Cover Story
So You Want To Start Your Own Engineering Firm [Part 1]
by Timothy A. Smith, CPD
October 1, 2009
Tim Smith (left) and Phil Kroll, head of the plumbing department, review designs for a swimming pool.
You’ll need to answer lots of tough questions and create a sound business and marketing plan. But mainly, you’ll have to position yourself mentally for the big jump.
When I was asked to write this article, my first thoughts
were…okay…sure…uh, can I write about this? Starting a plumbing engineering
firm? It will be very difficult to do in today’s world of “one stop
shopping.”
More and more, architects, owners and developers prefer to do work with a
single engineering firm, as opposed to several firms who each perform a single
trade. Even the traditional MEP (mechanical/electrical/plumbing) firms of the 1980s
and 1990s are being pushed to provide structural and civil engineering services
under one umbrella.
The theory is the project will be less expensive to design and will have higher
quality and better-coordinated designs when provided by a common team. Plumbing
contractors seem to be a primary source of revenue for purely plumbing
engineering firms whose main product is engineered building systems.
Some successful plumbing engineering firms have diversified their design
services by also offering forensic, code consulting, testing/research and
standards writing services.
I am going to give you the best recipe that I have for starting an engineering
consulting firm, but there will be uncontrollable deviations to the recipe that
will either make or break the business’ success. For example, being in the
right place at the right time will benefit a firm’s growth, whereas having a
client or developer go bankrupt can drive a firm into insolvency.
Begin With a Business Plan
The first part of any business recipe is a business plan, which needs to
be a very accurate and truthful document. You have to look deep into yourself
(and potential partners) when formulating the business plan to make sure you
(they) have the ability, strength, determination and resources to realize the
business plan.
A basic business plan needs to plan a minimum of three to five years. A
10-year, long-range plan would be an excellent supplement to any business plan
you may be submitting for financial backing. The long-range plan indicates deep
and thorough thought, and illustrates that you are not taking this
lightly.
There are introductory and small business grants available from organizations
such as the small business administration (SBA). There also may be
government-funded projects assigned for minority (MBE) and women-owned (WBE)
business enterprises.
The first two years of the business plan must have accurate and obtainable sales
numbers, appropriate overhead and a sufficient amount of reliable work force to
achieve the plan. Do not be afraid to be cautious because it is better to
over-achieve your business plan than it is to miss your
target.
You need to think out of the box in preparing today’s business plan, because
current firms are being required to improve efficiency and cash flow from their
financial institution. Borrowing money for new start-ups is still readily
available but tougher to obtain. Shorter loan terms and larger down payments
are typically preferred in the current economy, even though the cost to borrow
the money is low.
Loans are not being shuffled through any more. Therefore, an efficient and
well-developed business plan will speak highly of your abilities.
A great business plan needs to sufficiently answer all of the basic who, what,
where, when, why and how questions (their order is optional, as you’ll see)
that will apply to or possibly affect the type of business you want to start.
Address The Tough Questions
The following basic questions will assist you in establishing your plan.
Keep in mind that more accurate details illustrate your knowledge of the
business plan presented. Be assured that banks like that. Answers to these
questions will overlap as you assemble your business plan. This list does not
represent the perfect formula of questions to get to your successful business,
but it sure is a good recipe to start your thinking.
Why?
- *Why are you selecting this type of business and/or industry
to start a new business?
*Why do you feel you are qualified to manage and successfully develop a business of this type?
*Why do you think you will be successful and not become another business failure statistic?
If money, prestige or envy is a primary motive, then stop right here. You have to do it because this is the business you love and you still enjoy putting that “pen to the paper” to create a new design. Conversely, being the chief executive officer (CEO) puts you in charge and personally responsible for corporate liability. The rewards can be plentiful but so can the everyday stress and strain with being the top dog.
What?
- *What makes you qualified to start an engineering firm,
either plumbing or multi-disciplined?
*What is the market or market segment that this business is going to reach and what is the potential for sales?
*What types of buildings or projects are you best at and are best known for? New construction or renovation work?
*What are your design strengths and business specialties? High-tech medical labs, building tenant work and/or everything in between?
*What are the services you are going to provide? Plumbing design? Mechanical and electrical design? Forensic services? Construction management?
*What will you do for an office — rent or lease? What is your budgeted start up costs?
*What are your projected overhead costs going to be (i.e., phones, faxes, copy machines, computers, utilities, secretarial services, etc.)?
*What are your personal finances and net worth, in the event you are going to seek outside financing for this endeavor?
When starting a new firm you need to stick with your strengths and what you do best. If you’re involved in one hospital project every three to five years, stay away from that market at the onset. You will spend a ton of money marketing that business segment and get nothing in return. Your strengths may be as a consultant working for architects doing plan and specification work, or it may be as a designer working for contractors doing design/build projects.
Also, multi-disciplined firms will have more success in marketing their services in today’s market. The ability to spread your project setup costs (i.e., establishing files, base plan x.refs set-up, developing title blocks, cover sheets, formatting specifications, etc.) over multiple disciplines will help when pricing projects.
Metro Design Associates, Inc., has its offices in Elgin, IL. Photo by Matt Lowrey.
Also make sure you negotiate for extra option years to be either accepted or declined, at your discretion, when the term of your lease expires. Office equipment such as desks, chairs, phone systems, fax machine, copy machine, bookshelves and plotters are also part of start-up costs. These can also be leased, and lease payments are deductible, whereas purchases are depreciated over time.
Do not get hung up on prestigious addresses with fancy fountains and being located on the main drag, because all of that comes with a price tag. Engineers are not hired because a client was driving down a beautiful parkway and saw your name on a fancy building. If anything, they may shy away from you because they perceive your space to be too expensive for them. You want to have a professional space, but you can create a good working environment within a strip building tucked away back in an office or industrial park.
Project overhead costs are another important item within any business plan. The lease payments for office space and/or office equipment — in addition to personal salaries, utilities, cleaning services, office supplies, etc. — are all part of monthly and annual operating costs.
Some start-ups may want to utilize the corporate suite option. This is an arrangement where completely furnished office suites are serviced by a common front office with full-time receptionist and secretarial services, and complete phone, fax and copy services.
You pay a flat monthly fee, as well as additional services as you go, thereby keeping overhead costs fairly fixed and projected costs constant. The lease agreement for this type of space is usually reasonable and can be very flexible.
Where?
- *Where is an ideal location for you to locate your new
business?
*Where is the area or region you intend to market to?
*Where do you live in relationship to your targeted marketing area and should you relocate to be closer to your client base?
*Where are office rates inexpensive? Are there any corporate office suites available in the targeted area where you can obtain office administrative services without actually making them employees or making capital equipment investment for front-end equipment like phones, fax machines, copiers, etc.?
*Where will you incorporate your business? Delaware, California, Illinois? They all have benefits and disadvantages based upon the type of corporation, partnership or trust you decide to establish.
There is no doubt that doing your homework on your business’ market segment and potential client base is a critical element in making or breaking any business. The Metro Design team was fortunate from the standpoint that some of the partners were involved in the research and establishment of a satellite office for our previous employer in the Chicago market.
We had market research data, rental space rates, average employee salaries and various cost-of-living rates for the city of Chicago, as well as for suburban business hubs like Schaumburg (northwest), Naperville (west) and Joliet, IL (southwest). This by no means made our business decisions any easier, but it did give us the advantage of making well-educated decisions. There is no such thing as having too much information when developing a business plan and starting a new business.
It is highly recommended to incorporate a new engineering firm regardless of individual or multiple-person ownership. This is not just my recommendation, but other financial experts will recommend this in order to isolate this business from others you may own and/or your personal assets.
Incorporation also prevents transfer of liability from one corporation to another. You can incorporate in almost any state, but Delaware seems to be common place due to their simplistic “incorporation act.” There are other methods to register your business, depending on the state where you are established.
These include limited partnerships (Ltd.) and limited liability corporations (LLC), which, depending on the provisions of the state, can be fairly easy and inexpensive. Some states allow for families to incorporate their assets into a corporation to protect them from outside creditors or litigation directed toward other corporations that a family member may own or be partner to.
Family assets may include home, property, children’s trust, insurance policies, etc. A properly established family corporation may also act as a will or foundation in the event of the principal partner’s death.
If there are multiple owners and/or partners, you should establish a “buy/sell agreement.” This can stipulate a formula for the value of the corporation in the event new people want to buy in or existing people want to sell out. You can also stipulate how people sell out, terms of payment, or terms to pay your estate in the event you pass away.
Buy/sell agreements may also contain trusts within them to manage life and disability insurance for principle partners and owners. Starting a new business is a daunting task so establishing a “buy/sell agreement” may not be a top priority. But it is definitely better done sooner than later when disputes amongst partners start occurring.
Many states require professional firms to be professional corporations or PCs. This type of corporation still holds the individual professional engineer responsible for any design that they may sign and seal. There is no corporate umbrella in which to hide.
Part 2 of this article will appear in a future issue of pme.
Dedicated to Excellence
Bill was a tough guy to work for because he always pushed for production and excellence. Many people worked for him at different firms over different periods of time, but not as long as I did consecutively. Bill had previous experience with the formation and executive operation of engineering firms, including H.E.V.A.C. Engineering during the 1960s and 1970s.
Bill successfully sold that business to serve his public duty for a second time. Unfortunately, he lost his battle with cancer only a few short years after his retirement, and this kid wants to take this opportunity to thank him for inviting me to take the jump with him.
Keith O’Higgins, P.E., (president), Larry Arnold, P.E. (vice president) and myself have continued to keep the Metro Design Associates mission focused on providing excellence to our clients.
Timothy A. Smith, CPD
Timothy A. Smith, CPD, is
the vice president and one of the founding partners of Metro Design Associates,
Inc., in Elgin, IL. He celebrated 30 years in the consulting engineering
profession this past September. Metro Design was founded in 1988 and is a
full-service mechanical, electrical and plumbing engineering firm that was
named Enginering Firm of the Year by pme in Nov. 2001. Smith is also
the American Society of Plumbing Engineers (ASPE) Region 5 Director. You can
contact him at tsmith@metrodgn.com.
Also be sure to visit the firm’s Web site online at www.metrodgn.com.
Did you enjoy this article? Click here to subscribe to the magazine.
In the AEC Store
2009 Hydronics Know How II CD
Virtual encyclopedia on modern hydronic systems.
CONNECT WITH PM ENGINEER: