Fundamentals - How an Architectural Firm Works
The Financial Model of an Architect’s Office is a well-kept secret. I have never seen it mentioned anywhere. But there are several things that need to be in balance to get positive financial results. The resources available from the AIA are only useful if you already have an MBA-like understanding of finances.
A Financial Model entails more than “Income minus Expenses should be a positive number.” Negative numbers equal poison. You can’t survive much poison.
I have to mention Page Highfill here. He is the architect who told me about the
financial model that architects need to know about.
Architectural financial management has two components -
bookkeeping and accounting.
Having my own firm gave me the opportunity to make lots of mistakes;
and I took advantage of nearly every one of them.
It is simple math and there is no way around it.
If you do a good job of Construction Administration,
you, the architect, will lose money.
The Initial Four Architectural Fee Types In MyCorbu
Three things are needed to be profitable. Of course I am referring to the time after you have secured a commission to design a project and also a reasonable fee to do the work.
MyCorbu just got closer to the vision of offering a real solution to the small firm’s need for architectural bookkeeping. All that’s missing is an invoicing solution. (That’s next.)
Architectural Bookkeeping has come to MyCorbu BOOKS, the renamed, paid version of the MyCorbu timekeeping app.
Small firms don’t need accounting.
Your accountant doesn’t agree with me.
He’s wrong unless your firm has over 20 members.
The problem with accounting is that it requires brain-surgery-precision for a task that doesn’t much matter. When you stop to think about the time, effort, and aggravation that accounting requires; and what benefit you receive in return; something is fundamentally wrong. Basically you can’t afford to do accounting until you are large enough and complex enough to afford a bookkeeping employee.
I know this because my six-person firm used accounting for most of our existence and got almost no benefit from the tens of thousands of dollars per year that we spent on accounting. Why did we do it?
Ignorance. I thought I had to. I mistook AIA publications as applying to me. They don't. They apply to much larger firms than I ever had.
About 93% of architectural firms are smaller than 20 people. They can't afford accounting. They can only afford bookkeeping.
So what is the difference?
For over 20 years I had the benefit of having Project Financial Status calculated for me by our (pricey) accounting software after each month was ‘posted’. You could choose from two methods. Method A was automatic but gave useless results. Method B required you to input an overhead factor to allocate overhead per hour of time charged to the project. This method gave consistent results and the results were accurate as long as your overhead factor was up to date.
You can see how to calculate an overhead factor here.
MyCorbu provides the same Project Financial Status as a pricey accounting system. One difference is that MyCorbu does it daily rather than monthly.
I have always found that one of the key parts of getting a grip on the firm's finances is to have a good idea where the money goes. You might not need all the line items in the budget template here, we didn't; but it is helpful to start with all the possibilities and narrow things down from there.
Reimbursable Expenses are like boomerangs.
They are supposed to return to you like a boomerang.
Are your boomerangs returning larger, smaller, the same size, or not at all?
Determining your Billing Overhead Factor [BOF] can be an eye-opening exercise.
I learned this technique from Paige Highfill, an architect, who was teaching other architects how computers can be used in architecture even before CAD came along. When I tried out the calculation, I was shocked to find that we were losing $15 per hour on every hour we billed! I suggest that you avoid that situation.
Profit planning wasn’t a concept I was familiar with. I distinctly remember our first profit and not knowing what to do with it. I didn't have a plan. I didn't even know I needed one. That’s probably one of the best problems to have. I don’t remember what I decided to do, but I know that was the start of many efforts to come to grips with profit planning in case the miracle happened again. I can’t claim to be an expert on the topic of ’Profit Planning’, but here are my thoughts.
Whenever the economy tanks, I get really interested in cash flow. It's a habit that I try to hang onto when things are going well, too, because you can run out of money any time. But there is something about impending doom that gets your attention. Most of the guidance you can find on cash flow is geared to 'small businesses', less than 5,000 employees! This isn't very helpful.
In a nutshell cash flow is predicting your cash-basis profit or loss. It is the nature of predictions to be wrong almost all the time. So a cash flow projection isn't reality, but you want to get close enough that there aren't any devastating surprises.
This simple spreadsheet below is my attempt to get a view of the income side of the cash flow projection. The idea is to quickly allocate your fee for a project over time so you can compare it to the other ingredient - an expense projection.
Whether you have arrived at a fee by a wild guess or a fee schedule you want some kind of corroboration.
One option, if you keep good records, is to compare this project to a similar project. Was the fee adequate on that other one? Usually the two projects are dissimilar in some way.
Another way of checking the 'rightness' of an architectural fee is to evaluate its 'rightness' when viewed as a design budget.
This option involves doing an evaluation. It is fairly easy to 'spread out' the fee over the design phases to see how adequate the fee actually is.
I don’t know what it is about accounting. It is really boring. And yet I am repeatedly drawn to the challenge of finding a system that works for architects.
This past week I revisited two services that I hadn’t looked at for over five years - LessAccounting and FreeAgent. I have already put LessAccounting aside for the time being. You would probably need a better timekeeping system than LessAccounting’s app, LessTimeSpent. And other aspects just weren’t falling into place.
FreeAgent on the other hand has me digging in.
My Interview With Business Of Architecture / Enoch Sears
A guy who knew me from my Corbu adventure mentioned me to Enoch Sears. Enoch has a website called The Business Of Architecture. Part of what Enoch offers is a podcast that interviews people in the architecture industry. He invited me to be interviewed. I said, 'Yes'. And here we are.
The interview is broken into two parts below.
During my career we saw a wide range of projects. They ranged from really small and simple to really big (for us) and complicated. On the small end of the spectrum was a two-car garage addition to the side of a house. On the opposite end of the spectrum was a new high school. I will show you how the five fee tables of a fee schedule can span that kind of range. Let's take a closer look at the five tables that make up the fee schedule.
My firm had in-house payroll for 30 years. I thought it was great. Pay period ends. The next day everyone had their paychecks by 11 AM.
It wasn't until the last recession had us on the ropes, and, simultaneously, our accounting software provider wanted $12,000 for their new program that replaced the old program that they had decided to abandon that we challenged what we were doing.
The chicken or the egg
If you specialize in one project type, your past experiences give you a solid basis for determining fees. But what do you do until you have past experiences to draw on? When you don't have a comparable project to use for gauging the right fee, a fee schedule gives you a way to arrive at an appropriate fee for your project.
Even where you have a similar project, the size or some other aspect of the new project might be significantly different.
During my career we used a true accounting package designed for architects. You would think that everything worked great. You would be wrong. When it came to checking on the status of a project's budget, you rarely got an answer in the time frame that you were expecting.
Why wasn't a Project Status readily available?
The point is that getting a timely project status was a lot of work to keep up with.
I am happy to report that bookkeeping solutions don't require all of that.
Here's all you do...
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