Scaling up from a one man band 7

[NorthCivil]

Any engineers here with experience scaling from a sole practitioner to an office with employees?

I am currently a one man show, and the money is pretty good. The phone is ringing quite a bit, ive had thoughts of hiring a few young guns and scaling things. But at what point does a company become more lucrative than sole practice?

Right now I have very low expenses, in fact a lot of tax breaks from writing off my home office, utilities, car, etc. I can pound out the work and make a great rate, with good margins and good profit. I charge market rates, but with low costs and expenses, it's really lucrative.

If I scale up, I will need an office, likely a part time admin, a couple engineers who I will have to train, oversee, and keep well paid, with a good chance they will move on after ive invested in them. I might have to be less picky about the work i take, in order to feed the machine. The efficiency, quality of work and quality of service will likely drop, at least a little bit.

I recall a company i worked for in my younger years, with a staff of around 12, the owner told me he made no more money running the company than he did when he was practicing solo.

Any input would be appreciated. How much bigger than 1 do you have to grow to make it worth your time?

 

[Ron]

I have been in your position twice. The first time, I ramped up with the typical business model as you described. Ended up with 13 employees but hated the management side of it. Profitability was ok, but not great. Sold the business to my former employer and went back to work for them in the "corporate world". Started out managing a branch office and doing engineering. Again hated the management side. Transferred to fully technical position (Chief Engineer type) and enjoyed that until the corporate world became too oppressive with admin crap.

Started my second business with a different model. I only brought in engineers that I knew and had worked with before. We operate as a consortium under a single corporate umbrella for name recognition. We have an office, but no admin staff. Since Covid, the office has become irrelevant and might stay that way. We all work independently on projects that I usually generate either directly or by reputation. Each consortium member bills at rates I establish and they get a high percentage of the income from that billing. Each of them makes more money than they would working for a salary somewhere. They have the autonomy of self-management and we are only constrained by our client's schedules. Each works as an independent contractor for tax purposes and I provide global professional liability, general liability and worker's comp insurance. They are responsible for their own health insurance.

This model has worked well for 15 years.

 

[phamENG]

Ron - I like that. Sounds like a good model, and particularly suited to the current, general professional work environment.

NorthCivil - I haven't done it, but as a solo guy myself I've at least played through the thought experiment. I'm not completely risk averse, but I don't like taking big ones. My thought is to save up a minimum 50% of the annual cost of the first employee before hiring - preferably a bit more - to give myself a little cushion for some of the training you mention without having to sacrifice too much on work quality. I'd also like to find a partner first. Find somebody else who is either a sole prop/single member or high enough up in another firm to have the clients to bring over. (I already know who, just a matter of convincing them!) Then I'd probably start with a draftsman. Right now I have enough drafting to slow me down but not enough to keep somebody on full time, and I have trouble parting with the cost to a contractor since I have very limited control over the outcome. After the draftsman would be a newly minted PE. That way, we'd have 3 PE's under one roof and could provide adequate mentoring/supervision of an EIT down the road.

Like I said - this is all a thought experiment and is untested. I'm interested in hearing others thoughts as well as I may be looking to go down this road in a few years.

 

[IRstuff]

This has partly to do with billing rates and overhead; at most companies where the management makes more money than an engineer, management isn't doing engineering anymore, for the most part. Personally, I hate managing people, so I've never voluntarily taken any sort of managerial role.

We have a "thing" called the "wrap rate" which is the multiplier against actual salary drawn by the person with the billable hours. In aerospace/defense, it's high, greater than 3x, i.e., a billable hour is 3x the actual salary. Obviously, the rate structure has much to do with overhead, general/administrative, profit, benefits, etc., for any given industry. So, whatever you are billing, the non-salary part of that is what management must live on. In order to remain competitive or provide reasonable value, the billable hour must feed management/profit, i.e., the wrap rate must cover that. Therefore, you need to be either very lean, or run a large stable of engineers with billable hours. So you need to have a skim on each billable hour; let's say it's 5%, i.e., every billable hour gives you 5% additional income.

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[8thStreet]

I started as a solo engineer 5 years ago after being burnt out and underpaid by larger firms. It took about a year before I was overwhelmed with work (we do custom residences and commercial buildings) and I hired a part-time young engineer who basically functioned as a smart drafter. I didn't think about it much - I just need some quick help and part-time made sense.

Over the following years, I hired him full time and an experienced EIT and a recent graduate. At some point, you can only manage so many people and I realized that I was rarely doing engineering. I mainly did client meetings, projects reviews with staff, and big picture engineering for projects.

My general rule of thumb for hiring was to be cash flowing 2x of all monthly costs of the new hire so that if the new hire was totally unproductive I would still have 1x cash flow. Also - I had to make sure we had a stack of work lined up. It is definitely a tricky balancing act to expand, but totally worth it. Also, it doesn't make sense for you to be doing all the low level stuff like simple drafting/engineering and sheet setup - its more cost effective to hand that off to a drafter or low-level engineer. Focus on what you are good at, and outsource the other parts. Start expansion slowly and see how it goes.

The general rule of thumb for business is that the profit margins are very high for small businesses, and the margins decrease as the business and revenue grows. So on a percentage basis, you aren't making the same rate, but on overall gross profit, you are making much more with a large business.

 

[glass99]

I scaled from basically me to me plus two - it's a little bit more money, but I work less and the quality of our work has gotten better in the sense that we can talk about things in the office, and we can be more responsive to clients. In theory it could be a lot more money, but there is a lot of inefficiency with training and management in particular. There is noticeably more BS with things like health insurance with 3 vs 2 even.

 

[EnergyProfessional]

No experience owning a company... but my first thought is that it all depends on hiring the very right people. And for really good people you probably need to offer some path to partnership or ownership to keep them there.
you basically need to fin people that are good enough to be able to get a corporate job, but don't want one. And s you know from being solo, they need to able to do a lot of different things.

 

[glass99]

https://en.wikipedia.org/wiki/Diseconomies_of_scale

- this applies to engineering design

you basically need to find people that are good enough to be able to get a corporate job, but don't want one

Yes, someone who likes variety in their work rather than specialization, and someone allergic to bureaucracy.

 

[Enhineyero]

Hi Ron, I'm curious about your business model. Do each engineer draft their project? How big are your projects (<$10M)?

We all work independently on projects that I usually generate either directly or by reputation

Each works as an independent contractor for tax purposes and I provide global professional liability, general liability and worker's comp insurance

Considering that you generate the project and provide the insurances, I'm assuming you get a percentage of the project fee and the rest goes to the engineer who does the work?

I think your business model is great, why haven't I seen it with other engineering firms?

 

[Ron]

@phamENG...thanks. It has worked well and the associates like it.

@Enhineyero...most of our business is forensic work. We do investigations on the failure of buildings...structural, waterproofing, etc. We also do remediation design once the litigation issues are settled. For these, each engineer does their own design work, including the drawings. I sometimes check designs but all of my associates have over 20 years of experience and have worked with me for that long so I don't need to check much.

Yes...I take a small percentage of the revenue for covering the overhead. That is what makes this model work. Each Engineer makes more than they would make in a salaried position with a traditional firm.

The typical model of an engineering firm is that the billing rate is 3 to 4 times the salary rate. In my model, the numbers are flipped. As an example, if one of the associates has a billing rate of $300 per hour, he/she gets 75-85 percent of that rate, paid only when paid by the client. I hold 15 to 25 percent for overhead and management. Under this model, an engineer can work 50 to 75 percent of the time they would work in a traditional firm and make more money. This means they have more time with their families or other pursuits of their choice. I also contribute the same amount to the overhead from my billings. We all share the risk for unpaid invoices, but those are relatively rare. We do no marketing and our projects are by referral and repeat clients. We are very fortunate in that respect. We try hard to do a good job for each client and we hold steadfast to our premise that we are lead by the data, not the client's perceived need....most respect us for that.

 

[Sparweb]

Ron, how do I "hire" you to be my new boss? And does any of your work leave the ground (intentionally)?

http://www.sparweb.ca

 

[MacGyverS2000]

<chuckle> Yeah, if only all of us were so lucky to be in a similar work situation...

Dan - Owner

http://www.Hi-TecDesigns.com

 

[IRstuff]

Ron's numbers are outstanding; presumably, a big chunk of that is there is no brick&mortar and other infrastructure, which accounts for a sizable portion of most overhead structures.

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[kipfoot]

I've had as many as one other engineer working for me.

The only downside was related to uneven accounts receivable. As a solo engineer, you can deal with the feast/famine nature of the workload, but regular employees get used to being paid on a regular schedule. This is apart from the risk of real economic downturn, and the sickening feeling that you have to let people go. So, a consistent cash flow and some cash in the bank is important before you hire.

The upside was that he was productive and I could bill his time for more than he was paid. There was also a perception from clients that we could handle bigger projects, so I had jobs with chunkier fees. Also, I could take vacation.

 

[alchemon]

OP, to grow organically, in my opinion - you need to have net revenues exceeding 3-4 times your direct labor costs. The multiplier depends on your OH costs and desired profit margins, but the long term trend is somewhere there. I have seen some companies need multipliers of 5-6. Unfortunately, for the employees there (who are often salary) - that means working many "unpaid hours" over 40 - unless you have unusually high billing rates or unusually low labor rates. If you just need someone to answer the phone and do CAD work for you - don't hire a PE. If you need someone to manage clients/projects independently, then hire a senior PE. If you need someone to get down into the weeds and figure out problems for you - hire a Senior Designer or junior/mid level PE.

When you hire a new employee, it is presumable that your multiplier will "go down" until you are able to increase billings.

If you are on the fence at this point - get a contract employee (say 3-6 months) from a staffing agency. If they work out, great - hire them on full-time afterwards. If they don't work out, the most exposure you have is their contractually obligated pay. As others have noted, you need to have a good handle on your cash flow - and need sufficient capital to cover the famine months until the feast months can happen.

 

[Ron]

@SparWeb...LOL! I hope none of my designs go airborne...considering I practice in Florida and we routinely deal with high winds!

@MacgyverS2000....Hey Dan....I thought all Gators worked like this