Engineering Firm Startup Question (Structural) 3

[SWEG]

To all those who have started their own structural (or other discipline for that matter) firms, at what point did you decide you were ready to transition to starting your own firm?

What aspects of design and consulting did you pursue? General consulting? Design only? Construction services? 

How did you handle cash-flow when you started out (i.e. when did you receive your first payment of services) and how did you resolve start-up capital? How long before you hired your first CAD operator? 

Thanks for any input you can provide!

 

[SteelPE]

My previous company went out of business and I was kind of forced to start my own company. It wasn't a simple or easy decision.

I consult to other engineering companies (when they have too much work), steel fabricators, owners and architects. I do anything I can from designing connections to designing small multistory buildings.

I received my first payment for services about 6 months after I started...... and it took a while to "prime the line". I don't ask for upfront payments (retainers) although many companies do. I had a guy that was in the same position I was in terms of CAD. I hire him when he is needed.... which doesn't work out too well for the CAD guy as most of my jobs don't need CAD work. I usually end up paying the CAD guy about 4-6 months before I will get paid on the job. I do try to stagger my payments as to not expose myself to too much risk.

Unless you have a really good backlog of clients this gig isn't as glorious as everyone around you might make it out to seem. However, I'm probably a horrible businessman and an even worse engineer .

 

[SteelPE]

Oh, one more thing. When I went to graduate school years ago I had to take a business class (don't know why) but the one thing I took from that class was "Never go into a business without a plan to get out of business".

About a month ago I was talking to a 60+ y/o engineer who was planning on retiring in a few years..... he stressed the point that nobody can do engineering "part time" that is,you have certain fixed costs you need to cover.... namely insurance which isn't cheap. So you are basically in or out. The other thing he didn't realize was the cost of a tail policy which typically runs 2.5x the yearly premium for a 5 year tail ($$$$$$). He never thought about this cost when he started...... he isn't exactly happy.

 

[SWEG]

SteelPE-- about the steel fabricator work, which I guess would classify as "construction services". Did you have previous connection design experience, as far as designing connections as a consulting engineer?

Do you mind explaining what you mean by "tail policy"?

Thanks for the feedback!

 

[SteelPE]

I had some previnous experience with connection design but I am no expert at it. I actually turn away connection designs when I am busy. I know a few engineers who make a decent living doing this work. Most of the work i do with fabricators would be classified as design-build work. They have clients that come to them for design of buildings 1-3 story buildings.... I design these buildings for them.... And sometimes stairs.

A tail policy is a policy you buy from the insurance company when you decide to close the business. Every EO policy I have seen have been claims made policy meaning you are only covered for work you did while the policy is open and only if the policy is still active. Once the policy is closed you are no longer insured. A tail covers you once the policy is closed.... Say after you retire. You stop engineering..... And purchase a tail that will cover you for a determined amount of time.... 1 year... 2 years..... 5 years etc. The price of the tail is determined when you open the policy.

 

[SWEG]

SteelPE - Thanks for the info. That helps.

When you first started up, did you have any clients in hand/immediate work or did it take you a while to generate work/sales? I think from previous posts you mentioned it took you 6 months to start generating cash flow.

For my own startup, I have quite a few connections that are pretty diverse, but I still think I'll need to spend a considerable amount of time up-front marketing. Do you find yourself still marketing as much, or are you starting to get work that comes to you without pursuing it first?

Thanks again for your feedback and any other info/advice you have I'd appreciate it.

 

[SteelPE]

I didn't technically "first start up", it is way more complicated than that. Lets just say that I worked for a steel fabricator doing design-build work that went out of business. People who I used to work with went different places or started their own thing. I do most of my work through this network. I've never done any marketing. All of the work I have gotten have basically been through the contacts I already have. I work for pretty much everyone contractors, fabricators, architects, owners, other engineers etc. I don't think you can to much more diverse than that.

On average I am getting paid for my work 3 months after a submit my invoices. Not really a quick turn around but I am used to it now so it doesn't matter. I am working on landing jobs now that I will not be paid on for 6+ months hence the long time before money started coming in.

I wouldn't necessarily follow my model as I was sort of forced into this position. I am doing better than I was when I was working for someone else..... but I wouldn't necessarily say that it is worth the risk. I do a lot of work that other engineers look down upon. I also work with a lot of clients that other engineers would refuse to do business with (fabricators and contractors).

One last thing, trying to get this consulting gig going has been the biggest challenge I have ever faced. It's just not as easy for me as it is for some (probably because of what I listed above and in other threads). I have no idea if it will pan out in the end..... but come April it will be 3 years out on my own.

 

[JedClampett]

I'm not in business for myself, but I'll give my two cents (probably your first invoice) worth.
Think of why someone is going to give money to you to design something. Do you have a unique skill? Do your connections think so much of you that they will pull work from their current subcontractors to give it to you? Can you offer a substantial price advantage? And can you wait for your first paycheck? Six months can be a long time between bank deposits.
Also: How will you present your work? Will you hire a CAD operator? Can you afford that? If you're doing your own CAD, it makes life less complicated, but that's time you could be doing engineering or marketing.
SteelPE was forced into a situation when his employer went belly up. He pretty much had a ready built clientele. Can you count on a clientele?

 

[SWEG]

JedClampett--- I think all of the questions you pose are great and they are one's that I've asked myself earlier on in my thought process. The questions that I'm really posing are in my initial thread; what started your firm off, type of work and cash flow issues that arose from your choices.

I see many a consulting firm put out lack luster drawings and are backed up (or lack of) by questionable design. Additionally, I see many large firms putting more and more pressure on the shoulders of it's employees to force quantity over quality when it comes to project production (including my own). My vision since college has been to start my own firm small and grow with time. I've found myself, with my current A&E firm, facing interesting work and but not nearly enough time to adequately and thoroughly design such. In many cases, if something were to happen on one of those projects, the CEO who signs and seals the drawings would face professional liability issues. If I were able to escape that without liability or professional penalty, then I would surely face professional/career sustainability or future employment issues.

I'm looking to take control of that situation, offer clients quality work in a reasonable amount of time and be able to offer services to a much wider range of clientele than currently. Additionally, I can offer Revit/CAD deliverables and am current with the IPD process. My firm would be one of 3 other small consulting firms in the area which holds an MSA of about 400,000 people. I am a licensed PE and SE, of which the latter stands out as the only in my area (within firm ownership). Currently, A's in my area are not entirely dedicated to a certain structural engineers, but rather look for quality and low cost. The latter is sometimes there, but they sacrifice quality. I'm hoping to price myself, starting out, along with the competition but instill a higher level of quality to show how much better I am than the other guys in town.

As for CAD support/deliverables; I'm willing to put in the sweat equity required to design and draft projects while trying to keep a sustainable margin during the startup stage. I'm self-sufficient with CAD and Revit and can usually produce drawings faster than our typical draftsmen. So, I don't see that as an area of difficulty.

I don't see this as a small task, but I see it as a great challenge. As SteelPE put it, it will most likely be the most challenging of my career, but it's something that I've been looking forward to and am willing to do what it takes. As for SteelPE, he was faced with an unfortunate situation but fortunately had a good alternative. Gratefully, I'm not facing the same situation; however, I'm looking to build something bigger than myself. I'm looking to build something that will pay great dividends in the long run; professionally and monetarily. I may not have the workload lined up with set clients yet, but I have the skill set to reach out to people, connect with them and convince them that I am most likely better than the guy they are using.

 

[SteelPE]

One thing you might want to consider is to team up with someone. Someone that has similar skills but is better at things you are bad at. Similar to the way Carnagie teamed up with someone back in the day. I didn't have this option.

Another thing, I'm not sure where you work now, or what types of projects you do or how many projects you do in a year. I know a few guys who are out on their own.... some have been for years. The more successful ones will go through 200-300 projects in a year. So you might want to prepare yourself for that.

 

[SWEG]

Thanks, SteelPE. My main competitor is another consultant who's been around since the mid 90's. I've considered partnering with him as he is nearing retirement age. The goal would be to buy out the business within the next 5-10 years. My main concern with that is how do I approach him without also giving him an inclination that if he doesn't want to partner then he'll have a competitor hitting the market soon?

I've often considered the quantity of projects I'd need to stay successful. I'm pretty sure it'll all depend on what type of projects I am marketing towards, but more importantly at start-up time, what will keep the cash flowing.

Thanks again for the input.

 

[SteelPE]

I had the opportunity to do work with a similar engineer. I was told that it would be good for me as he was also nearing retirement age and I could possibly buy his business. I never took that opportunity as buying a sole-proprietors business didn't appeal to me. What would I exactly be buying... more than likely a client list, and how could I be sure these clients would use me vs finding someone else. Then there is the matter of you carrying on his insurance and being required to pick up his tail.... which I sure he wouldn't appreciate when selling the business. I envisioned partnering with someone your own age (or roughly near your age).

 

[SWEG]

I would see it as a true partnership for about 5 years and then another 5 years of transitional period to retirement. By the first 5 years I would hope that I would have developed a good relationship with the key clients so as to continue those relationships into the future.

As far as picking up his tail policy, do you mean he wouldn't mind me picking it up when selling?

There's a less chance that I'd find someone close to my own age; however, there's a possibility there to partner with someone about 10 years older. However, the drive that I have to run my own show isn't as strong in this person.

I do like the fact that buying a mature business carries less immediate risk and better chances of long term ROI. On the flip side, I'm also attracted to building something myself from scratch.



Virginia PE, SE

 

[SWEG]

To add to the partnership idea with the guy who is retiring soon; he doesn't market his business or skills very well. He doesn't have a website, he doesn't network with professionals, he mainly relies on a steady stream of work that just keeps coming in. It keeps him busy, but without additional marketing, I don't think it would grow enough to keep me as a partner.

I think it would take my marketing and networking skills to create an additional clientele base to keep me viable as a business partner. Additionally, that would only work out better for me in the long run when he nears retirement.

Virginia PE, SE

 

[Triangled]

Great comments heretofore! (luv to use that word)
****at what point did you decide you were ready to transition to starting your own firm?
1st time when I was invited into a partnership as a minority member.
2nd time when the first one blew up.

****What aspects of design and consulting did you pursue? General consulting? Design only? Construction services?
2nd time, anything that would pay quickly and that I knew I could produce rapidly

****How did you handle cash-flow when you started out
I grabbed it and deposited it as fast as I could.

****when did you receive your first payment of services
At 30 days 1500
At 90 days 33000

****how did you resolve start-up capital?
didn't have any, so, no problem!

****How long before you hired your first CAD operator?
I subcontracted at fixed fee per job (so I could control costs) until I was spending so much there that I thought I could save money by developing in house talent.

OK, now, my 2 cents.....
1st cent: running a business requires a completely different set of skills than performing engineering. To be sure, if you are a good engineer, which I entirely believe you are, I have little doubt that you can master the skills of running a business. I'd simply recommend that you not minimize in your mind the demands of running a business. It is your job to bring in work, to direct work, to check work, to deliver to the customer quality, to collect money, and, yes of course, to pay taxes. I'm sure you can do it, and, but, you must do it, continually, like a machine, like a machine generating paychecks on the schedule your family and employees expect, every time, all the time. I suspect that many start ups struggle exactly here - thinking that if they just perform outstandingly within the expertise of the product they're offering (engineering services), the business parts will take care of themselves.

2nd cent: managing a partnership requires yet another set of skills.

 

[berkshire]

One thing I learned was if you are the expert you cannot also be the salesman unless you have an extremely good reputation.
I ran a business repairing aircraft and doing custom fabrication . I had that business as a part time evenings and weekend operation only.

Two things happened not related but coincidental. I was working as a designer for an engineering company on a large project in Youngstown Ohio. The project folded, at the same time I had three people come to me with wrecked aircraft. I was complaining to one of my fellow designers about how was I going to find time to do all the work I had, when the managing director came out with my severance check.
It was actually a relief at the time.
I hired people to cover the work load and worked for that year getting the backlog out of the shop, then towards the end of the year I could see the end coming, there was no more work there. While I had been putting my nose to the grindstone and working with my guys getting the work out Nobody had been soliciting more work. The next year was like saw tooth chart until I realized that I was my own worst enemy I could not solicit work, if I was buried in the shop doing or directing it, I hired a salesman .
B.E.


You are judged not by what you know, but by what you can do.

 

[lacajun]

I didn't think I was ready for it financially. That was a correct thought. It seemed my only option.

I will do consulting or design. It depends on the customer and what they want or need. No construction.

Used my own capital because no bank would do a business loan. It's been expensive. One fella' repeatedly said to use other people's money never your own. I don't know how that is accomplished and when I asked him, he didn't either. I had to laugh...and shake my head. People say a lot of stuff.

It will be the most rewarding enterprise you undertake as an engineer in all ways. You'll be exposed to people, projects, and opportunities you never will as a direct employee. Just ensure you and your family are ready for it and want it.

It is a lot of work. You will not be able to do it all. Consequently, position yourself to hire others or contract them. I contracted.

Look for clients that have money to spend and if they don't, walk away. What they want and what they are willing to pay for will be oceans from each other. I know some that bluntly ask if the potential client has the money to spend and they ask it right away to not waste anyone's time, particularly their own. If they don't have money, the meeting is twenty minutes and they're gone. They're very polite about it but very blunt and to the point.

If the client is going to use end of year money to finance the potential project, walk away, unless it is a very small project and end of year money will cover it. If it is a large project, it needs to be run and financed like a large project. Don't kid yourself about that or let anyone else do it to you.

Learn good project management skills, if you haven't already. They are needed and work.

Document everything diligently.

Have a good contract.

Call around to check potential clients out. That happens often in my world. People will call suppliers to find out what kind of people they'll be working for. Easy to work with, supportive, serious, pay bills on time, has money to spend, are they sue happy, honest, fair, etc.? Everyone has a reputation at stake and you do not want to tangle with a company that will give you grief. If a company gives you grief and you are doing your job, they are not a good company. Good companies will not hesitate to pay you fairly for work performed.

Having employees and/or partners will be a lot of work. People have problems you cannot imagine. Those problems will present you with some very tough decisions to make. Don't kid yourself about that either.

Grow your company so that it is independent of you and whatever life may throw at you. My business has come to a grindingly slow pace due to an event beyond my control. If I have an opportunity to continue, I will welcome it.

Whatever you do I wish you all the best.

Pamela K. Quillin, P.E.
Quillin Engineering, LLC

 

[Ron]

I have started and run two different engineering businesses. The first was a conventional engineering testing/consulting business where I had a laboratory to do lab and field testing for construction QA, and I did design and consulting as an adjunct to that business. The first mistake I made was trying to grow too quickly...almost killed me! I could not get a loan, so all cash flow was within the business. That teaches you timely invoicing and collections! After a year, I took on a corporate partner (a medium size engineering firm bought in to my business with minority ownership). That was fine for a few years, but I'm an engineer first and don't particularly enjoy managing a bunch of people. I sold out after 6 years and worked for the firm that bought me out....I was already familiar with them since I had worked for them for 5 years before starting my business....they liked the niche market I had developed in a city that they had an office but had never been able to penetrate the market I had cultivated. I stayed with that firm for another 12 years before leaving for presumably greener pastures with a position with a smaller firm...stayed there for 4 years before starting my next firm, which I still have and have been in business for 10 years.

This business is structured quite differently from the first one. It is a consortium of licensed professionals. We do mostly forensic work and the reason we have a consortium is that I have developed a reputation and following over the years, so I bring in most of the work and my consortium associates then have an opportunity to do the work if they want. I have no employees so I have no real management issues. I coordinate projects, but the individuals who work with me are all "hand-picked" and I've known all of them for a long time....I can trust each of them to do what they need to do and we have established reporting procedures so we have a quality assurance system that works. It is a non-conventional system, but it seems to work pretty well with the group I have.

You can play management games, develop spreadsheets to track "stuff" and do a bunch of other admin procedures to get and keep your business going, but the most important things you can do are to provide competent engineering that will stand up to any scrutiny and to communicate with your client on a personal basis.

 

[Ingenuity]

This business is structured quite differently from the first one. It is a consortium of licensed professionals. We do mostly forensic work and the reason we have a consortium is that I have developed a reputation and following over the years, so I bring in most of the work and my consortium associates then have an opportunity to do the work if they want. I have no employees so I have no real management issues. I coordinate projects, but the individuals who work with me are all "hand-picked" and I've known all of them for a long time....I can trust each of them to do what they need to do and we have established reporting procedures so we have a quality assurance system that works. It is a non-conventional system, but it seems to work pretty well with the group I have.

That is an interesting consortium structure.

So the client (whom seeks forensic services) has a single-entity that it engages (your consortium) and then internally the forensic work is undertaken by consortium associates who are not employees as such, all producing work under a single report to the client.

How are the individual consortium associates paid for their contribution to the work-product? Independent-contractor type relationship between you and the individuals?

Presumably each individual associate has his/her own E&O. Does such a structure cause 'issues' for E&O insurers, given potentially multiple authors of a single report.

 

[Ron]

Ingenuity....yes, all are independent contractors and have separate insurance; although we have a blanket consortium policy as well, and the consortium picks up the general liability policy (CGL).

All are paid a percentage of revenue (quite a high percentage in fact), with the difference going into the consortium for insurance, office space, specialty equipment, etc.

We use dual signatures on all reports, issued under a single banner. The engineer in responsible charge of the project is generally the one who ends up testifying; however, we have projects where both engineers are called to testify.

We have had no adverse feedback from E&O carriers with this setup.