveat — that percentage only applies up to a salary cap of €58,000. It’s also why state pensions are capped: beyond a certain amount, the company stops contributing.

With the employer contribution added in, €45,000 gross turns into €60,000 of annual cost for the company: €5,000 a month. The company pays almost double what that person sees as net pay on their payslip, and we haven’t added a single other cost yet.

Beatriz Villar, Orbitant’s CFO, added a useful clarification: the social security cap doesn’t apply to income tax. If you earn €120,000, you’re taxed on the full €120,000, even though the company’s social security contribution stops at €58,000.

The overheads you have to cover before earning a single euro

Not every day of the year is billable. Take weekends, public holidays, and annual leave out of the 365 days, and you’re left with 220 working days: divide the €60,000 annual cost by those days, and that person costs the company €273 a day.

This is where a decision we made deliberately at Orbitant comes in: instead of billing per day worked (the industry norm, where nothing gets billed if you’re on sick leave or holiday), we average out a flat monthly rate that already covers holidays, sick leave and training.

Salary and its associated costs aren’t the only expenses to cover. A consultancy has overheads that can’t be attributed to any specific project, spread across every billable employee and grouped into five blocks:

1. Management, administration and finance: leadership team, accountants, payroll, tax and legal compliance.
2. People and HR: recruitment, people management tooling, internal training, employee benefits.
3. Marketing and sales: sales team salaries, campaigns, tooling, travel.
4. Infrastructure: office, utilities, software licences and servers.
5. Financial costs and insurance: liability insurance, bank interest, hardware depreciation.

They don’t all behave the same way as the company grows. Some dilute: one HR hire comfortably covers 60 or 70 people. Others don’t: if a licence costs €20 per person, that cost is the same with ten employees as with a thousand.

In a young but growing company, these overheads usually add 40% to 50% on top of an employee’s cost. In our example, that puts another €137 a day on top of the €273 of direct cost: €410 a day in total, €7,500 a month, before we’ve talked about profit at all.

Gross margin and EBITDA: how a software consultancy makes money

Working out whether a project is profitable takes two concepts most people mix up:

• Gross margin: the difference between what a client is billed and what it costs to deliver that service, counting only direct costs (COGS): the person’s salary and the associated employer cost. It doesn’t tell you whether the company as a whole is profitable, only whether that service leaves any margin.
• EBITDA (earnings before interest, taxes, depreciation and amortization): what’s left once you also subtract overheads. This is the metric that genuinely compares the health of two companies: you can have a sky-high gross margin and still lose money if your structure is too big.

Back to the example: with a target gross margin of 40% on the €273 of direct cost, the rate would be €455 a day, but that leaves an EBITDA of barely 9.9% — not enough. Set the target on EBITDA directly (13%) against the €410 of total daily cost and the rate rises to €471 a day, €8,635 a month. That rate implies a gross margin of 42%, higher than strictly necessary because today’s overheads (brand, sales, hiring) will dilute over time. What we’re aiming for is a gross margin between 35% and 40%, and an EBITDA that climbs from an initial 10% towards 15%.

One key caveat: what counts as a reasonable EBITDA depends on the sector. A business with low barriers to entry and plenty of competition might sit at 2-3%. One with very high barriers, like pharmaceuticals or aerospace, can reach 30-40%, but only after pouring money into R&D before selling anything. And a licensing business, like Sherpa, reaches a far wider gross margin because it doesn’t need an engineer for every new client.

If you’re competing in a sector with very high barriers to entry, EBITDA can be much higher, but first you’ve had to sink an enormous amount of money into creating that asset.

JOSÉ A. DORADO
CRO Orbitant

What a consultancy’s EBITDA is actually for

Before explaining it, I asked the team what they thought happened to EBITDA before tax. The answers came fast: pay taxes, reinvest, split it between the partners. All correct, but incomplete — the order matters.

Before anything gets shared out, EBITDA covers needs that are rarely explained together:

• Reinvestment in growth: sales, marketing, more people in HR and finance as headcount grows.
• Pay rises and bonuses: they don’t come from anywhere else.
• Benefits and events: private health insurance, team dinners, kick-offs.
• Liquidity for low-billing months: the “one person bills all twelve months without interruption” scenario is idyllic; in practice clients drop off and people end up without a project assigned.
• A buffer against 30, 60 or 90-day payment terms: if a client pays at 60 days, the company has already paid two months of salaries before the first euro comes in, and that gap is financed out of accumulated EBITDA.
• Interest and partner returns, which do exist, but come last on the list, not first.

Our colleague Carlos Jiménez, software architect, asked the question that was probably going through more than one head in the room: with that many costs stacked up, how does any company survive? The key is that the system works because the rules are the same for everyone, and it breaks when someone skips them (undeclared work, contractors paid below minimum wage). On top of that, so many consultancies go under because it’s easy to lose sight of some expense, right up until the VAT or social security bill arrives and there’s no buffer.

After the session, several people on the team told me it had changed how they saw everyday decisions: why a project needs a certain volume to be viable, or why raising a salary isn’t simply a matter of “the company makes plenty”. That’s why we turned it into the first in a series of business training sessions, treated with the same seriousness we already give engineering and innovation. The next one lands next month.

Frequently asked questions

What’s the difference between gross margin and EBITDA in a software consultancy?
Gross margin only subtracts a project’s direct costs (the assigned person’s salary and the employer cost that goes with it). EBITDA also subtracts every overhead: management, HR, marketing, infrastructure. That’s why EBITDA is the metric that reflects whether the company as a whole is profitable, while gross margin only tells you whether a specific service leaves any margin.

Why does an employee cost the company more than their gross salary?
Because on top of the gross salary you negotiated, the company also pays an additional percentage into social security (33%, up to a €58,000 cap). A gross salary of €45,000 therefore works out at a real cost of around €60,000 a year for the company.

What gross margin and EBITDA are considered healthy in a software consultancy?
For a consultancy in its growth phase, a gross margin between 35% and 40% and an EBITDA climbing from an initial 10% towards 15% are reasonable targets. Both also depend on the sector: businesses with very high barriers to entry, like pharmaceuticals, can hit EBITDAs of 30-40%, while highly competitive sectors barely reach 2-3%.