It’s Your Business to Know Your Sub-Consultants

Most engineers, it’s probably safe to say, will never go into business for themselves. However, design professionals at the management level frequently interact with such independent consultants. For their own protection, therefore, managers of large firms sometimes need to think like independent consultants, particularly to understand the business requirements of the sub-consultants they are contracting with.

Becoming familiar with the basic requirements of an individual or entity offering professional services helps avoid possible contractual, liability and financial problems.

One of the first things to note is that your sub-consultant must comply with an array of statutory items common to all professional firms. The process of starting a new business or relocating a business is regulated by each state to control liability, protect the public and consumers, ensure federal and state taxation, regulate import and export of goods and safeguard other business’ rights. All businesses are subject to these requirements, but engineering firms have some unique issues.

Business 101 revisited

Forming a business to offer engineering services adds its own unique dimension to business registration in a state. Such regulated professions, of course, are required to maintain proper licenses to practice, maintain appropriate professional liability insurance and deal with other policies such as worker’s compensation and general comprehensive liability.

The basic legal structures for all business entities are sole proprietorship, partnership, limited liability company or corporation. Each structure has its advantages and disadvantages depending on the nature of the business, management structure, equity ownership, employment and a host of other factors. The main purpose of these structures is to establish a legal entity apart from the business owners and employees.

In many legal respects, a business entity can be regarded the same as an actual person. It has the right to enter into contracts and hire employees. It must pay taxes and can sue others in court and be sued. At the same time, business operations and liabilities are separated from the actual people who own and run the business. With the exception of sole proprietorship, each structure provides indemnification to each member and employee for acts of the business including acts of negligence. Therefore, a lawsuit brought against the company will not put the personal assets of its members and employees at risk; only the business’ assets are at risk.

For engineers, what’s important to remember is that when employing the services of another consulting entity, you must verify that firm’s legal existence. The individual or firm must be registered at least in its home state, which would normally be the address listed on the company’s letterhead or business cards. Don’t assume that they have done so. The company is required to file with the state. Its status can usually be verified on the Internet, at websites for secretary of state, department of consumer affairs, commerce and economic programs or a similar type of agency. If the firm cannot be found, it is important to ask its principals to provide documentation of its legal status.

In addition, most states require that any foreign business entity—meaning a firm formed in another state or another country—must also register with the state in which the firm will be doing business. For example, a business established in California must also register itself with the state of Michigan if the firm is to contract with a Michigan business.

A look at tax forms

Another important way of identifying a firm’s legal status is tax documents. Any business entity other than a sole proprietorship is required to file IRS Form 8832, “Entity Classification Election,” and apply for an employer identification number (EIN). An EIN is basically a corporate entity’s taxpayer identification number, like an individual’s social security number. For example, a limited liability company (LLC) is taxed as a partnership by the IRS. All partnerships and corporations must have an EIN, which they must list on their corporate federal and state tax returns. For an LLC, the tax form is a 1065, “U.S. Return of Partnership Income.”

Keep in mind that even if an LLC’s only employee is its self-employed managing member, it must have an EIN, which is applied for by filing IRS Form SS-4, “Application for Employer Identification Number.”

Whenever contracting with a sub-consultant, it is always good business practice to request that the company fill out IRS Form W-9, “Request for Taxpayer Identification Number and Certification.” The company must provide its EIN on this form, not the social security number of an individual, unless the party is a sole proprietor.

If this information cannot be provided, then do not contract with the firm. Your sub-consultant could vanish on you, leaving you with little or no recourse. But just as important, if you don’t have a sub-consultant’s EIN, you won’t be able to supply the IRS with a proper 1099-MISC statement reporting the payments made to the firm.

Confirming licensure

I’ve already mentioned that all regulated professionals have requirements to meet to be a legitimate provider of professional services. All professional engineers and architects, for example, must be licensed in the state or states in which they conduct business. In many states, at least two of every three managing members, partners, equity owners or other corporate officers are required to be licensed. This requirement varies from state to state, but the two-thirds rule seems to be the most common and also the most stringent.

But you might need to go beyond just simply confirming your prospective sub-consultant’s licensure. Most state professional boards maintain Internet sites listing the status of licensed professionals. It is always good business practice—and a relatively simple matter—to verify that the licenses of a consulting firm’s members are in good standing. It is also a good idea to require in the contract a stamp impression from each company member to verify their license status.

In addition, you should carefully consider how they are licensed. For example, if you are looking to hire a firm for M/E/P services, but the majority of managing members in the firm have licenses in civil and chemical engineering, then you’ll probably want to reconsider hiring the firm.

Of course, this rule does not apply to contractors offering design-build services—as long as design is not the principle function of the firm’s operation and the design service is a necessary function to perform the construction service. In this case, the employees who are actually in charge of the design need to be licensed and not the corporate officers. However, verification of the status of a contractor involves a whole new set of items.

Checking out insurance

Licensure is, by no means, the only thing that needs to be verified. Another rather important item is insurance—specifically, professional liability, worker’s compensation and general comprehensive insurance policies.

Each state requires that any professional firm maintain a current professional liability insurance policy. These policies are sometimes referred to as “errors and omissions” policies or E&O insurance. The amount of coverage is usually up to the two parties forming the contract, but for engineering firms, $1 million in coverage is typical. Other professions may traditionally carry more coverage.

Your sub-consultants can act negligently and wind up causing you or your client harm. If you want the money to be available to remedy such a situation, then liability insurance is vital. It is always good business practice to write into your contracts with sub-consultants the requirement that they provide a copy of a certificate of liability insurance from their insurance provider.

Even if the sub-consultant you are considering offers “specialty” design services, all of the rules listed above apply. It is especially important to verify all of these items when the prospective firm is small or new. You will want to know if firm managers have done all their homework. Any missing items could potentially void a contract and leave you or your firm with no recourse if the consultant does not perform.

For example, how can you take legal action against a company if it existed in assumed name only and not as an actual legal entity? If you hire an unlicensed person to perform regulated professional services, your firm could be found as liable in breaking the law as the individual or firm you hired. If the firm you are considering hiring was originally formed in a foreign country, your best course of action is to have an attorney verify the corporate status of the firm to ensure it is in compliance with state and federal laws for regulated professional services. In fact, involvement by an experienced attorney is always advisable when contracting with a firm with which you have no prior relationship.

Checklist

I’ve only touched on some basic items. Verification of the fine details by a lawyer is important. However, some of the basic issues to consider can be summed up as follows:

• Is the firm currently registered in its parent state? If so, is it a sole proprietorship, partnership, limited liability company or corporation?

• Has the firm filed annual reports with the state, and are the filings current as of the prior calendar year?

• Does the Better Business Bureau have any complaints on file against the firm?

• Has the firm provided IRS Form W-9, “Request for Taxpayer Identification Number and Certification,” and is its EIN valid?

• Has the firm provided a current certificate of professional liability coverage? If so, is the amount of coverage adequate for your firm?

• If the firm has actual employees and maintains a physical office, has it provided verification of worker’s compensation and general comprehensive liability insurances? You’ll want to be certain the firm won’t file bankruptcy or otherwise fold if an employee sues or if one of your employees is injured in its office.

• Does your contract name an individual with whom the agreement is to be made? It should not. List only the name of the corporate entity, even if it is a sole proprietorship. Including an individual also connects the individual to the contract and places his or her personal assets at risk. The individual names provided should only be the signatures on the contract.

• Does the firm meet state requirements for licensure of corporate officers in its parent state and in other states in which services are rendered?

• Are the majority of the corporate officers of the firm licensed in the field or fields in which actual services will be rendered?

• If the firm in question was originally formed in a foreign country, has the firm complied with all applicable state and federal laws and regulations if it offers regulated professional services such as design of M/E/P systems?

Finally, A Website That’s Good for Business

The Internet has given a whole new meaning to the real-estate slogan, “Location, location, location.” Now, for all businesses—but especially for engineering firms—the right website is crucial. While some firms have found their websites immediately rewarding, others have launched sites only to see them become sinkholes down which time and money disappear. Upkeep on a showroom without visitors proves too costly.

Others have tried low-cost “cookie-cutter” website packages. But these often prove inflexible and give the impression that the business and the website were at odds.

Engineers need to look for a website provider that gives their business the benefit of a virtual showroom—shortening the sales cycle and allowing them to spend time completing projects instead of going out and presenting the company to prospective customers. The right website will give your prospective customers the initial information they need about your business, which areas you specialize in and, most important, a look at some “before and after” photos to make them feel confident enough to ask you to submit a proposal.

Engineering firms also often need the ability to provide photo updates on the status of jobs, both in progress and completed. Website-based photo galleries can be assigned to specific customers and be updated 24/7 by the lead engineer. This action can help to increase customer satisfaction and cut down on time-consuming project updates. Also, online photos leave much less to the imagination, lowering the chances of misunderstandings. Web-based photo galleries can also make long-distance customer relationships easier to maintain, as customers can see the status of projects remotely. Interaction is immediate.

Many large website designer/providers work well for mid-to-large size firms that have the money and time to invest in creating a website with eye-catching graphics designed to get the prospect to click through and spend some time at the website. This is great, but the price tag—which is usually several thousand dollars up front and hundreds more per month to maintain—is a significant barrier to smaller firms. In addition, many of these providers prove inflexible if they are contacted and charge extra every time the user would like to update his website. Again, a larger business that has marketing and IT departments will not see this as a problem, but smaller businesses will find this disparity a deal-breaker.

However, a new breed of website provider features website-design templates that are more flexible than the low-cost services, giving the engineering firm the ability to customize its website. These providers also give users the ability to update their website anytime, from anywhere and without additional charges. Another vital feature gives users the ability to add “virtual tours,” which let a prospective customer get 360-degree views of “before” and “after” shots of their work.

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