Chapter 4: Insuring Your Engineering, Architecture, or Design Firm
Part 2: Keeping Insurance Rates Low with Risk Management
Be warned: insurance can't solve all your problems, and it definitely can't prevent accidents or lawsuits from happening. Instead, insurance gives you a lifeline when those unpreventable tragedies strike. So in addition to carrying adequate coverage, you also have to build a risk management plan to minimize the chance of accidents, losses, and lawsuits from happening in the first place.
As an added bonus, a solid risk management plan can also keep your insurance rates low. Why? Because every time you file a claim, your premiums may rise.
Read on to learn more about the techniques architects, engineers, and design professionals can use to mitigate risk and prevent costly accidents.
More claims on your insurance policies can increase your premiums.
Take Cost-Saving Preventative Measures
When shopping for an insurance policy, ask your agent if there are any precautions you can take in order to lower your rates. Your agent will be able to suggest some simple steps that could noticeably reduce your premiums. For example, they may recommend…
- Disaster-proofing your workspace. Securing your workspace from potential property damage can potentially reduce your Property Insurance rates. In some cases, simply furnishing your space with a fire extinguisher, smoke detectors, or a sprinkler system will do the trick. Your agent might also suggest modernizing your wiring and plumbing. In some areas, installing storm shutters may result in an insurance discount.
- Locking your doors. Taking steps to prevent theft can cut your Property Insurance costs, too. This might involve installing dead bolts, security systems, or burglar alarms. This route can be a bit pricey, so you should always talk to your insurance agent before making any changes. Not all security systems qualify for a discount. Your insurance policy may require a specific system to grant savings.
- Working with one provider. When you do this, you may be able to bundle certain policies together for a lower rate than you could get if you purchased them separately. For example, a Business Owner's Policy combines your General Liability and Property Insurance policies. Purchasing your policies from the same provider also reduces the likelihood of confusion and gaps in your coverage. This is especially true if you carry an Excess Liability / Umbrella policy. (Of course, if you can get better coverage or lower rates by working with multiple providers, that may make more sense.)
- Choosing the highest deductible you can afford. A deductible is the money you pay toward a claim before you insurance benefits kick in. Generally speaking, the higher the deductible, the lower your premium will be (and vice versa). So if you can afford a higher premium, this option is worth considering. Just don't choose a deductible that will break your bank. If you can't pay your deductible, you can't enjoy insurance benefits, which defeats the point of having coverage!
We'd like to emphasize how important it is to speak with your insurance agent before you make investments in preventative measures. Yes, these precautions will reduce your risk exposures, but that doesn't always translate into insurance discounts. So if you are specifically looking to reduce your premium, talk to an insurance agent first.
Reduce the Likelihood of Lawsuits
Lawsuits run rampant in the architectural, engineering, and design industry. Projects are complex and costly. They often involve many self-interested parties and large sums of money. A lot is at stake, and when people feel cheated, they often turn to the legal system for help.
66% of claims against architects come from clients.
According to "The Road to AEC Project Execution Success," 66 percent of claims made against architects come from their clients. These lawsuits are usually triggered by a project not meeting expectations.
Failed expectations aren't necessarily tied to a mistake in the work. Rather, they are a reflection of a deficit in communication efforts throughout the project. According to "Mitigation of Risk in Construction," a report by McGraw Hill Construction, disputes about "how and when work is done" contribute to more legal claims than "contractual terms and payments."
Below is a chart from the report, which breaks down common causes of claims against those in the construction industry, including A/E firms:
The report notes that 88 percent of A/E firms find "changes in scope of work to be a common cause of disputes." That's a huge number! So how can your small operation avoid them? Here are some ideas:
- Temper your clients' expectations. As a solo practitioner, you have a lot of responsibilities. Make sure that educating your clients is one of them. Design projects are often complex, and many of your clients may not be familiar with how things work. They may not know what's possible and what's impossible. Always try to explain how and why a project must be designed a certain way, and be patient with your clients' lofty expectations.
- Outline specific project goals. As you know, design and construction take quite a bit of time, which can irk clients if they don't understand why things are taking so long. Before you begin a project, draft a detailed outline of specific project goals with your client. This is especially important when you are designing complex undertakings, such as an Energy Star certified building. When your client can look at a document and see all the steps (and red tape!) of the process, it will give them a better understanding of the project's scope, timeline, and potential challenges.
- Always keep your client in the loop. If you run into an issue during a project, contact your client as soon as possible. That way, they won't feel blindsided by a delay or change of direction. It can be tempting to put off giving bad news, especially when you're confident you can make up lost time elsewhere. But your client will appreciate being kept apprised of the situation.
- Kill them with kindness. A client who likes you as a person is far less likely to sue you than one who sees you as the aloof "man behind the curtain" of their design project. Sometimes it can be difficult to be patient, especially when your client communicates unrealistic expectations and insists on changing the plan throughout the design process. But building relationships with your clients can save you time and headaches down the road.
Remember, Professional Liability lawsuits often have little to do with actual errors and more to do with miscommunication. So be sure you keep the doors of communication open and keep records of your correspondences. That way, you can squash claims before they happen.
88% of A/E firms cite scope changes as a common cause of disputes.
Save Money on Your Quarterly Tax Returns
Sole practitioners have different tax obligations than design professionals who are employees at someone else's firm. Because an employer isn't withholding taxes on your behalf, you must file your own quarterly estimated taxes.
You can read more about these estimated taxes by reading the IRS.gov's Estimated Taxes page, but here's the gist:
- The IRS prefers you file taxes in four equal increments.
- You may be penalized if you still own more than $1000 in taxes at the end of the year.
Self-employed design professionals must file quarterly estimated taxes.
Your business's structure will determine which tax forms you need. For example, sole proprietorships and limited liability corporations require different forms.
If you are an employee at a firm and work on separate contract projects on the side, you may be able to pay your taxes without following the quarterly schedule. You can ask your employer to withhold more taxes from your paycheck to cover your entire obligation. Ask a tax professional if this method can work for you.
When you start filing taxes as a self-employed business owner, you'll notice that you seem to pay a higher tax percentage than a salaried employee would. This is because self-employed individuals are required to pay a self-employment tax. This tax covers two obligations:
- Your Social Security tax.
- Your Medicare tax.
When you're an employee, your employer covers half of these taxes. That's why the rate seems so different when you are working for yourself. To learn more, check out the Self-Employment Tax page on the IRS website.
This extra tax can feel burdensome to self-employed professionals, but there are a few ways you can keep your tax obligation down. Your best bet is to hire a licensed tax professional to help you with deductions — at least until you get the hang of it yourself.
In the meantime, here are a few things you can do to get a head start:
- Be organized and scrupulous with your records. Get in the habit of keeping receipts from business transactions and recording them as soon as you get back to the office. You should keep track of your business mileage, too. Even short business errands can count toward a mileage deduction — all those small trips really add up. Be sure to neatly organize your deductions in a spreadsheet so that your tax professional won't have to sift through a shoebox of receipts. The longer it takes them to do their work, the more you can expect to pay for their services.
- Don't sell yourself short. Business deductions are everywhere. You can save yourself a lot of money simply by making yourself aware. Marketing efforts and office space expenses are just a few costs you can write off as deductions. Most expenses that help you run your business can be counted as a deduction, as long as they're within reason and the scope of your state's laws. If you aren't sure whether an expense will "count," don't disregard it. Keep those expenses separate from the ones you are certain about. Bring both records to your tax professional so they can sort things out.
- Save for retirement. Some sole practitioners can receive a Savers Credit by making eligible contributions to a retirement fund. You can learn more about this option by reading the Get Credit for Your Retirement Savings Contributions page on the IRS website.
For a more complete overview of your tax obligations, visit the IRS's Self-Employed Individuals Tax Center.
NEXT: Part 3: When to Update Your Architecture, Engineering, or Design Firm's Business Insurance Policies