The Challenge of Running A Small Engineering Firm
Running a small engineering firm encompasses a number of challenges, not the least of which is competing with bigger firms for the same projects. However, the small firm owners we consulted didn’t seem to regret taking on the big guys as long as they could maintain their independence and still make a living.
What Constitutes a Small Firm?
First, let’s define how many employees make up a small engineering firm. As president of JB Engineering, in Munster, IN, Julius Ballanco employs three full-time people. Ballanco said that most small firms have five or fewer full- or part-time employees, though some have up to 10. “Between 10 and 20 [employees], engineering firms rarely survive; don’t ask me why, this is just what the numbers show,” he said.
So, as the president or owner of a small engineering firm, how do you hold onto your employees when larger firms have the money to spend on perks and incentives? Edward Saltzberg, president of Edward Saltzberg & Associates, an engineering firm made up of three full-time employees in Van Nuys, CA, believes project variety is one plus. “Small firms have a somewhat better advantage in that the employees get a greater variety of projects to work on, so the employees don’t get cubby-holed into doing one thing over and over again,” Saltzberg said. “Thus, their personal knowledge and ability become greater, and they also get to see how businesses are run, so it gives them a broader knowledge of the profession.” In addition, Saltzberg said his own firm offers HMO medical benefits, sick time benefits, and educational and social activity reimbursement.
Mike McGreal, president and sole full-time employee of Firedyne Engineering, P.C., Tinley Park, IL, acknowledged that a large firm could offer a more enticing salary to employees, but the downside might be a longer commute to the job. “Most large firms are located in the downtown area of a city, while most small engineering companies have their offices in the suburbs. An engineer with the small firm can effectively make a higher hourly rate if he travels only 15 minutes to and from work, instead of a two- or three-hour commute to and from a downtown office. I know that from experience,” McGreal said.
Ballanco suggested the way to hold onto employees is to provide a comfortable work environment. “Small firms offer an intimate setting, and they are more relaxed in their work environment. Normally, there can be a shorter commute, and there’s the ability to leave for family events,” he said. “The downside is if the work isn’t there, you are more likely to be let go.”
As for perks, Ballanco said a small firm usually can offer similar benefits, including health insurance, paid vacations and bonuses. “And, a small firm can sometimes offer a better retirement account than large firms. Our firm has a SEP-IRA. That means that as soon as we deposit the money in the account, it is the employees’ money. No vestment period,” he said.
“We also allow our employees to self-direct their retirement money,” Ballanco added. “They can invest it in anything they want—stocks, mutual funds, insurance or money market.”
A firm’s business principles can also affect how long its employees will stick around. According to Saltzberg, the surefire way to hold onto employees is to treat each employee fairly and utilize their talents and abilities to the fullest extent. “Pay them fairly, and remember you were once an employee, too,” he suggested.
Ballanco’s business principles follow a similar path. “Keep your environment more relaxed. All employees should feel like they are a part of the management team.”
Facing the Challenge
For small firms, success in the construction industry can be elusive. Too many slow-paying clients can result in the smaller firms going under quickly. Saltzberg said it is the responsibility of the firm owner to get the jobs and make sure to get paid for those jobs, as well as to see that the projects are completed properly and on time, or else customers will go elsewhere.
Another disadvantage of being a small firm owner, Saltzberg said, is that “more of the work falls on your shoulders—you become chained to the job, and you end up working harder and for longer hours for not much more money than your key designers are making.”
McGreal added, “One of the biggest challenges you’ll face is that you must wear numerous hats. The larger companies have different individuals (or even separate departments) that do the engineering, marketing, accounting, etc. To successfully manage a small engineering firm, you must be well-rounded.”
You must also get paid, as Mark Bromann, president and sole full-time employee of Flex Fire Protection Design in Wheaton, IL, found out. Bromann has had personal experience with being ‘burned’ by large, uncollected invoices. “I’ve had two different companies go Chapter 11 in my 13 years of business. Both had zero money left to pay me after whatever monies they owed to the state and the federal government.
“Another firm that owed us over $10,000 also owed a sizable amount to the federal government. We took them to court, went to trial and won, but still could never collect the money, even though they remained in business, mainly because the firm and the owner had no lienable assets,” Bromann said. “They say that 5% of all you bill will never be collected, and on the average, it has (unfortunately) worked out that way for us,” he added.
Competing with large companies for the same projects can also be difficult for small firms, Bromann said, because “for some reason, big corporations like to do business with big corporations.” As a result, Bromann advised, it is wise not to waste too much time chasing down leads and competing for potential jobs with larger firms.
What Makes it all Worthwhile?
Small engineering firms can also offer a lot of professional advantages to their employees, including the promise of repeat business and project selectivity. According to Bromann, one advantage to being small is that you can maintain a reputation for quality work, thereby guaranteeing repeat business. “Since you then remain very busy, you have the ability to ‘pick and choose’ work, which naturally allows you to keep your best customers happy, while being able to focus on doing the profitable jobs first and turn away the headache projects,” he said.
Ballanco agreed. “You can take on any size project. Nothing is too small; nothing is too big,” he said, adding that for large projects, networks can be formed with other small engineering firms and resources pooled, and “you don’t have to hassle with government regulations that apply to larger firms.”
McGreal sees reduced overhead as another advantage of small firms. “This really helps when pricing out projects. A small engineering firm will be able to provide more favorable prices to its clients.”
Job security can also be a plus for the employees of small firms, Saltzberg said. “Small firms are able to weather cyclical periods in the engineering profession without hiring and firing,” he said. “It takes less volume to keep the door open, and you don’t normally have as great a turnover of personnel.”
The Keys to Success
One of the keys to running a successful engineering firm of any size, according to Ballanco, is managing the money. He explained that the reason most small engineering firms fail is that they can’t manage their cash flow. Many firm owners think that the most important factor is keeping the docket full, Ballanco said, yet some of the busiest firms have still gone under.
Bromann believes that success is based on the owner’s mindset. “When the company is very small, your income directly correlates to your own productivity, drive and energy,” he said. “If you are dedicated to doing well, success will come naturally.”
Saltzberg provided his keys to success, including “salesmanship, reputation, doing quality work and finding a niche of clients.”
McGreal attributed his own success to dedication and hard work. “I remember seven-and-a half years ago when I was just starting out, my good friend Julius Ballanco told me that I would probably starve for about nine months. I think that Julius should spend more time placing bets in Vegas, because he only missed the mark by about two weeks.”
McGreal added, “Julius also gave me a very valuable piece of advice: the more you hustle, the higher your probability of success.”
How Does Engineering Stack Up?
When compared with other small businesses, running a small engineering firm is less costly in capital and in physical effort, these owners agreed. According to Ballanco, small engineering firms require very little capital outlay to get started, while in many other types of businesses, you can be faced with a significant initial capital investment. “I started JB Engineering with a computer, a fax machine, a printer, and a bookshelf full of engineering books,” he said, adding that his company now boasts “six computers, three printers, 10 times the amount of books and files all over the place.”
McGreal’s start-up list consisted of a desk, chair, drafting board, telephone, computer, printer, fax machine, copier and office supplies. “Other small businesses need all of these, plus major expense items, such as manufacturing equipment and raw materials. It is much easier financially to launch a service-based firm than a product-based one.”
Bromann believes the main difference between engineering and other small businesses is the amount of time focused on marketing. In engineering, he said, the projects are eventually acquired without a lot of solicitation, which is a positive thing, because “what needs to be concentrated on is managing the flow and production of work.”
In addition, Bromann said, “There are times when the firm will experience such heavy workloads on big projects that new business is not really welcome, because it cannot be accomplished in a timely fashion.” And, he added, it would be highly unusual for other small businesses to turn work away.
How specialized should small engineering firms get? Saltzberg said the scope of available projects runs the gamut. “There are some small engineering firms that specialize in plumbing only; however, many others do plumbing, mechanical and fire protection. As for subcontracting out work, we, as a small engineering firm, have been hired by other firms that were just too busy to do specific jobs, and we’ve been able to subcontract from other firms as well.”
“Normally, small engineering firms do specialize in plumbing and mechanical engineering, including fire protection,” Ballanco agreed. “The projects range from residential to high-rise buildings, but they will rarely get involved with industrial buildings.”
“Typically, when an engineering firm is just starting out, they take on any size project just to get the work,” Bromann said. “Also, they may take on work that they don’t really specialize in, because they need the work and they have the time to ‘learn while they earn.’”
However, Bromann added, taking on very large jobs can result in more headaches, especially if payment isn’t timely or the work is too time-consuming. “After a few years in business, the disadvantage of taking on big work is that the project has to be attended to for weeks or months, while the ‘bread and butter’ business from regular clients cannot be turned away. But, while the profit margin from one big project is very similar to that of many small ones, a large project may be more desirable because it can be used as a ‘project reference’ to obtain future jobs.”
Words of Advice
McGreal offered some final thoughts to those who are thinking about starting their own engineering firm. “My advice is JUST DO IT! But, first, you must do your homework.” According to McGreal, here are the steps to follow before you invest in your own firm:
- Get your MBA if possible.
- If not, research publications that contain information about starting up a business (e.g., INC magazine). There are also a number of books on the subject, and the Internet is another good resource.
- Talk to other engineers that have already gone through it.
- Calculate and save up adequate start-up funds (multiply the calculated estimate by two.)
- Try your best not to borrow any money.
- Plan on spending a lot of time at work, especially during the first few years.
- Don’t forget that dedication and hard work are the keys to success.
- GO FOR IT!