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Cutting the Cord
3

Cutting the Cord

Cutting the Cord

(OP)
Hello,

I am a Licensed Electrical Engineer with 8 years experience in engineering and 15 years experience in related trades.   I am planning to start my own engineering firm.  Currently, I am employed with a billable rate of $100.00/hr.  I have given my employer notice and told him that I was planning to head out on my own and put together my own engineering firm.  Now, he wants to talk about contracting me for specific jobs and job types in the future; however, I am unsure as to a fair rate.  I can estimate hours, but I am unsure of the value in having an experienced firm secure work for me.  Any ideas on how I should proceed with negotiations?   If I look at this from a cost basis, I am unsure of the value lost from not gaining the name recognition of my new firm.  If any one has been in this position and can share the experience, drop me a note.

Thanks

RE: Cutting the Cord

Zapster

Negotiating rates is supposed to be that, a negotiation. What is fair is whatever is agreed to by both parties.


Generally your rate should be between two and three times salary costs. This is your wages PLUS payroll costs like insurance, pension etc. When I started out I was told that normal would be to be productive for 1,000 hours per year, the balance would be in administration and marketing.

Some things to consider:

You may want to give your former employer a discounted rate based on an expected  volume of work. This is not unusual. You may want to consider it a “first client discount”.

If the former employer is finding the work, integrating your efforts into a complete whole, then some discount is also reasonable.

In any start up situation, cash flow is critical. You have some significant outlays for initial capital purchases and stocking up on supplies etc. An initial discount is therefore reasonable to ”prime the pump”.

Is the former employer extending insurance coverage to you? Is there some use of his facilities and equipment?

You obviously know your employer and are comfortable working with him. This lowers your risks and would also indicate a lower rate.

The former employer has to make some mark-up on your work.

What sort of offer is the former employer making? If the offer is simply salary costs then this is not reasonable. Is there any guarantee of the amount of work? Where will the work be done?

Be careful that you are not seen as an employee for tax purposes. For this reason you may want to look into becoming a corporation and the agreement between you and the former employer would be an agreement between two corporations.

Are there any limitations on your doing work for others? Having several clients goes a long way to establishing yourself as a separate entity and not a employee.

Provide something besides pure labour. At a minimum use your own computer or other equipment. This also is important to separate yourself from the former employer.

As a suggestion I would recommend something around 75-80% of your previous normal charge out rate. Don’t lock yourself into this rate, you may have the opportunity to work for others full time at your old rate.

As always for any startup, get legal and professional accounting advice as required. You are not a lawyer or an accountant, you have your profession, they have theirs.

Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion
www.kitsonengineering.com

RE: Cutting the Cord

You could get more usefull advice if you would tell us
your location -- state -- and area of expertise.

<nbucska@pcperipherals.com>

RE: Cutting the Cord

Zapster,

I started my own company several years ago.  My previous employer wanted to retain me for a specific client in the area which was close to me.  I thought about this and decided against it.  First, I needed all my time and energy to get my company up and running. ( The client was one that I could not get for myself due to noncompete issues)

Second, if you don't make the commitment to go completely out on your own, you will not feel the need to develop your own clients.  Plus there is noting like the sink or swim feeling of starting your own company!

From my experience, I never had success on cold calls.  All my clents have come to me by referals.  

RE: Cutting the Cord

2
It all depends on how fat your bank account is. Can you sustain it to develop a new engineering company with all the equipment procurement + stock buildup + marketing + client development with your current bank balance , without fearing to be broke in six months , probably having house mortage + kids in university etc also draining the finances ?

If yes , then go the tankman route.
If no , the cut the apple in two and start as a consultant/ freelancer , to increase your capital base rapidly and simultaneously hope to get more free time to chase new business opportunities.

I was 30 years old  , end of carreer at my current employee and fed up with office politics and the rat race that goes with getting up the corporate ladder.  However , my bank account wasn't fat , I had a mortgage on my small house , and drove an old second hand car.  I started by finding a company that needed urgently new experienced personel , got a cheap independent statute to be able to invoice that company rapidly and gave my notice to my current employer. I never looked back. After a few months , I had earned enough to be able to start a corporation , in order to significantly reduce my overal tax rate. I worked with my own corporation for several corporations/clients , jumping from reference to reference every 6 to 18 months , to create the illusion to the governement that I am a fully independent company. Some other consultants that I met during those jumps were already working 5 years or more with the same corporation , not bothering anymore to increase their experience capital , having earned enough to be confortable staying where they were. However I am still working as a consultant in corporate organisations , doing industrial project coordination for them , without bothering anymore with office politics , since I am a consultant.  

I started my consulting career at 30 , by doubling my salary as invoices , and now am invoicing three times my previous salary , at 35 years.  I have in the meantime paid off my house mortgage , and drive another second hand car of very good quality.  I will continue to work as a consultant , the Economy God prevailing , because I am not interested anymore to create my own fully independent company with personel etc , the hazzle is too much compared with the ease I now have.

Keep into account that going the consultant way is not the easy way. Clients are very demanding and most of the time not honnest concerning the real project scope they want to hire you for. I am regularly working very far away from home , living in hotels , but I am no married and nobody is waiting for me back home. Happy references are a major plus to get new projects , but they are not always straight behind your back.  

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