There’s a silver lining to the Great Resignation: It spurred a record number of people to start new businesses. According to NBC News, the Census Bureau’s Business Formation Statistics dataset shows a surge in people filing tax paperwork to start new businesses. From January to November 2021, just under 5 million new business applications were submitted, representing an increase of 55% over the same period in 2019.
Running your own business isn’t for everyone, but if you’re curious about how to start an engineering firm, that’s a good sign. You should be an engineer who likes to be the boss, is okay with uncertainty, doesn’t mind constantly hustling for work, and has a passion for both business and engineering. If all of the above applies, you may be the type of person to succeed in starting an engineering enterprise.
Before you begin this adventure, it’s important to understand some basics of how to build a successful foundation for your firm—and how to steer clear of common pitfalls for new businesses. Here are five things to consider when opening your engineering firm:
You may be an expert in your engineering discipline but not know the first thing about creating a business plan. Don’t know how? A number of online resources can point you in the right direction. The guide from the Small Business Administration (SBA) on how to write a business plan is a good place to start.
Creating a business plan forces you to think through the foundations of your company: the services you will provide, what will differentiate your business from other engineering firms, the types of clients you want to work with, how you will attract those clients, and your financial projections. A business plan is an important way to understand what you’re building—and can also be a way to get funding for your start-up.
Figure out what legal structure will be the best fit for you, and register your business with your state. The legal structure has tax and liability consequences, so do your research and choose carefully. You can always change your firm’s legal structure as it grows. You may start out as a Limited Liability Company (LLC) but eventually change your structure to an S-Corp once you have a substantial number of employees. Learn more about business legal structures at the SBA’s legal structure page.
Whether or not you’re a licensed engineer, you need to get professional liability insurance to protect your firm in case a disgruntled client or someone else sues. If you’re licensed, getting sued may affect your license. Even if you’re confident in the quality of your work and believe you won’t face legal action, you still have to get liability insurance to protect your firm from an unpredictable event that could have serious financial consequences. There are insurance companies that specialize in professional liability insurance for engineers. Ask similar engineering firms whom they contract with, or research companies online.
Working remotely has become the norm in today’s world, which lends tremendous flexibility to how you can structure your office environment. The only tools you really need to provide most services are a laptop, the right software, and Wi-Fi. To keep overhead costs low, working from home, a hotel, a friend’s place, or a coffee shop are all viable alternatives to renting office space.
When working remotely, you may sometimes need to meet clients in person. The key is finding a reliable meeting place that will bolster your professional image. Some coffee shops or other venues provide “conference rooms” you can book ahead of time, and some coworking spaces rent out rooms to drop-ins.
You won’t be able to bypass buying the right software for your engineering firm. Plan for this cost as an essential building block for your business to serve clients. If you need other tools for your firm, such as a 3D printer or other prototyping machinery, you may want to join a coworking space that furnishes them. Paying the extra money for a coworking membership gives you hidden benefits like access to other professionals who may provide synergies, such as businesses to partner with or even potential client contacts.
Without marketing, you may not have a sustainable business. Even if you’re lucky enough to start the business with a list of clients onboard, that work may eventually dry up, and you’ll need to market your firm to get new clients.
Understanding your target clientele will help focus your marketing efforts. For example, if you’re a civil engineer targeting infrastructure work, market to governments by getting on their lists of qualified vendors. If you’re an electrical engineer, do business-to-business marketing with companies that design electronics. If you work with the general public, social media marketing may win you clients.
Marketing often involves person-to-person interactions. Engineers are stereotyped as introverts who would rather be home tinkering on their latest projects instead of out meeting people. If that’s true for you, running your own business requires either strengthening your people skills or partnering with someone who enjoys meeting with people. For example, if you’re a structural engineer, attending networking events with people in the construction industry—such as architects, developers, and contractors—would be a great way to meet and secure new clients.
Starting your own engineering business doesn’t just consist of getting clients and doing the work; it also includes billing, bookkeeping, filing taxes, drafting contracts, and running payroll if you have employees. It may be tempting to do everything yourself, but that’s not always the best use of your time. Unless you’re trained as both an accountant and engineer, chances are that retaining a certified accountant would be a better choice than filing your own business taxes. Even if it costs money upfront to hire someone for tasks not in your wheelhouse, it may save money in the long run.
You may eventually have enough work to hire employees. Hiring part-time employees who can help with tasks such as drafting or running calculations is an effective way to begin. The more you can afford to delegate tasks to others, the more it frees you up to do things only you can do, such as envisioning and building your firm into what you want it to be.
The familiar adage “with great power comes great responsibility” couldn’t be truer when it comes to owning your own business. As your own boss, you have the power to choose how much, where, and with whom you work. However, this comes with the great responsibility of paying your bills even when business is slow. If you have employees, the responsibility is even greater, because you have to meet payroll and provide a stable, positive, and professional work environment.
Dealing with uncertainty presents one of the biggest challenges of being your own boss. When you work for someone else, you can rely on a regular paycheck. But when you’re responsible for rustling up business, paychecks become anything but regular. Engineering businesses can be vulnerable to economic downturns, world events, specific sector shifts, and new technologies and innovations that affect business detrimentally. If you’re just starting out with a solo practice, you may become too busy working on current projects to focus on other aspects, like marketing, which could leave you with no new paying work while bills and expenses roll in.
Cash flow is another big challenge. It’s highly recommended that you amass savings—at least a year’s worth of living expenses—before you make the leap into full-time entrepreneurship. The uncertainty of money coming in combined with the certainty of expenses—business or personal—means that having savings to fall back on when it’s a slow billing month can prevent a great deal of stress and give you enough flexibility that you aren’t forced into a corner with creditors, your landlord, or others. When you’re starting out, there will be some months that you can’t pay yourself. That’s where savings can fill the gap.
When you’re starting your own firm and haven’t been involved in the business dealings of companies you’ve worked for, it’s almost impossible to know what to charge. In most circumstances, there are industry standards for what and how to charge. The best way to find out the industry standard fees in your specific engineering discipline is to talk with other engineering firms. If this is not possible, you can always research online.
Some basic ways of charging include hourly, fixed fee, and cost-plus. The first step is to come up with your hourly rate and the hourly rate of any staff or contractors who work for you. Once you have these figures in mind, you can opt to charge a client hourly for the work you perform. There are a variety of apps that keep track of hours worked and can be shared with your client at billing time.
Another common method is charging a fixed fee. There are several ways to determine a fixed sum. You can estimate the number of hours it would take you or members of your team to complete the task; other industry standards include charging per square foot if it’s a construction project or charging a percentage of the ultimate cost of building the product.
Finally, you could charge clients cost-plus. This is an appropriate method to use when you have a good handle on the costs involved in executing, manufacturing, or building the final product. Cost-plus means you charge an extra fee on top of what it costs to build the product. You may be building the product yourself or contracting with someone who is building it. The fee to your client is whatever it will cost you to have the product built plus an extra fee for your expertise, management, and time.
Subi Shah is a Chicago-based writer, maker, and mechanical engineer who started her own engineering firm. “I left my job as a salaried mechanical engineer because I didn’t have as much ownership in my projects as I wanted,” Shah says. “I wanted a career with more accountability and engagement with what I was working on, and I wanted more control of how I was spending my time.”
As a mechanical designer, Shah makes clients’ ideas into physical things, such as an insert for a blender or a mountable light fixture. For ideating, designing, modeling, and prototyping, she accesses 3D printing through a hardware-specific coworking space. “Think about the tools you need and whether you have access to them,” Shah says. “A few upfront investments in time or money can help you out in the long run.”
To make prototypes for clients, Shah has discovered many raw-material suppliers and manufacturers already vetted through her network of makers, which has also helped her find new clients and opportunities. “In my coworking space, I’m surrounded by people with ideas for physical products, so our needs often match up,” Shah says. Networking can happen through coworking, social media, or industry meetups in your area.
She also relies on her network for subcontractors when she can’t complete a project alone due to time constraints or lack of expertise. “If a client wants me to do electrical work in addition to mechanical work, I know I need to subcontract an electrical engineer,” she says. “Fortunately, I know someone; otherwise, it wouldn’t be wise to take on that client.”
Communication is key to successful freelancing. Clients should be kept in the loop, especially regarding any complications or delays, which can occur due to factors outside of your control such as supply-chain issues for a part sourced from overseas. Establishing good relationships with existing clients can also pay it forward for your business. “Some clients will want to hire you again, so before the project is over, start talking about next steps and future projects,” Shah says, noting that to drum up new business, “creating a portfolio online can let prospective clients easily see your engineering consulting firm’s past work.”
To sum it up in Shah’s words: “Freelancing can be great, but it’s definitely not the same as a salaried job. Sometimes, you’ll have a lot of work, sometimes none. It’s just like riding a bike: It’s really hard at first, and then you have to constantly pay attention to your surroundings to succeed.”
This article has been updated. It originally published in August 2015. Subi Shah contributed to this article.
Taz Khatri is a licensed architect and she has her own firm, Taz Khatri Studios. The firm specializes in small multifamily, historic preservation, and small commercial work. Taz is passionate about equity, urban design, and sustainability. She lives and works in Phoenix, AZ.
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