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It is Challenging to Run an Engineering Firm

Updated: Feb 8, 2022

If you are interested in the business side of engineering firms, you'll most definitely want to check out the following article on Architizer by Lior Schnabel, a leader on the business side of the A/E Industry.

While the first paragraph of the article paints a dire picture of an industry heading to commoditization, Mr. Schnabel provides a path to relevancy for engineering firms in this crowded market. The points range from core competencies that all firms should have a degree of expertise in, to customer service, and also creativity. The creativity, or innovative solutions, comes from your senior and principal engineers applying concepts learned through prior project experience to new client problems. The goal being that the firm swoops in, does great work, and solves the client’s issue while saving them money.

These high-dollar activities will help retain clients and get the firm recognized but won’t necessarily help the bottom line. You’re paying a premium for that career knowledge at the senior levels. Project profit can be quickly burned through missed schedules, poor estimating and budgeting, or even staff allocation issues.

Mr. Schnabel brings up other instances that once considered, may give firms an “Oh no” moment. His example on the effects of downsizing staff while maintaining a fixed overhead illustrates the perils of fixed cost allocation.

Monitoring projects can give management warning signs of a project heading south. A good PM can flag these and correct the project. Metrics can provide insight into the nature of the overruns:

  • Your labor rate is too high. Did you estimate a junior engineer for specification work, but due to staff availability, your chief engineer is doing them? Again?

  • Your schedule is slipping and budgets are going over. Did you miss the estimate, uncover additional work that should be a change order, or are you providing that “Cadillac” product for the client with the “Yugo” budget?

What’s the key to increased profitability for an engineering firm? Heeding the advice of Mr. Schnabel will go far to illuminate the issues so you can correct them. What about those firms that find themselves competing primarily in the commoditized engineering space? These can be great projects but just know going in that you are competing on price. Points #4 and #5 in Mr. Schnabel’s article are “Firm Staff Allocation” and “Keeping to Objectives and Budgets”. This is cost control and is paramount for competitively bid projects.

Cost control and flexibility are your greatest assets for these projects. In the example above, if staffing limitations dictate that your chief engineer is editing specs for a project instead of a junior engineer, you are providing value that the client is not paying for, and you are not being compensated for. Two options come to mind. Hire a junior engineer and have the work to keep them busy. Or subcontract this work out to a more efficient entity. The execution of this scope is not what the client will remember, but it is a necessary component of the overall deliverable. Be flexible and match your resources with the value of the activity they are performing. Critical activities that have high visibility are what makes or breaks your firm, so have your senior staff focus on them.

A good estimate sets up a project’s budget and informs on schedule durations. If you missed the estimate, you’re already behind on the project and the best you can do is play catch up. This typically results in pulling resources from another well-performing project to get back on schedule. Now you’re likely to have two mediocre-performing projects that are moving towards unprofitability. Reallocation of staff involves spin-up time and a loss of efficiency on the new project and their previous project. This is readily apparent in construction. If you want to ruin productivity, reassign crews in the middle of them working on a task.

Commoditization isn’t the death of the engineering industry. High barriers to entry necessitated by the requirement to safeguard the public mean these jobs will be around for a while and stay on the upper end of the pay scale. Succeeding in this competitive market requires either moving to a niche market or being a leader in controlling your costs. Business as usual doesn’t cut it anymore. Adopting ideas and best practices from other markets can make life easier and more profitable.

Many companies rely on outside consultants and technical staff. Software engineers have a long history of freelance work. When your most important tools are knowledge, a computer, and some software, working for yourself is a lucrative option. Our industry has a few more roadblocks around responsible charges, liability, and public safety than software. These aren’t deal-breakers, it just requires due diligence.

Outsourcing and freelancing aren’t dirty words and high-quality domestic options exist. This can make subcontracting to a single-person LLC, with the appropriate insurance, a sound strategy. shingle is working to connect engineering firms that have an immediate need for engineering assistance with a network of independent engineering consultants. This workforce can help your firm through those work peaks or help you staff up to get a project back on schedule without impacting your other projects. Foster flexibility and be a leader in cost control. Now come check out what we’re up to.

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