Architectural Economics

It is simple math and there is no way around it.

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The economics of an architect's office are fairly simple. Like every other business you need more money coming in than going out. Here's how you can tell if that is going to happen.

Add up the money you are paying per month to actually produce the work that you are getting paid for. This will be primarily salaries, but more particularly the portion of the salary paying for productive work as opposed to office tasks. This is your project expense.

Now add up all the money you are spending per month to run the office, everything, including project-related expenses. The amount you calculated above is included. This is your total expense. 

Divide the total expense by the project expense. You want the resulting number to be about 3. The lower the number the more easily you can be profitable. The higher the number the harder it will be to be profitable. 

What this is telling you is how much you have to charge for each hour you work on a project to cover all your expenses. The higher the number you got, the more you have to charge. At some point no one will pay what you need to charge. 

This is simple math and there is no way around it. 

Let's say you are a sole propriator who wants to make $100,000 a year after expenses. Let's also say you will be 70% billable; the other 30% will be devoted to marketing, and other business activities. If the number you calculated is 4, then you have to bill out at $285/hr. If you calculated a 2, then you have to bill out at $143 an hour. 

If market rates in your area are $175/hr, there is a real problem with having calculated a 4. On the other hand if you calculated a 2, you can charge less than your colleagues, and maybe get more work. Or you can charge the market rate and put some money away for a rainy day, replacing equipment, or bonuses. 

How do you reduce the number you calculated? Here are the things you can do:

• Reduce your overall expenses by eliminating all the things and expenses that aren't necessary. 
• Eliminate non-billable stuff you spend your time on.

Keep in mind that this discussion about profitability depends upon keeping the pipeline full of work and being effective in the execution of your work. Rework and poor procedures will undermine the economics of any organization.

The Article Architects Financial Model takes this description of finances  farther.
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You might benefit from the Financial Model Workbook