Price model for engineering office 1

[JerinG]

So, the two of us are running a mechanical engineering office for machine design. We are located in Europe. After almost 10 years on the market we arrived to the next step in defining how or business will work.

Or we go stay hourly rate and try to lift the rate every so much time, which is a challenge and we fight for the hours we worked where someone thinks we didn't. We have a strong wish to move away from hourly rate charge if we want to continue in this business, so that it will be somewhat satisfactory to do and live from it.

Or we go on a value based price approach (% of success, etc.), which is quite unknown in engineering field, based on the data I recieved through what I have seen in last 10 years.
We are doing a lot of reasearch about this and yes in other fields this value based approach is quite very much defined. From what we researched it comes down to the basics of measurability what was improved. And that is very hard to do in machine design segment of mechanical engineering. We improve a machine so that in the end is more simple design, easier to manufacture, less maintenance, but because of all the features it becomes more expensive than it used to be. And also it is hard to measure by price, because of inflation which is also usually doing problems in long term price evaluations, among other things.

Does anyone have any good recommendations where to look about this for our field? Or maybe some valuable experience would be also welcome. Take it as a brainstorming topic...

 

[phamENG]

I admit I have nothing to do with machine design, and I'm not in Europe. Before starting a structural engineering business (before even going to school for civil/structural engineering), I did spend several years in machine operation and maintenance. I'll offer my thoughts and you can feel free to take them or leave them.

In my current business, I do a hybrid of the two with a preference for value based. The 'industry standard' is about 10% of the total design fee for a building (split between the architect, the mechanical engineer, electrical engineer, plumbing designer, structural engineer, etc.). That is typically about 6% of the total estimated construction cost for the building. So I get about 0.6% of the estimated construction cost for my part in the design (though I do adjust it for more complex designs). This works great for new buildings that cost at least US$750,000. Anything smaller, or for work on older buildings, that percentage starts to get very small with respect to fixed project costs and I switch to an hourly rate. I also use hourly for forensic work, where I figure out why there's a problem or a failure in a building's structure. Those are very difficult to assign a value to upfront.

Regarding tracking value in your field, those are all problems that can be overcome. Simple design and easier to manufacture should lower production cost. Less maintenance often increases it due to higher quality materials or more complex designs. But in those cases, you can look at life cycle costs. If you eliminate a PM or cut its periodicity from quarterly to annually, you can assign a price to that PM and determine a savings over the design life. Subtract from that the upfront production cost increase and you have your value add. With this, you have to use present value calculations to ensure it's an 'apples to apples' comparison. How you model present value would be a matter of negotiation between you and the client to be sure you both agree on inflation predictions, etc.

 

[LuK13]

I used to work as part of a design team where the team members had to log our time spent vs. the budgeted hours.

Every now and then some manager would be trying to cut the budgeted hours. When presented with something along the line of "this will take 6 months and require 6 people" it is easy for someone that is not involved in the work to abstractly state that there is excess in that schedule and budget. We are talking about 3 man years of labor after all. It is not a big stretch of the imagination for someone unfamiliar with the process to think that you should be able to cut the schedule for 5 months, or complete the work with 90% of the budgeted hours.

A few smart managers had insisted that the schedule and budget be broken into many many small activities. It is much harder to claim that X task should be done in 7 hours instead of 8. You can defend the budget and point out that this task typically reflects producing 12 drawings and 8 hours is already pushing it.

Now I bill my time directly to the client. I track my time with an app on my phone, and I get pretty detailed with the level of tracking. I don't submit an invoice for 20 hours, rather I submit an invoice with 10 to 20 line items that total to 20 hours. Don't think we really spent an hour on the phone? Here is a screen shot of my call logs. Don't think it took that long on site? Here is my first and last photograph with time stamps and an explanation for any unexpected delays.

I don't know how you track and bill time right now, but if you stay hourly I would look at increasing detail in your billing to make disputes harder.

Then there are the customers that always complain about the bill. Some of them get billed at 110% my hourly rate, a PitA fee if you will.

If the customer is bad enough I am in a place now where I just fire them. Its not worth my time to get nickeled and dimed, then spend unpaid hours chasing money, to be underpaid at the end of the day. This should be the end goal, to reach a point where your existence is not dependent on customers that do not value your time.

 

[CWB1]

I suggest reviewing business basics. There's three general types of contracts:
1. Firm Fixed-Price - The customer's risk is fixed, they pay the same regardless how much/little you spend/profit. This type of contract has the highest profit potential but also the potential for you to lose money.
2. Time & Material - Your risk is fixed bc you're paid an hourly rate and the cost of materials is also covered, you'll always have a small profit.
3. Cost+(profit) - A hybrid of the first two, you're paid for your time and materials + a guaranteed profit which is somewhere between FFP and T&M.

IME engineering projects are typically one of the first two. If the project's scope (most) is well-defined FFP generally is your best choice. If the scope isnt well-defined then T&M is a good choice.

 

[Euler07]

I my opinion charging hourly is a big mistake!! Charging hourly is a tradition that no longer applies to the current technology (computing) and it will only hurt you. In the world of computing then automation using computing is one of the most important aspects of the company. Automation is free money!!

Take the following example:
- It takes you 100 hours to complete a task. You charge 100 hours * X $/hour. You then automate part of the process using computing (Excel, SMath, API interface with FEA software) and it now only takes you 50 hours.
- The company that charges hourly just lost 50 hours worth of income. Automation is a detriment and the company will not care about automation or increasing efficiency of calculation.
- The company that charges based on the finished product just doubled profit. They will always focus on automation and efficiency.

If you charge hourly then there is no benefit to automation or increasing efficiency. This is especially important if you are a business owner (the employees don't care as much since they still earn based on hourly income). Think like a business owner, not like an employee!

I always charge what the market can accept. Keep increasing your fee until you get the best $/time ratio. eg. If you double your fee and now lose twice as many bids then you just doubled your time profit and earn the same amount for half the work.

Hourly charge is only applicable if you want to find out the lowest charge you can go. It is not good for anything other than the lowest charge.

 

[phamENG]

Euler07 - that's why it's important to update your hourly rate at a regular interval to reflect such advancements. When I started my business, my hourly rate was quite low - but it took me a long time to do anything because I hadn't built up my set of tools. Now that many of them are in place, my hourly rate is over 30% higher.

I'm with CWB1 on this - a hybrid approach selecting the model that best fits the project/client in question is the best way to go.

 

[JerinG]

Huh, thanks for good answers. I need to study them a bit and get back with answers if I will have them.

One more question. How are your experiences regarding selling products as an engineering office, that turns some money while not working? Don't get me wrong, not trying to sell mist or anything, but to invest time in the beginning and then put something out that can make some side profit to lighten more dry periods of work or to take some time off more easily. I think that basis of engineering office is knowledge how to do things that we do and that is hard to get to these days and I think a lot of people are interested in that. Everything what you described in your posts is still just I work - I get paid and so on.

 

[IRstuff]

Side gigs are a distraction, I think, particularly if you're thinking about doing a YouTube channel. There are tons of videos already, and the good ones require a fair dinkum of work.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert!

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[phamENG]

Selling some tangible item will probably be very dependent on what kind of thing you can make and sell. For me, it would be a no. At best, I could team up with an architectural designer and provide a 'standard' framing plan for their houses they sell online for a few hundred bucks. The problem with that...to make it worth the liability exposure for me (since the unlicensed designer really doesn't have any) my 'stock plan' price would still be a few thousand dollars for most houses. Nobody would buy that.

And then you'd have to support that item...so what do you do when you have a bunch of service calls on whatever you're selling while your engineering is overloaded and you're swamped with work?

 

[CWB1]

Its not uncommon, do whatever brings in profit and interests you. A former employer opened a major consultancy after years as a parts manufacturer, which rapidly dwarfed the parts business. Another designed and prototyped equipment then leased the designs to manufacturers. Several buddies work for a consultancy that has software tools on the market. Its also not uncommon for engineering firms to have "unrelated" sister-businesses like being landlord to other businesses, offering prototyping services, etc. My only advice in this regard is to legally limit your liability to prevent a lawsuit against one business fatally impacting the others. Not sure how that works in Europe but stateside that generally means having a good attorney and multiple business entities like LLCs.

As to passive income, others will disagree but IMO that's a myth. Every business requires work whether you're doing low-level design or managing people, and even if you grow enough to hire executives to run a large business you'll be working to babysit those execs. There's pros and cons to both hiring employees and not hiring, to each their own opinion.

 

[Enable]

In terms of repeat designs that turn a consistent profit with minimal work I think you would have to find a specific niche, and it would likely have to be local in nature so you could provide support as phamENG suggested. Maybe in mechanical it might be an easier thing to do - I have no idea - but in structural that would be a difficult go. Because even if you find that niche, the support aspect would probably be quite time consuming.

The closest thing I have to that is standard shoring details. When I opened the engineering division (to get away from dependency on engineers lol) I spent some time developing standard shoring configurations for various conditions. Through-slab/soffit/ledge beam/whatever for all types of garages and buildings (1 story, 2 story, etc). Now I can pump out a typical shoring design in an hour or so and the rate is $1500 (CND) with a site visit. So pretty easy, low-stress stuff. But I have to be there for A) the site visit and B) if they need site specific details such as superstructure repairs or lateral shoring design, I have to be there quickly to address it and it is always time consuming.

Good luck and hope it goes well!