@Ozzy needs your wisdom on business stuff

ozzy

Lesson one:

I have been working on some design/drawings for a customer's project.  Now customer says he has secured enough funding to build a prototype of the design.

What does @ozzy charge for such services?

Though I would prefer a flat package price, there are far too many unknowns in this project to do that and I would probably lose my ass to do it that way, so I think that's not an option


This is the option I am thinking of presenting:
a.  Customer provides/purchases all of the materials and purchased components,
b.  Ozzy will provide the labor and design/consulting brain to put it all together into something that works.  I will charge $X/hour with a commitment from me of at least Y hours per week, where Y is somewhere between 10-20 hours.  Since Ozzy already works full time, need to set some upper limits on hours to keep things reasonable.

This way covers me in a few ways (I think):  
  1.  I am not out for the materials or labor if customer wants to change the design, add stuff, or such
  2.  If customer runs out of money and cannot proceed further, then he just collects his parts and we go our separate ways.
  3.  Basically, if the customer's demands become unreasonable, then he pays for his unreasonableness via my increased hours on the project
  4.  No sales tax issues, as all my billing is for services
  5.  Ozzy's business bank account is rather thin and could not buy much anything in advance of payment.

This leads to the next question - How much per hour?  
In my day job, I make $Z per hour as an employee.  To take home the same hourly rate from this project would be suitable. 

So.. I need $Z + taxes + overhead + ??  in order to take home the same.  

What am I missing/not considering/etc?

ETA - what is a reasonable % for taxes, overhead etc.

Tennee

I assume he's going to 1099 you.   Are you incorporated or individual contractor?   You'll have to estimate what the additional income does to your bracket if individual.   If a biz, that could change depending on how you structure things. 

I would absolutely draw up a contract here and lay out very specifically what is, and what is not, and what contingencies, and liability, etc.  Don't go in without expectations clearly defined. 

ozzy

I am LLC, and so is he.  The income just goes on my regular taxes via schedule C since I am a single member LLC.  That will stay the same for this year.

I will make up a contract, as I have worked for people where the scope of the project went far off the rails, and other adventures..  

RebuildingHusband

Simple time and materials contract. Not even materials, really. Whatever your hourly pay is, triple it. My consulting firm paid me about $35-40/hr and billed me at $120-135/hr to cover all of my compensation, taxes, overhead, profits, etc. 

Angeline

Who owns the design you are creating? 

ozzy

generalzod said:

How does customer know he's secured enough funding if you haven't talked turkey?  Are you being shopped?

Along the same lines, do you know if you have competition?  If so, what their price and value proposition is?

I believe he will have enough.  I highly doubt I am being shopped or have a competitor at this point, but anything is possible.  There are a lot of processes going into this project - machining, welding, fiberglass, electrical wiring.  I'm thinking too many processes for most typical machine shops to take an interest in the project

  

RebuildingHusband said:

Simple time and materials contract. Not even materials, really. Whatever your hourly pay is, triple it. My consulting firm paid me about $35-40/hr and billed me at $120-135/hr to cover all of my compensation, taxes, overhead, profits, etc. 

Triple seems like a lot - though I am no expert in pricing.  I do need figure more exactly my tax rate.   Though..isn't part of that triple, the profit for the employer?  Since I am the employer, part of that could be left out?  I'll follow up with some #s soon.

Chief_TC said:

Is this something he plans to mass produce and sell after he has a working prototype or is it personal use? One and done type deal.

He has some grand plans, which are potentially possible.  He wants to take the prototype and build a kickstarter type program.  He may want a second prototype with some different features, hard to say for sure.  There could be some potential for me to be involved in future product manufacturing, but nothing is certain there.  

He may also want to offer me some equity in his company, which sounds nice, but at the moment I need cash asap.  Farther down the road...maybe?  I don't know..working and running one business seems like too much already, might not be any mental room left for someone else's business too.

Angeline

No you don't eliminate your profit, or there's no reason to do the project. One third is for taxes, the other third is for overhead, which regardless of whether you think is really a cost or not because you're designing and the work goes on in your head, trust me, it is. 

Crashaxe

Whatever you end up charging, get a retainer up front, and bill every two weeks or monthly. Also, have a clause that he doesn't get the materials, parts, or completed item unless and until you are paid in full.

You don't want to end up screwed over if you get stiffed on a bill.

I'm sure your wife knows of what I speak. You are providing knowledge and talent much as she does.

Also, like a plumber, people are much more willing to pay the money when their basement is flooded. Once the pipes have been fixed and the basement is dry, they start finding all sorts of rationalizations as to why they shouldn't pay.

RebuildingHusband

@Angeline has it. Don't cut the rate. I always thought the price for my time was absurd but clients paid it all day, every day. So there was clearly a reason for it. I moved to industry and I get paid a ton more but still less than they would pay a consultant to do the same work. 

You really don't want to cut your margins. Figure out what works for you and covers all of your numbers. Make sure you're getting paid for your labor time AND there's a profit line as well. Those are not mutually exclusive things. 

frillyfun

The 1/3 taxes, 1/3 overhead, 1/3 profit sounds just about right...you may pay less in taxes, but they are higher when you're self-employed.

How long do you anticipate this project will take to complete?  What are the deliverables?  I'd set a financial goal and then name your price based on that. 

If it's work for hire stuff you're only making the money one time so you have to charge enough to cover your overhead until new work comes in.  

You also need to think about what opportunities you might be missing out on while you're doing this project.

Blackwulf

Typically most professional type labor is 3-4x salary hourly rate for people like accountants and attorneys.  I would setup up a contract where they reimburse 100% for any materials used since you are manufacturing/fabricating.  I would then charge for my outside work time at the very least 3x/hour of what your current job is.  You still have overhead, and you have to pay the guy who does the work (you), and then you get to profit (you again).  The only way I would do less per hour is if they were going to pay you 2X your current salary plus equity.  

As a business owner you have to pay yourself first.  The working model for most successful solo professionals is that they can actually make a decent living at 1000 billable hours a year, because they are spending 1200+hours marketing tracking down business.  

Since you are cash poor definitely get a retainer up front.  You are not in a position to bank roll anyone's pet projects.  

frillyfun

It would seem that he'd be checking around for quotes from more than one person if he's a capable business owner.

You said he has some real pie-in-the-sky ideas, and it doesn't seem like he's nailed down the spec.  Is he a loon who's going to drive you crazy with endless revisions, and then offer you a cut of the company (who's only asset is the product you just designed, but will need $10,000 worth of patent attorney work), or a dream catcher he made himself instead of payment?

It sounds like you have an employee mentality- work, get paid, lather rinse repeat.   It's different when you're self-employed. Check out Rich Dad, Poor Dad.  It gives you a good look into the mindset of a business owner.  It will help you get your bearings.

Crashaxe

@ozzy What are you doing about insurance? Since you are running this through your LLC, you do have a business property casualty policy in place, right? Also, you will want liability insurance as well. Have yourself listed as an insured on your business liability policy as well, not just the business. Make sure you have Occurrence coverage and not a Claims Made liability policy. 

See if you can get the customer to indemnify and hold you harmless in the agreement, and try to have him list you as an additional insured on his policy. He might well want the same from you. Do not rely on the customer's insurance however. Have your own. 

Make sure that you have enough casualty coverage now to cover the materials plus your structure and tools, and bear in mind that you will likely need more casualty coverage as the prototype gets built and value is added.

If you do end up ordering the materials, make sure that you truly do have off-premises coverage for the materials if you are paying the freight. It isn't always written that way in a business policy. If you are paying the freight costs, the product belongs to you and is your responsibility to insure once it leaves the seller's dock and gets loaded onto the truck.

Make sure that you have the insurance cost factored into your quote to the customer.

Angeline

Angeline said:

Who owns the design you are creating? 

ozzy

Angeline said:

Who owns the design you are creating? 

Angeline said:

Angeline said:

Who owns the design you are creating? 

The product is his idea, his concept.  I am creating the details to bring it into the real world from his napkin type sketches, for which he is paying me.  

ETA I know I didn't answer the question, because I am not sure if he owns it, or if the law would view it as a joint venture.  It is a point of debate at the ozzy house

mrsozzy

My view is that Ozzy is contributing to bringing the product to market, so he should be compensated for that above and beyond the hourly rate should the product become successful. He does not want to be a partner with this client. I know very little about corporate law. But I think a contract which states that they are not partners, and that provides for some sort of royalty payment if the product becomes successful, may be appropriate.

Angeline

The reason I ask is that I have been involved with some form of design/drafting for most of my adult life both as an employee and as a self employed independent contractor, and the general understanding is that the company hiring you owns the concept and any ideas that working on the concept produces. You have to have a very clear audit trail of independent work done on the concept outside and separate from work done for a boss or a client, or already be a partner, to be able to successfully claim it as your own.

So, assumptions that it will mean shared ownership, or even a signed contract saying so, could be ignored in favor of existing intellectual property law, sort of like a pre-nup. Having this nailed down ahead of time is essential.

Tennee

@mrsozzy said:  "But I think a contract which states that they are not partners, and that provides for some sort of royalty payment if the product becomes successful"

and ^^^^^^ to @Angeline‌ above, reread this.

Abso-friggin-loutely.   Don't mess with a piece of the Co., then you have Owners headaches.  If he has his shit together, he can run it.  You're providing design input - get a piece of this.  I'd want an ownership piece of both the design AND a % of gross sales.  Both.  If you weren't involved in design, then the design piece wouldn't be appropriate,  but it sounds do to me like you're heavily a part of this - fleshing out 'details' from a napkin sketch is heavily involved in product design and development to me.  If this is something y'all seek a patent/TM on, owning a piece of this aspect is valuable - if y'all sell it to MegaCo. Inc. later, you'll be positioned for that royalty piece too.

Don't sell yourself short as to your involvement in product development and owning a piece of the design.  The real money lies there and in sales % s.

The_Dude

You charge as much as the market will bear.  3x sounds like a good starting point.

seriously

Tennee while I agree that's where the real money may be if it's successful, I would never give a stake in the product.  We have a large design and manufacturing component to our business.  The idea sounds like it came from the client.  All my sub contracts include the clauses the require all intellectual property including that developed by the designer, engineer and prototyped belong to me.  I can't imagine the scenario when I would give that up.

seriously

Ozzy what is your time worth.  If he is supplying materials and you don't need to add any other special capabilities, it's all about your time.  Consider your own opportunity cost, and figure it from there.