Profitability for Architects

Profits and profitability for architects

6/23/2022

If work load is adequate but you aren’t making a profit, the cause is easy to find.

I don’t think profitability is well understood. Not among small firm architects. I thought all you needed was plenty of work. Luckily a fellow architect taught me how it really works in his seminar. When I applied that lesson, I found that my billing rates were seriously below breakeven rates. In fact I learned why my results were always disappointing.

It is easy to analyze without an expensive accounting report full of jargon that you may not understand. It turns out that there are just a few things that you need to juggle.

Here are the usual suspects.

You aren’t charging enough.
Your overhead is out of control.
You aren’t spending your time productively in one of two ways. a) spending too much time for the fee, or b) spending too much time on non-project issues.

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You aren’t charging enough
This possibility reveals itself after you have eliminated the other suspects. How do you think your fees compare? If you want to be the low cost solution, you will also need to be the most efficient. Does that sound like you?

Your overhead is out of control
Look at a breakdown of all your expenses. What items are there that make life easier, that act as perks, that aren’t making you more efficient? Another source of excessive overhead is not getting reimbursed for project expenses. When my five person firm looked at this issue, we found over $25,000 of expenses we could bill for. Mileage. Copies. Couriers. Repro costs.

Yes, it can be a pain in the neck to bill for this stuff. On the other hand think of it as profit you can’t be bothered to collect. We sure found a way. And we found that we could mark it up (10-20%) and nobody cared.

Spending too much time for the fee
This usually falls into one of two categories. You can’t let go of design until you have a masterpiece. Or you always find things that cause a re-design. Re-design can have two causes. You caused it. This is almost always due to not having a logical design process. Your client caused it. If you didn’t charge him for the extra time, you have found an unsustainable way of doing business.

Spending too much time on non-project issues
The time you spend on timesheets, breaks, office meetings, AIA, Chamber of Commerce, Rotary, “networking”, might be beneficial. But can you afford it. Your project fees have to carry that load. The percentage of hours devoted to these non-billable activities might be the same for small firms as for big firms, but that is a lot less hours for the small firm.

I turned that advice I learned in the seminar into a spreadsheet called the Financial Model Workbook. After you enter a few numbers for each staff member (or contract worker), plus a profit target and your overhead expenses, you see just where you stand.

Here’s what you can expect from the Financial Model Workbook:

It calculates a number for you that I call the Billing Overhead Factor [BOF]. Low is good. This one number tells you what shape you are in.
It calculates your breakeven billing rates [Cost Rate]. Good to know. Divide your net fee (after deleting consultants) by the Cost Rate and you have the allowable hours for the fee.
It calculates what your billing rates need to be to meet your profit target. How do your actual rates compare?
It shows your average billable ratio for your firm. High is good. It gets harder to be profitable the lower your ratio sinks.
The Financial Model Workbook shows your target revenue, expenses and more per month for reference. Do they look achievable?

All good information. And you can try ‘what ifs’. If you are like me, I needed to make some changes. This tool shows you what will work.

See if the Financial Model Workbook would help you.