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Royalties for consulting engineers 1

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glass99

glass99

Structural
Jun 23, 2010
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Does any of the consultants here use royalties with clients?

There have been some product based opportunities come across my desk over the years, one of which was quite large, and I have not known how to implement a royalty based contract. Do you need to monitor your client for sales?
 
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IRStuff - yes it is often one and done, but there will be times when the client wants you to have some skin in the game. I suspect there are some liability implications too.
 
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yes, for example we talked about designing a glass stair tread for a fabricator a few years ago - it would be configurable within only tight parameters (length and width). He was thinking about selling about ~10,000 per year at ~$200/ea. We would have done calculations, testing, and drawings. I passed on it in part bc I could not figure out my insurance, but I would love to be receiving a ~$2/unit royalty check for a decade or so.
 
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I'd be surprised a client would offer royalties in that type of scenario, unless your design fee was appropriately reduced in anticipation of royalties for x timeframe.
 
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Your insurance people should be able to give you guidance on the insurance liability for such a situation, since that's partly actuarial and partly what they've seen historically. Based on that, you can come up with a PV lump sum that covers the potential liability risk.

$2/unit seems extremely high, given the volume; that's $20k/yr, so is your insurance and technical support for just this product equivalent to $20k/yr?

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! faq731-376 forum1529 Entire Forum list
 
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Its about alignment of incentives. If an engineer is paid a lump sum, their only incentive is to reduce technical risk. If they sell 10% more units bc I made the design nicer, a 1% royalty is a giveaway.
 
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If an engineer is paid a lump sum, their only incentive is to reduce technical risk.
Click to expand...

The converse is that you're suggesting increasing the technical risk, which, presumably, neither your customer nor their users would actually want. "Nicer" isn't necessarily synonymous with risk, per se.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! faq731-376 forum1529 Entire Forum list
 
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glass99 said:
I suspect there are some liability implications too.
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I suspect so as well. I had a client want me to create a design for a temporary welding shelter made from their scaffolding system that would be used by welders all over, in perpetuity. Turns out my insurance doesn't cover anything considered a "product". And I wasn't willing to deal with the hassle and perpetual insurance bump to address that. That said, your $2/unit sounds pretty darn attractive. And two parties can agree to pretty much anything legally if they want it badly enough.

As for policing sales volume, I can see how that might be a delicate thing to accomplish without ruffling feathers. Perhaps, at the outset, you could ask that you're clients accountant sign off on a record of annual sales each year. Frankly, I'm sure what else you would do short of hiding in the bushes and counting delivery trucks.

HELP! I'd like your help with a thread that I was forced to move to the business issues section where it will surely be seen by next to nobody that matters to me:
 
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If an engineer is paid a lump sum, their only incentive is to reduce technical risk.
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No, the incentive to do your best in terms of good, efficient design is the desire to be hired again. If the client believes your design can be improved more than a tiny bit then they'll hire somebody else - happens all the time as consultants/contractors are notoriously lousy engineers. Unless a consultant owned the IP to a potential product, manufacturers would be nuts to offer royalties to a consultant as that ties their product and new IP to that specific consultant. In a nutshell, they cant fire you if your design is or becomes terrible. Even when another company/consultant owns IP a manufacturer needs, its generally considered a terrible business move to hire that company/consultant instead of simply leasing the IP and developing your product independently.
 
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I challenge the seemingly prevalent notion that an ongoing royalty wouldn't stimulate highly efficient design. I absolutely believe that it would. Anybody that's spent more than 5 minutes in structural engineering practice knows that you're effectively:

1) Providing a level of design refinement consistent with what your client is willing to pay in fee and;

2) About what your competitors would be providing given the same fee.

Moreover, human nature just is what it is. Ditto for product development. "Products" always get more attention than prototypes (most every building ever).

HELP! I'd like your help with a thread that I was forced to move to the business issues section where it will surely be seen by next to nobody that matters to me:
 
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If you do a lump sum, you have a well defined scope and a simple deliverable. If you are on a royalty, no scope is necessary - just pull out all the stops to help your client move as many units as possible. Its a matter of creativity and business smarts vs being a human calculator.

Its also possible to be paid a royalty without owning the IP.
 
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If you do a lump sum, you have a well defined scope and a simple deliverable. If you are on a royalty, no scope is necessary - just pull out all the stops to help your client move as many units as possible.
Click to expand...

When expanding an existing product line, sure, the marketing folks often know exactly what they think the customer will buy. IME tho its pretty rare to get a decent scope of work when developing new product lines. Even at mega-corps, the marketing folks usually want the world with no concept of what tradeoffs will be necessary. All they typically know is what they can afford to budget and a vague description of the new product line. Ultimately, you either make them a segment leader with the first product or you get replaced and possibly blacklisted, hence the many adages about choosing your customers wisely.

Regardless, I believe you're significantly overvaluing your engineering vs their profit while underestimating the ease of improvement. Its easy to say "pull out all the stops" yet if the project was successful enough for them not to fire you then you're already going to be deep enough into diminishing returns for the project not to make fiscal sense to continue until the market changes significantly - years.

I challenge the seemingly prevalent notion that an ongoing royalty wouldn't stimulate highly efficient design. I absolutely believe that it would. Anybody that's spent more than 5 minutes in structural engineering practice knows....
Click to expand...

This isn't the civil world, its product design - DFMA mostly. In the CE sense of structural engineering you're dealing with very limited (mostly) local competition, your "product" is essentially a prototype with almost no opportunity for refinement or cost reduction, your safety factors are simply massive, and consequently most business models center around being the proverbial jack of all trades. In product development we don't have those luxuries nor is that a very sustainable business model.
 
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It has to make economic sense to the customer, so typically, that would only be the case if you were to offer a lower, fixed-price up-front in trade for the future royalties. The net present and future cost has to be commensurate with your competitors that might only have a present cost.

If everyone is playing fairly, that can work out, but the customer can stiff you pretty badly, since it's fixed-price at the get-go, and they can scope creep to squeeze you. Then, they can simply not market your design at all to stiff you of the royalties.

TTFN (ta ta for now)
I can do absolutely anything. I'm an expert! faq731-376 forum1529 Entire Forum list
 
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@IRstuff: A royalty would of course entail a lower or even zero initial fee from the consultant. I think this fact alone explains why royalties are uncommon - consultants don't know how to project sales of the clients. Our own fears however, might be irrational.
 
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My dad's business was heavily IP-driven and thus royalty-dependent. What a glorious pain in the arse. No matter how well you deliver, the customer will insist they aren't doing anything with your work.
 
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