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Reality Check

Reality Check

Reality Check

(OP)
I have been researching starting my own civil engineering consulting firm and have come up with some large ranges of values for certain costs and time commitments that I would like to get feedback on. These ranges are based on the fact that I would be a single person firm and estimate $100,000 in billings over the first year.

Insurance (E&O and professional liability):
Range: $2,000-$10,000

Time spent doing non billable work:
Range: 10%-50%

Expected multiplier (how much more I would need to bill to take home the same amount of money as my salaried job) (factors in health insurance, vacation time, bonuses, self employment tax and other benefits that I won't be receiving once I leave my current job)
Range: 1.5-3

If you have experience with these issues, please reply with where you fit into these ranges (or if you are outside of these ranges) to help me get a "reality check" on what others are paying/experiencing.

Thanks
 

RE: Reality Check

Your ranges are about right except your low end multiplier.  Keep your fees high.  Don't discount from the larger firms by more than about 5 or 10 percent.

A 1.5 multiplier might give you a small profit, but it won't be a sufficient buffer for slow cash flow.

RE: Reality Check

(OP)
Sorry I think I need to clarify on the multiplier point. I am planning to bill with a multiplier of around 2.7-3 of hourly rate as an employee. I guess what I meant to say is what is the fraction of amount you need to bill in a year to get equal compensation to a salary job. For example if you were making 100k a year pre-tax as an employee and you had to bill 200k a year as a company (1-person still) to receive the same compensation (after factoring the cost of benefits and self employment tax) I would say the fraction would be 2. I understand this isn't how the term "multiplier" is used so I probably shouldn't have used that wording. Also, this may not be a calculation that is typically considered, but I think it will help in my planning nonetheless.

RE: Reality Check

I'd be very skeptical of an E&O insurance cost as low as $2,000.  Mine was around $10,000 ten years ago when I sold my shares to an ex partner.  It is not only your total billings that affect your rate.  The larger factor is going to be the coverage required by your Clients.  I'd estimate $5,000 to $6,000.

If you remain a one person show, your non-billable time will be much closer to 50%.  And when you are doing actual billable work, you are not out beating the bushes for more.  This leads to a maddening cycle on feast and famine.  Better to plan for at least one other person, maybe even part time, to do billings, bank deposits, payables, and make a few Client calls now and then.

Multiplier is 2.5 to 3.0, absolute minimum.  It is far more likely that your fixed and soft expenses will be higher rather than lower than anticipated.

"Gorgeous hair is the best revenge."  Ivana Trump

RE: Reality Check

Cas,
Your old signature was my favorite on any of the forums.  New one is just average.

David

RE: Reality Check

(OP)
Thanks for the input!

RE: Reality Check

Fully agree on the non-billable time at 50% for a one-man office.  That's been my experience for the past 24 years.

Mike McCann
MMC Engineering
Motto:  KISS
Motivation:  Don't ask

RE: Reality Check

Add up all of your expected costs for a Year, add your gross salary, then add 7.65% of your gross salary for the employers half of FICA.  Your net billings would have to equal that number.  Then back-calculate out how many hours that is and at what rate.  Like others have said, 50% of your time will probably need to be spent doing non-billable activities.  

Keep in mind that you probably won't make your salary the first year simply because of cash-flow...it'll take a while to find an opportunity, propose on it, win it, do it, invoice it, then get paid.  make sure you have enough savings to live through that period and to pay for the costs you will have, and then make sure you've saved more.

Make sure you include ALL expenses you can think of and be conservative because you will probably spend more. Insurance at $6,000 is probably reasonable.  You will also need a computer, software, accounting software, an accountant to do taxes, business entity set up, cell phone, health insurance, web site, marketing expenses, etc. etc.    

Pete Madson
www.npcg.net

RE: Reality Check

To take what you need to earn and apply a multiplier is completely the wrong way to go; this will only tell you what you would need to charge not what the industry will let you charge. If you doubt this I suggest you go out and buy a mansion and a private jet that way your charge out rate will go through the roof and so will your profits. However the reality is the complete opposite is true.

Let's just for example say you earn $100K and you work 48 weeks a year for 50 hours a week that is $41/hour, the company will be charging more than this say $130/ hour. If you base your rate around the $100K and apply a factor of 3 that means £300K which for the same 48 weeks and 50 hours but with only 50% billable the new rate is $250/ hour. The big problem here is you are only billing 50% of your time and why would anyone pay $120/ hour over the market rate?

You need to go completely the other way, see what the market rate is and guestamate how many billable hours a year you can generate, whilst this will only ever be a best guess this number will determine if you succeed or not, that will give you a figure, then subtract the running costs for the company and see how much you are left with, that will be what you earn.

Also have enough money put by assuming that you will not earn a penny in the first six months and only 50% of what you expect in the second six months.
 

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