Metrics for Running a Profitable A/E Firm
About the author: Don Archibeque is a Project Executive with Planifi, bringing more than 25 years of experience in construction and A/E (architecture and engineering) Project Management, as well as associated professional managerial services.
As an Architecture or Engineering (A/E) firm, your focus is typically something like creating amazing buildings, environments, and solutions for your clients. It can be difficult to justify energy spent on the bigger picture of the business. However, effectively running the business is critical to the continued ability of your firm to deliver design solutions. Implement a streamlined process and a few basic performance measures to track performance month-over-month. This will keep projects on track and help you identify issues before they become catastrophes.
Key Performance Indicators (KPIs) are simple metrics that you can easily track and align to across your teams and disciplines. Use these metrics to track trends and identify disciplines or skills that require improvement.
Tracking profitability at both the project and firm-wide level helps Architecture and Engineering (A/E) firms maintain sustainable project- and business-management practices. Profit is the measurement of gross income minus expenses. Some firms believe that this profitability should not be shared with project teams or designers. We see it differently. There is nothing wrong with the company aligning their project teams to a profitability target. In fact, developing these skills with designers helps them understand their role within the project while building financial literacy for aspiring project managers.
Project team members need regular evaluations, so they understand how their performance is affecting the project’s performance and company performance overall. Are they completing their assigned work within the allotted time? If not, why? Can coaching address the situation? Errors and omissions lead to RFIs, Change Orders, or overworked projects. In any case, this could lead to frustrated clients or unprofitable projects. Conduct a root cause analysis to discover “why” and use this as a learning opportunity to improve project delivery in the future.
Track project profitability with real-time actuals from Deltek – Visual Planning
It is critical for firms to accurately calculate and apply overhead to their project pricing. This number includes things like rent for office space, software, health care, and insurance costs. It also includes hours for operations staff and training time. All of these things are critical to running a successful business and must be priced into projects to maintain profitability.
Accounts Receivable/ Work in Progress (AR/WiP)
Collecting on-time payment for services delivered is a challenge for every A/E firm and every accounting department. Allowing payment to stretch to 90 or 120 days is like providing a free loan to your clients and puts a cash crunch on the firm. In order to get a handle on and improve this problem, start with the simple calculations below.
Start by determining your firm’s “annual average accounts receivable,” Total the dollar value of accounts receivable at the end of each of the past 12 months and divide by 12. Next, calculate “aged accounts receivable” (the average number of days that it takes for you to receive payment from the invoice date). For example, if you have an annual average accounts receivable of $125,000 per month and annual net operating revenue of $1,000,000, then your aged accounts receivable is 125,000 ÷ (1,000,000 ÷ 365), which is equal to 45.6 days.
It seems like every firm we talk to has a slightly different definition of backlog. However, it all boils down to: How much future work does your firm have? Backlog is a constantly moving data point as clients are invoiced and new projects are added to the firm’s backlog. Do you have enough work to meet the firm’s utilization target? Are people overbooked and the firm should hire? Are people underutilized and the firm needs to sell? These are critical questions to ask for an A/E firm to be profitable and sustainable.
Profit, Overhead, AR/WIP, and Backlog. These metrics are just a starting point and there are likely other KPIs your firm uses to track performance. Regardless of which metrics your firm uses, consistency, training, and accountability are critical to overall success. Make sure everyone on the team understand the numbers and tracks to them as a measure of individual, team, and firm-wide performance.
Planifi’s Visual Planning tools help remove the administrative burden of tracking and calculating these numbers on an ongoing basis. Become proactive and improve your business with live project plans and actuals in an easy-to-use interface.
Improve profitability and utilization with Visual Planning – schedule a call today!