1099 Fee Split Dispute 1

[Structura1Engineer]

TLDR: What's a fair split of fees for a 1099 contractor? Licensed Engineer produces all the construction documents and engineering. Owner procures the jobs, stamps and reviews.

I'm a licensed Senior Structural engineer with 15 years of experience and started moonlighting on a part-time basis for a former colleague of mine who started their own small 1-person firm. He's too busy and asked if I would be interested in working on some of the excess jobs for him as a 1099 contractor. I provide my own drafting software and design tools, but I'm using his template for uniformity in design. This was similar work that I have done in the past and was able to get up to speed quickly and knocked out about 5 small jobs in a month.

We decided to do a fee split of 70/30 instead of going hourly. It's simpler and it seemed equitable that since I would be doing all the production that I would get the 70, and he gets the 30 for owning the business, finders fee, stamping, and a little review time. But when I went to submit my invoices, it turns out, he thought I had proposed he gets the 70 and I got the 30, which was quite the miscommunication! I had already requested a formal contract in writing prior to this, which was something he was working on, but we were still in the feeling each other out phase of any working relationship.

We disagree that the engineer doing production should get the higher number of the percentage, but I wanted to pole other engineers on what is fair. Are there any market salary reports that cover this specific area of consulting engineering fee splits? I usually just see salary reports which isn't helpful here.

 

[LittleInch]

Agree 50/50 this time and then make sure the next one is in writing....

 

[Structura1Engineer]

Agree 50/50 this time and then make sure the next one is in writing....

I agree. Lessons learned here for sure. 50/50 seems fair for now. What is fair for future agreements? What is industry standard?

 

[SWComposites]

70% is appropriate (and kind of low frankly) for you, though might depend on how much review he needs to do to stamp the drawings. 30% to you is absurd. Why is he stamping if you are licensed?

 

[hawkaz]

If this were an employee/employer relationship- the owner should be getting two to three times what the engineer does. This covers overhead, liability, employer taxes... Being a 1099 does narrow that gap. Since he is sealing the plans, the owner does still front the liability (insurance is not a small number). Not sure about your overhead situation.

 

[IRstuff]

Was just about to post similar; aerospace contract charge is often 3x-4x hourly rate of employee doing the actual work, since the "burden" of overhead, management, facilities, IR&D, etc. are all on the employer.

Burden on contractor labor is on the order of 30-40%, but insurance and B&D would have to be added to that.

 

[LOTE]

I have a couple 1099 contractors. One is a junior level and one is a senior level. I would never do a fee split as you described, regardless of their amount of involvement on the project. I would only do hourly for them (and none of my projects are based on hourly fee, they are all $/quantity designed). Gun to my head and I was forced to do a fee split, my portion as the business owner and PE would be greater than 70%.

First, the owner is taking all the risk when it is his seal and his business COA. He has the administrative costs of insurance, business licenses, PE license, invoicing, payment processing, template setup time, support staff, etc., etc., etc.. Regardless of your experience, you are a worker under his responsible charge, and you should be paid similarly to how you are paid with your current employer (likely ~30% of what your employer is charging clients as others have mentioned).

For determining your minimum hourly rate, as a starting point I would use your current W-2 base hourly rate (adding in employer paid taxes, insurance, vacation day adjustments, etc.) and add approximate annual software costs divided by approximate amount of time to be worked in a year. You could argue for a slightly higher hourly rate since you are providing intermittent services on an as needed bases, and there is added value to that. What he is charging the client is mostly irrelevant for determining your fee.

 

[SWComposites]

yeah, but it sounds like in this case the "overhead" is much smaller - there is no facilities, equipment, R&D, taxes, etc - its only insurance costs, time spent on reviews, etc.

i've done exactly the same thing as the OP for aerospace consulting work, and the hourly rate split is on the order of 95/5 (we don't stamp anything and there is no insurance cost/hassle to deal with).

 

[gte447f]

Wow! Quite the screw-up... I mean miscommunication by both of you on this one. I would say best case scenario to resolve this one would be a 50/50 split, but I also wouldn't be surprised if your owner doesn't see it that way. I think hoping for any more than 50/50 going forward is probably wishful thinking. @SWComposites suggesting more than 70% up to 95/5 is crazy talk, but I don't dispute that that has been their experience in another industry (aerospace). I think @LOTE has it about right except that they say, as the business owner, they would be insisting on more than 70%, but it seems that the figures they laid out suggest around 70% for the business owner is about right.

 

[LOTE]

its only insurance costs, time spent on reviews, etc

Insurance = can be up to 10% of gross receipts for a small outfit just starting out
Payment processing = up to 3% of gross receipts
Business licenses with SoS, Business license with engineering board, PE license, registered agent = up to a couple grand a year
Lawyer fees to review contracts = $350+/hour
Accountant, invoicing software, bookkeeping = several grand a year

You could say they only accept checks, work as a sole proprietor, don't have a lawyer review contracts, do all their own bookkeeping in excel, and do their own taxes, but that is typically not an outfit that requires outside help.

@gte447f I should preface that I also have separate drafters doing all the drafting work, so my 1099 engineers are not the only ones contributing to the project outside of myself.

 

[phamENG]

Most structural engineering firms target an average net margin of about 20%. So 20% of the fee is intended to be profit, the rest will cover overhead and labor. So if you figure 10% of the cost of the job is marketing, proposal writing, contract negotiation, supervision (since they need to exercise responsible charge over you as they are the EOR), QC, submitting final work product, and CA (assuming CA is built into the initial contract), and insurance, then the 70/30 with 70 to you is fair. And it probably is for some projects, but there are plenty where it should likely be less (you getting less than 70%). Edit: But this is highly unlikely. In most cases, these will cost much more than 10%. In some cases it will be less, but not many.

A "fair" arrangement would probably be coming up with an hourly rate for you - something on the order of what you want to be paid per hour x1.25 + allowance for your overhead (maintaining software licenses, etc.). Then, either charge hourly based on recorded hours or estimate the time you think it will take and give him a fee for it. Profit is money earned for risked capital. You have your own software and no liability, so your at risk capital is minuscule compared to the business owner. Until you are willing to go out and put yourself at risk, you have no claim to any of the profits that come from the risk, only payment for your labor and reimbursement for your 'rent'.

 

[IRstuff]

Insurance = can be up to 10% of gross receipts for a small outfit just starting out
Payment processing = up to 3% of gross receipts
Business licenses with SoS, Business license with engineering board, PE license, registered agent = up to a couple grand a year
Lawyer fees to review contracts = $350+/hour
Accountant, invoicing software, bookkeeping = several grand a year

You could say they only accept checks, work as a sole proprietor, don't have a lawyer review contracts, do all their own bookkeeping in excel, and do their own taxes, but that is typically not an outfit that requires outside help.

@gte447f I should preface that I also have separate drafters doing all the drafting work, so my 1099 engineers are not the only ones contributing to the project outside of myself.

Don't forget that YOUR time as owner, business development, supervisor, your overhead, your other expenses, etc., all have to be accounted for in the billing and revenue splits.

 

[gte447f]

So if you figure 10% of the cost of the job is marketing, proposal writing, contract negotiation, supervision (since they need to exercise responsible charge over you as they are the EOR), QC, submitting final work product, and CA (assuming CA is built into the initial contract), and insurance, then the 70/30 with 70 to you is fair.

@phamENG 10% seems low to cover all of the overhead/non-labor expenses that you have listed plus probably others. Maybe you are able to run a ship that tight, but I don't think that is the norm.

 

[phamENG]

@phamENG 10% seems low to cover all of the overhead/non-labor expenses that you have listed plus probably others. Maybe you are able to run a ship that tight, but I don't think that is the norm.

For sure.

So if you figure 10%

I guess I wasn't very clear there, was I? I meant for the juxtaposition of a small number and a long list to indicate that I was pretty doubtful. Though there are some cases where that can work, most won't.

 

[Structura1Engineer]

Thank you everyone for the feedback. We have agreed on 50/50 split of the work-to-date for this past month's work. I drew my line in the sand at 60/40 in favor of me as the producer, but he says his numbers don't pencil out that way. That's fine, it's his prerogative and I respect that.

I reached out to another former colleague to get his take and he thought 65/35 was fair with the EOR getting the 35 for the type of work we do and thinks the EOR I'm currently working with is being greedy. The good news is I'm now taking on jobs that are at the 65/35 split with the same colleague as a 1099 contractor, so it's a win-win.

 

[Structura1Engineer]

Insurance = can be up to 10% of gross receipts for a small outfit just starting out
Payment processing = up to 3% of gross receipts
Business licenses with SoS, Business license with engineering board, PE license, registered agent = up to a couple grand a year
Lawyer fees to review contracts = $350+/hour
Accountant, invoicing software, bookkeeping = several grand a year

You could say they only accept checks, work as a sole proprietor, don't have a lawyer review contracts, do all their own bookkeeping in excel, and do their own taxes, but that is typically not an outfit that requires outside help.

@gte447f I should preface that I also have separate drafters doing all the drafting work, so my 1099 engineers are not the only ones contributing to the project outside of myself.

This is exactly an outfit that only accept checks, work as a sole proprietor, don't have a lawyer review contracts, do all their own bookkeeping in excel, and do their own taxes. They're turning work away, so it makes sense to contract out the work they would otherwise turn away. I'm happy to swoop in and pick up that work at a fair split with colleagues I have worked with in the past and know that we can be cordial; at least while I get my feet wet and transition into working on my own with my own client base. I'm just not there yet.

 

[dik]

If this were an employee/employer relationship- the owner should be getting two to three times what the engineer does. This covers overhead, liability, employer taxes...

So they say...

 

[Ron247]

I remember a company I worked for was doing a state funded project having a multiplier of 3.2 applied to the engineer's base salary to determine hourly rate for the customer. This was determined by some bean-counter process.

I agree this time, both parties should try a 50/50 to solve the issue and then better assess the future. I also suggest both parties confirm which "50" they are for practice. After all, 1 engineer did not fail to confirm who was the 70, 2 engineers failed to. Also, if the other person says they are the second 50, then I change my case to "they were originally the 30% " since it was second before.

Under the 3.2 multiplier it would be 31% to 69%. But, the 1099 situation adds some expenses to you, removes some corporate costs from the other party (Health insurance, holidays, lulls in business). Also, is a one-person show working out of the house or do they have off-site office expense? Since you are working on an as-needed basis only, with no benefits, I would expect to bump my part by another 8% at a minimum. Sounds like 60/40 is a more agreeable ratio not knowing any real financial specifics. The 40 would be you.

The other person is providing the office, liability, stamp and more importantly, the Client. I have found a more direct correlation to No Client, No Money than I have to No Office, No Money.

Also, a warning about your split on a fixed fee project. If I incorrectly estimate a fee, and I am really too low, or I low-ball it because I don't want my competition to get it, you are getting that project, and I will work a different project. Make sure the fee is somewhat reasonable. As the employer, I would take a 30% split of a bad project you work rather than a 70% split of a bad project I work.

 

[LOTE]

Shouldn't the business owner's expenses and fee he is collecting from the client be irrelevant in the discussion?

If you as the 1099 contractor are doing fixed fee instead of hourly, why not just present your fixed fee and defined scope to the business owner after reviewing the project, and you don't need you know what fee he is collecting. If he accepts it, great. If not, you can both move on until the next opportunity.

 

[jhnblgr]

As a 1099 independent contractor this situation seems shady the way you are going about it almost more of a finders fee which is illegal in most areas? You really should be the one stamping the end product, you did the work and you aren’t an employee. Are you listed in their professional liability insurance? Really you should be involved in the proposal stage as a sub providing hours of work with a detailed scope and cost to base your fee. His liability insurance will want to know how much work is being subcontracted, how is the contract written. I would expect that if any issues go to court you would likely be dragged in and not covered under their policy.

One concern is your statement he’s too busy, if that’s true does he do a proper review or just stamp the design? Do you transmit all related work to document a review such as calculations, assumptions, models?