Engineering Firm Start Up Costs 6

[hondashadow1100vt]

The purpose of this thread is to gather data and references that pertain to the costs associated with starting up an engineering consulting business. As a part of a business plan that I am putting together I am trying to forecast the start-up and operating costs needed to get the business off the ground (i.e., before revenue is really being generated). Does anyone know of a reliable source of information (e.g., websites, books, papers, personal spreadsheets etc.) that could be referenced to make sure that I do not overlook anything and also to help me temper the tendency to over estimate a bunch of unnecessary costs?

I will be very grateful for any/all information that can be offered/suggested. Thank you in advance!

 

[zdas04]

You only have to pay yourself a salary if you incorporate. I have a regular transfer from the business to my personal account, but moving money either direction has zero tax impacts. I do have to pay "self employment tax" which is the employer and employee FICA combined.

I heard about that red flag. This is my 12th year and my business definitely puts me in the hated 1% (another red flag). Consequently I never skate close to other edges on tax matters, I claim my home office, and haven't been audited.



David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. ùGalileo Galilei, Italian Physicist

 

[glass99]

Tax is a huge expense, and can be a bit difficult to adjust to if you are used to be a salaried employee. Every time my quarterly payment comes around my accountant tells me how much the IRS et al expect from me and I have a little heart attack. I could either A) buy a nice new BMW every quarter or B) pay my taxes. Its quite appalling.

 

[zdas04]

I put 25% of every check I get into an escrow account. When the quarterly payment comes due I just pay it without any angst at all.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. ùGalileo Galilei, Italian Physicist

 

[glass99]

zdas: 25% into escrow sounds sensible, and I am jealous of how little tax you pay. My cash collection tends to be very lumpy. If I get 40% of a a years income in the month of November (i.e. last year), it screws up my Q1 tax payment. I am fine because I have enough float to cover things, but I would still rather have a new BMW every quarter.

 

[SteelPE]

You must be doing well if you are paying the amount of a new BMW every quarter

Paying quarterly taxes takes some getting used to. It's definitely not for everyone. I keep track of what I owe and try not to dig into that money unless absolutely needed. I know people who would run out and buy the BMW only to stand there in the end and not have the money to pay..... and these are smart well educated people.

Yes lumpy cash stinks. I took a certain approach of paying quarterly taxes on only the money I received (paying a few % extra than what I should have). I will find out in a few weeks if it works or not. My accountant didn't think it would be a problem. We will see

 

[XR250]

I just take the tax I paid the prior year, divide it into 4 and pay that the next year.
It has worked for me for the last 17 years. I always try to keep at least double my quarterlies in the bank at all times so it is no big deal when that time comes.

 

[SteelPE]

Excell, that works because the IRS allows you to base your quarterlies on the amount of taxes you made the previous year. If you make more money there is no penalty, if you make less they just give you the money back or apply your overage to next years payments. However, depending on how lumpy your payments are this may cause some problems. I received 50% of last years earnings in October and November of this year..... so my payments last year were very lumpy.

FYI, I've only been doing this for 3 years so I am still trying to work out the kinks.

 

[zdas04]

ExcelEngineering,
That is kind of what TurboTax does. Last year I made 80% of my 2014 income in the first quarter, but just paid 1/4 of 2013 taxes each quarter. I had the money for the 4th quarter estimate in my escrow account, but I earned almost $6 on it.

Glass,
Not sure what you mean about how little tax I pay. My first year in business I paid more in federal income tax than I my gross pay for the last year I worked as a senior staff facilities engineer for big oil. The tax bill has been larger every year since. It has averaged 21% of gross income. Every few years I clean the excess out of the escrow account and buy something nice (usually a new Land Rover).

SteelPE,
I learned (the hard way) when I was working for a living and getting paid every other Friday that having income on a different time schedule than outflow was a problem. About 5 years of never having the money for car insurance, etc without scrimping somewhere else that I needed to absolutely divorce income from outflow. I started putting 1/26th of the annual insurance bill into escrow every payday, 1/26th of annual utilities, rent, etc went into their own buckets. When a bill came in, I paid it out of the escrow account. Family stress went way down.

When I started my business I just created a new category in the escrow account called "lumpy cash flow". Any money over current needs goes into that account. Last year It was really big in April. Every two weeks I would populate the other escrow accounts and pay the family account from the lumpy account and as far as I am concerned I will get a bank loan before I'll take money out of that account off schedule. Lumpy cash flow has always been the norm in my practice, my escrow accounts seem to solve it nicely.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. ùGalileo Galilei, Italian Physicist

 

[glass99]

zdas: you may pay a amount of tax in absolute terms, but 21% is microscopically small in relative terms. You probably have no state or local tax, which for me is approx 13% in addition to federal and FICA. I have thought about registering in a state like TX where there is no state tax, but its challenging to do so.

 

[zdas04]

That is 21% of gross receipts. I spend over $100k each year on travel alone. With the Section 179 tax credits it makes sense to expense a new vehicle every year or so. Computers last about a year and have to be replaced. There tends to be a new $10-20k piece of software that I just have to have most years. All of that is deductible. Federal tax rate is closer to 36% of net. And I do have a state income tax.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. ùGalileo Galilei, Italian Physicist

 

[glass99]

zdas: $100k of travel is a lot of moving about! It would be a big year for me if I spent $20k on travel. A business class ticket to China is ~$7k, and I have relatively frequent economy $2k trips to LA, but $100k is unimaginable. What kind of software are you spending $20k on? Is that analysis of some kind?

 

[hondashadow1100vt]

tygerdawg:

Thank you for the referral link to the CCH Business Owner's Toolkit. I have followed your advice and followed the link and sub-pages to the Business Finance / New Business Cash Needs Estimate word file (which I've converted to an excel file for ease of use). I then adapted the very simple business start up cost estimate that I was assembling up to that point to suit the prescribed costs including: 1) setup costs (e.g., buying a laptop, registering the business, etc.); 2) operating expenses (i.e., regular overhead, e.g., cell phone, rent, etc.); 3) personal expense requirements (i.e., minimum personal living expenses) and 4) a summary of the startup financial savings need.

All of my numbers are still in draft format and subject to improvement, partially based on the guidance herein this thread. However, what I found is that I was previously mentally geared to prepare cost estimates in the form of a lump sum capital improvement project whereas the suggested information got me thinking in terms of the: 1) initial one time only (or periodic) costs (i.e., similar to the capital cost estimates that I'm more accustomed to); 2) the routine operating expenses; 3) what the bare minimum income that I need to survive will be; 4) what the basic amount of money is that I'll need to have saved up in order to start up. Although it took a while, it was a worthwhile exercise to put myself through. Thank you for the referral!

In addition the site appears to have a plethora of good starter business documents for seemingly every situation that I could imagine needing a document for. For quick reference, I am saving the link to the same folder that I keep my business planning files.

Thank you again!

 

[hondashadow1100vt]

Glass99 (Structural):

Thank you for the helpful input. I have a few questions.
- Marketing and client entertainment – What sorts of expenses are included in type of a category? How do you budget it? I currently have placeholder values for: 1) client meals @ $110/ea x 50/yr; 2) networking events @ $220/ea x 12/yr (in addition to conferences); 3) charitable contributions @ $3,000/ea x 1/yr;4) Membership in two (2) professional societies, 5) business cards; 6) a company web site. Aside from attendance at networking events and the occasional conference, the remainder of this is somewhat foreign to me on account of having worked in service for public agencies (cannot accept anything greater in value than a cup of coffee) for the majority of my career.
- Accounting and tax prep – I am budgeting $3,000/yr for this.
- Payroll service – What is payroll service? Is this a subcontracted company that prepares the checks and sends them to the employees? What companies offer this service? Is there a ballpark cost that can be assumed as a placeholder?
- Unreimbursed travel – I assume that unreimbursed travel is travel that pertains in indirect activities such as business development and client service. Because I have largely remained technical and project management oriented up to this point in my career, a tangible grasp of this cost has escaped me. At present, I am budgeting $1,120/trip x 12 trips per year of non-reimbursed travel expense. I don’t know how realistic this is/isn’t.
- Recruitment –I hadn’t yet thought about recruitment, nor the cost of recruitment. I guess that I naively imagined that great talent would simply fall into my lap through association. How is this done?
- Corporate taxes – Percent of profit based?
- 15K/yr for software is considerably greater that I have budgeted but I am not at all surprised to by the value. Although I may have a need to reacquire the skill, over the years, I have unfortunately lost the ability to draft via atrophy and have reverted to only doing hand markups (extensive hand annotations) for the designer/draftsmen that work with me. As much as I rather enjoy drafting (apart from all the aggravating nuances associated with the software), I am inclined to look for outsourced/subcontracted drafting support. Until the business gains a foothold, this would ideally be outsourced to a firm in a low cost of living area. I have often fantasized about outsourcing drafting to southeast Asia, India, etc. where my cumulative daily hand annotations could be scanned at the end of a day and uploaded to a server for a team of talented drafters/designers on the other side of the planet to execute while I rest peacefully in my bed at night. I don’t suppose anyone knows where one could turn to start looking for that sort of subcontracted assistance?

Thank you again.

 

[zdas04]

Glass,
If you make that reservation to China on the way to a very small regional airport in the boonies instead of 45 days in advance from JFK and Business Class is full so you are "forced" to book first it is $28k. I don't often know what continent I'll be on next week. Airfare is a passthru cost, but the fee plus expenses is what shows up on the 1099.

HondaShadow,
I get e-mails from drafting firms in India a couple of times a week. I'm not sure how they find me, but they do. I haven't used any of them so I'm not going to post their links (which would imply a recommendation). If you do a Google for "Contract Drafting Services" you get millions of hits. If you don't know anyone who uses a company then it is a crap shoot whether they are any good or not. Don't be slow to fire duds.

I do my own drafting. A couple of years ago I did a front end engineering design (FEED) for a greenfield project in Botswana. There was an electrical component and a civil component that I wasn't qualified to complete, so my client hired a firm in London to do the drafting, electrical, and civil. I sent them my completed AutoCAD files and they were to put them onto my client's title block and make sure that the drawings met the clients drawing standards. I use the model space and paper space in AutoCAD so 40 drawings were in 2 files with a bunch of paper space tabs with the title blocks etc. The London company refused to do paper space and converted my drawings into 40 files. Problem was that about half the drawings had components that were in the other drawings. My way you draw the picture once and zoom your view ports to show what the drawing needs to show. Their way each element had to be drawn in each file. They never did get the synchronization right. They billed my client over $150k for the drafting and I spent more time marking up their crap that it took me to draw the damn things in the first place. My point is that drafting services are not all equal and getting one that starts with a paradigm that is divergent from yours is amazingly expensive.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. ùGalileo Galilei, Italian Physicist

 

[glass99]

zdas: If you get 1099's I assume you are not incorporated. Did you think about incorporating? Sometimes I feel like I should unincorporate.

Hondashadow: In respect to drafters and drafting services, there is a lot of good advise on other threads about this, but the bottom line will probably be that you will have to do at least some drafting yourself.

I budget $150/mo for marketing which is mostly taking clients out to dinner and a few odds and ends like website and business cards. I spend about $4000/year on conferences for myself, though that is kind of my luxury package and you could do it for probably $1500 if you just go to local things. Unreimbursed travel is perhaps $1500/yr, which includes city cabs and one out of town trip to a place like Boston for marketing purposes or something. My accountant charges $3k/yr for tax prep. I use SurePayroll for my monthly salary (even if just me) because its cheaper to have their computer do it than my accountant or myself screw around with the dozen or so little taxes. This costs $44/mo. I am not a member of any professional societies because most of my local ones are not worth the effort (other than perhaps SEAoNY), though you may feel differently. I spend about $5k/yr on software, not $15k. The first year is more expensive if you buy everything. After that you pay about 20% of the purchase price in maintenance.

Recruitment is only expensive if you use a recruiter. Get an accountant and talk to them about tax and corporate tax. Will you be incorporating? If so, NYC corporate tax is 8% of your profit taking a deduction for your salary and expenses.

 

[zdas04]

Everybody gets 1099's, I had to send one to a Corporation that did work for me a couple of years ago.

But, no I am not incorporated. Since the protections offered by incorporating do not protect a P.E. on something he stamped and my only real liability is engineering work, it didn't make sense to me to create the arm's length situation that a corporate structure is designed for. I don't pay myself a salary, I just take my stipend out of the company. Transfers to/from the company accounts and my personal accounts do not have a tax implication. As an LLC I would have to pay a salary to myself (which would create a W-2 requirement) and anything over that salary would have to be a bonus (approved by a board) or a dividend (approved by the board and subject to double taxation). None of that made any sense to me. I'm really glad I chose to organize as a sole proprietorship.

David Simpson, PE
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. ùGalileo Galilei, Italian Physicist

 

[hondashadow1100vt]

Zdas04 (Mechanical):

Regarding your 19 Jan 15 11:16 comment:
• I have pumped up the professional liability insurance to a placeholder value of $10K. (did not realize this was so expensive). I need to get a quote.
• I have re-examined software costs. It looks like for the software that I regularly use, I’ll need to budget about: $5,300. For the software that I probably ought to know how to use it could be as much as $23,000.
• I have bumped up the laptop budget cost to $3K.
• Productivity is critical so I had better go the route of budgeting for an external monitor @ $200/monitor.
• The Xerox 7120 @ ~$5,300 definitely looks like a serious printer. I’ll nevertheless budget for it for the long run. I now realize that multiple tiers of startup are necessary. I think that I need something compact that does 11x17" to start.
• I too have a space serious space limitation. I also have clients that standardize on 22”x34” sized drawings therefore I think that I am best off doing all half-sized work on 11”x17” with occasional extraordinarily overpriced ($100 each!) full sized plots from Kinkos.

This insightful dialogue on startup facilities equipment has me realizing that I need to approach startup in a phased/tiered approach. The following comes to mind:
1) pre-startup preparations, positioning, etc. while holding current day job;
2) Filing of paperwork to legalize the entity; start-up out of my apartment with bare essentials for fixtures and equipment (e.g., laptop w/out external monitor, small printer/scanner/copier, etc.); earn enough side work to pay the bills while development of clients is prioritized.
3) Earn first win (likely as a sub-consultant); secure office space rental within a teaming partner’s office using their equipment for a negotiated fee. Utilize virtual assistant and remote drafting for admin support. Try to work in this setup (or similar) until workload is significant enough to substantiate hiring.
4) Find office space, get the good equipment (e.g., full scale printer) at this time. Win more projects, staff up. Hire real drafting and administrative support.

Thanks for the great input/feedback.

 

[dig1]

I started by business in 2005 as an LLC (disregarded entity, schedule C on the taxes) not for any protection but more of a professional look, it was inexpensive (<$400); whether it was a wise us of the money is debatable. zdas (David) is correct on so many points; I would pay attention to what he says.

I'll add a points from my experience:

1. Get several quotes for your E/O policy. The ASME/ASCE rates are often not the best. I found 2x the coverage for less money;
2. $100/per print is ridicules. We pay $2.40 from a local shop for B&W and about $12/sheet for color (sometimes less). I e-mail pdfs and usually have them ready that day, for small orders <1 hour. We do have a large format that was given to use but we rarely use it except to scan and make copies. Check prints are usually on 11x17 machine (buy a good one) or we do drawing reviews on a 40" tv in the conference room and make modifications as we go.
3. Depending on what you do $3k for the laptop is probably reasonable. We just payed $5k+ for a new one. There is nothing more unproductive than a slow machine or embarrassing when showing a client a 3-D model of their plant and have a freeze due to RAM or graphics card;
4. Don't forget the annual cost of software license/maintenance/upgrades. We do a lot of ASME pressure vessel work so the upgrades are required to stay current. Also, in the long run, at least in my experience, it does pay for itself;
5. Get back into doing your own drafting. Even if you start with AutoCadLT or another cheap package (you can buy a cheap package that will read AutoCad for less than $100) and spend an hour a day on doing something that is productive. Make standard details, notes pages, anything to keep using it. It will pay for itself over time, especially when you need to make a fast change for a client. We draft in-house (engineers do their own) and have three local (<5 miles away and we are relatively rural) people who can help us on a day or so notice when necessary.
6. Treat your clients fairly. We have one client that likes lump sum projects. We also know they like to make changes, usually nothing dramatic. A few years ago we didn't get a chance to look at a potential plant expansion because they felt we were too small to get it done in the time frame. We were very disappointed but understood given the workload at the time they may have been right. Concurrently we did a small job with them that took more than either they or we imagined but we held our price. That along with the other firm charging 50% extras for changes (for what should have been considered normal project planning scope adjustments) has given us all their work. They are a profitable client for us, we don't have to bid, just provide a proposal with scope and fee) and they are happy to have fixed pricing that they can count on. When there are legitimate scope changes we work out a fee/schedule adjustment and move forward.
7. Stay lean in your staffing. Even if this means working 60-70 billable (which will put you at 90-100 overall hours) per week it is better than hiring staff which when slow either has to be laid off or carried. We team-up with several local small consultants to handle large projects. We act as the lead and are the contact to the client so they don't have to deal with multiple firms/people. Also, get good contracts/agreements between the group you work with.
8. Many clients don't like to pay in a timely manner. Weed those out quickly because it will kill you, especially early-on. Keep and cultivate clients that pay promptly and don't haggle over rates and fees as they are typically long term losers.
9. Conversely, pay your bills promptly. We often get our sub-consultants to do work because we pay them w/in a week of the invoice. Obviously you will not be able to do that when starting out. If you plan on doing pay-when-get paid tell everyone up front so there is no hard feelings.

Best of luck.

 

[beej67]

New engineering startups can be crafted from the ground up in such a way as to make initial startup costs, as well as ongoing overhead, almost nothing. But you have to do it right. Here's how:

1) Get every employee a Google Voice number. Have it bounce to their personal smartphone.
2) Skip the fax number, nobody uses fax anymore anyway
3) Buy the lowest hosting level possible for a website through Godaddy. Follow the menus to install Joomla or Wordpress. Write your own website. Follow online tutorials, it's very easy.
4) Tie Google Apps to your website, so you get email addresses "at" your website's address, but they use the browser Gmail interface
5) Install the gmail app on your phone
6) Each employee pays $100/yr for a couple hundred gigs worth of Dropbox sharing. This acts both as your corporate file server and your FTP site.
7) Buy Office365 for $7 a month or whatever it is
8) Buy a single license of Quickbooks, perhaps even off Ebay, and get an accountant friend to set it up for you
9) Send drawings out to a print shop to be printed, and include those costs in your proposals.
10) Tell every employee to work out of their house, expense a portion of their internet costs and home office on their taxes, and hold staff meetings at Waffle House.

Freeze. Evaluate. At this point, you have every single functionality of a fixed office space and corporate IT covered for less than $200 per employee per year, including all the usual Microsoft Office software. All you're missing is computers and whatever you use for CAD/CAE, and professional liability insurance. If you're not chasing public work, you probably don't need a GL policy at all, since you have no office.

I know several engineers, attorneys, and other professionals who've established startups since 2008 that are set up this way, compete against big firms at competitive rates, and pocket the delta on overhead costs. You do the math.

Hydrology, Drainage Analysis, Flood Studies, and Complex Stormwater Litigation for Atlanta and the South East -

http://www.campbellcivil.com

 

[jgailla]

If you're paying 36% in federal only you need to fire your accountant.