Liability / Re-use Fee for Factory-Built Housing 9

[SIPengineer]

As an outside consulting structural engineer for factory-built tiny home manufacturer who needs stamped drawings to get state approved permits in all 50 states, what kind of liability exposure fee is reasonable, considering the tens of thousands of units they will eventually be selling each year ?

Units will be designed for worst case loading in each state where possible, with location restrictions where loading is higher than the units can handle.

 

[gte447f]

I will be watching this thread with interest to see others' thoughts. Everyone always poses this question with respect to increased liability with increased exposure that comes from many, many re-uses of the design. I agree that there is increased liability, but there are also other legitimate reasons that you should be compensated for multiple re-uses. Primarily, you should simply be compensated for your contribution to the success of the endeavor, regardless of the scale of the endeavor. Meaning, if they sell 1 million of these designs, regardless of any liability concerns, you should be compensated some amount for every single design sold, since you rightly own the design, and the design is an essential part of the success of the endeavor, regardless of scale, meaning regardless of how many are sold.

 

[phamENG]

I would do it the same as any other reuse fee:

Calculate the full cost of designing it assuming there was only one. That's your 100% price. Charge them that for the first one. Following designs would be less. I usually use 50% for the next one - it's mostly the same, but there will invariably be some changes to the design as they work out the kinks and find better/more efficient ways of skinning that particular cat.

After that, each design is worth the profit from the first one. So if my target profit per project is 25%, I charge 25% of the original fee for each reuse.

In your case, it might be worth changing it a little. The last step is still the same, but you need additional compensation for checking the design 50+ times for various combinations of wind, seismic, snow, and possibly even rain or ice loading. So maybe 50% for each state's 'standard set' and then 25% for each reuse.

 

[SIPengineer]

Replying to gte447f : The thing is, it's not my design, it's their design . . I just make sure it can support the required loading and provide structural AutoCAD created drawings that more clearly reflect what is shown in the Solidworks drawings they send to me. Also, any re-use fee on tens of thousands of units per year would have to be less than what it would cost them to hire an in-house engineer to avoid paying me re-use fees.

 

[phamENG]

Also, any re-use fee on tens of thousands of units per year would have to be less than what it would cost them to hire an in-house engineer to avoid paying me re-use fees.

So let them hire an engineer. And then go through the regulatory headaches and hurdles of qualifying for a COA, and a firm license, and E&O insurance, etc. They'll likely find that it does not cost less to hire their own engineer.

The architectural design might belong to them, but the structural design belongs to you. Unless you sign it away, you own the rights to your design.

10s of thousands of units per year? Really? A tiny-home manufacturer?

 

[gte447f]

SIPengineer, like phamENG said, the structural design is yours and you own it. If they want to use it 10,000 times per year, then you should profit from it each and every time.

 

[SIPengineer]

Yes Pham, they already have over 160,000 pre-orders. Units are 19'X19'. They designed almost every detail of every component . . so I can really only say that I "own" my analysis. They've let me know that aren't too keen on the idea of being charged any kind of per unit fee, or on the idea of indemnifying me. Still, I'm considering a per unit fee, but not to exceed a total annual fee of, say $80,000. Too much? Too little ?

 

[phamENG]

They can design it all they want. But what's on your drawings with your seal is yours. Just because they got it right doesn't mean you don't have a claim of ownership over the work you have done and the work product you have created.

At the very least, you should have a conversation with your insurance provider to be sure you're adequately covered. This is where the liability really comes in. A lot of insurance companies aren't keen on allowing unlimited liability scenarios.

 

[TLHS]

Call an insurance company and get a specific policy for this work. Lay out exactly what is happening and let them cost it. Then use that as a baseline cost. This is really different that what most people are talking about when they talk about reuse of designs. The potential quantities make liability the primary consideration. What's fair for the engineering is completely secondary. You also need a lawyer to make sure the company is taking as much liability as possible, with the understanding that if they go out of business or go bankrupt it's going to come back on you.

See if you can pay for insurance upfront for a certain number of units. The normal claims-based insurance will leave you with ongoing liability that you have to reinsure every year without the corresponding cash flow. If you get a problem on a couple of buildings that you can't resolve you may end up with a policy that you can't afford to renew.

 

[gte447f]

160,000 pre-orders? I don't know how much they are going to be selling these tiny homes for, but that is in the billions if not 10's of billions of $$.

 

[SteelPE]

160,000 pre-orders? I don't know how much they are going to be selling these tiny homes for, but that is in the billions if not 10's of billions of $$.

Sounds like there may be a few extra 0's added to the end of the preorder number.

They've let me know that aren't too keen on the idea of being charged any kind of per unit fee, or on the idea of indemnifying me. Still, I'm considering a per unit fee, but not to exceed a total annual fee of, say $80,000. Too much? Too little ?

If the numbers they are stating are correct (which I doubt) then $80,000 is 1/2,000%..... Honestly, give them your fee how you would like it laid out (after a conversation with your insurance provider) and just let it stand. Don't spent too much time on it... and make sure it is favorable towards you (remember, they came to you). If they say no, then tell them good luck.

I would probably run the other direction if someone came to me with a similar idea and similar constraints.

 

[SIPengineer]

SteelPE, The $80K/year is not tied to the 160,000 preorders. Units sell for $60K each, by the way. The 80K annual limit, plus the regular hourly work I do for them, would need to be less than the annual cost of them to pay for an in-house engineer . . that's my thinking.

 

[chris3eb]

You're saying they are going to have 9.6 billion dollars of revenue and you get a maximum of $80k per year?

 

[SIPengineer]

Yes Chris3eb, if I get $80K plus around $40K for my ongoing hourly work, that total should be less than what they would have to pay for a an in-house engineer. Maybe I should just press them to indemmify me ?

 

[Aesur]

@SIPengineer - To be honest it sounds like you don't actually want the great advice others are giving you here and already have it in your mind that you are going to do this for way too cheap. Charging 80k a year with them doing say 10k units a year at a sale value of $600,000,000 and probably a profit of 30 to 90 million (assume 5 to 15% - maybe even more) is just a bad deal for you.

As other have said, ask your insurance what they would charge if you take on that amount of liability every year, I bet you will find a large portion of that 80k will go to the cost of that, then factor in the time it will take you to seal 10k projects a year (assuming you aren't just rubber stamping them - which has ethical concerns because of the potential for them to change something and you didn't notice), maintain your licensing (personal and business) in every state and any other misc costs associated with this endeavor.

I agree with phamENG on the fee arrangement, but would probably tweak it lower based on volume, maybe $350 to $500 reuse fee on the low end, this would cover profit, time to review and seal and any other admin time. Also remember, each state has varying statute of repose and you will need insurance that covers these well after they stop sending work your way, so a portion of the profits on each one of these also goes to future insurance.

Maybe another alternative is setup an arrangement with them that they cover your insurance costs every year and have to pay you a retainer amount up front to cover a tail policy, but I still wouldn't be happy knowing I made someone else 30 to 90 million profit a year and only got 80k of it.

 

[Aesur]

Also be careful of indemnity clauses - they only work if you are willing to pay a lawyer to sue them or your insurance is willing to fight a case, otherwise you will find your insurance wanting to settle and upping your premium. I have seen this happen to a company doing 1000+ projects a year with a very small fee ($125 to $350 max per project) in exchange for them indemnifying the engineer, in the end the client changed a part on the system without notifying the engineer and it was not noticed in the 15 min review (max time allowed on the projects for that small fee) then the piece failed and there was the multi-million dollar lawsuit which the insurance negotiated down to about half a million and settled without fighting because it was going to take years and probably millions in attorney fees to fight it. In the end, that engineering firms insurance skyrocketed for 3 years (I believe this is how long it stays on your record for many insurance companies) and the insurance company got most of their money back and the engineer ate that cost.

 

[dik]

Thanks pham... just revised my pricing to 4 or more item...

-----*****-----
So strange to see the singularity approaching while the entire planet is rapidly turning into a hellscape. -John Coates

-Dik

 

[XR250]

As has been previously stated, 160k preorders sounds like a lot. How are they even going to satisfy that many orders? Sounds a bit fishy. I would also be surprised if an insurance company would cover you - without a ridiculous fee.

They are likely better off hiring an in-house engineer. They could use him for other tasks in his downtime - probably in the assembly line!

Honestly, look at the RV industry during COVID when everyone pretended they wanted to be outdoorsy..
They pumped out waaay too many units with shit quality. I imagine the same would happen here at that volume.

 

[SIPengineer]

Aesur - I do appreciate the advice. I'm just having a hard time believing they would pay me the kind of re-use fees you all have suggested, when they could just hire an in-house engineer for so much less. By the way, they've given me a 100K stock options contract (not signed by them yet) that could be worth millions when they go public. This is in return for the work I've done for them for the last 5 years helping them develop the prototype. I also continue to do hourly work for them and charge them for my my state license renewals. They've been a good client for me and I enjoy working with them. They've offered me a job, but I don't want to move several states away. I'm waiting to hear back from my insurance company about any cost increases after explaining to them my situation. Also, I won't have to seal more than one set of drawings per state, as these are factory-built state permit drawings, which I will charge several thousand dollars for ... with repeat charges when they all have to be resubmitted to keep up with new buildings codes every few years.
If I did have to provide a separate set of stamped drawings for each house, I certainly would charge several hundred dollars per house.

XR250: The quality is very high, I would buy one if I had a place to put it. But, it will be a challenge to work down that pre-order backlog. Currently, they produce about 300 year, but they are ramping up with new automated equipment.

 

[SteelPE]

So presumably you are licensed in every state. I don't know how much of a PITA this is, but I'm sure it isn't that fun or everyone would be. So, you have to keep up with licensing fees and all other associated items to be licensed in each jurisdiction. You plan on sealing the plans once per state which will then be submitted every time someone needs to file a permit. So presumably you will need to keep up your license in every state long after your contract with this company ends? I'm sure they would hate to file a permit only to find out your license has lapsed. I'm sure the Board will come down on you and not your client.

Stock options are great, but who knows how things will shake out in the future. They could be worth a lot, their use as toilet paper might produce better value when all is said and done.

I just find it hard to believe this company is selling almost $10B in product at $60k/item and they refuse to shell out some sort of per use fee for the sealed drawings.