Profit Pitfalls of A/E Firms
Updated: Apr 19, 2020
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.
Due to the inherently creative nature of architecture or engineering (A/E) work, it can be difficult to estimate time or labor for one or several parts of a project. To make things more difficult, plan vs. actual is sometimes not tracked during the project because of a lack of adequate tools, project management skills, or, frankly, interest in doing so. If you don’t plan, schedule, and measure progress it’s difficult to generate consistent, predictable project results.
Set Up for Success
Whose responsibility is it within your firm to examine potential project risk? What could cause the team to blow the budget and burn through the project’s profits? Does this project involve a particularly demanding client or a compressed time frame? How about new or unfamiliar project delivery methods? Some projects are set up to lose money before they start because the risk is too great to overcome. Be sure to evaluate the risks for each project and set up project managers for profitable delivery.
The Fine Print
In the A/E training process, business classes regarding contract law are virtually non-existent. This is where many potentially great projects run into trouble. Very few A/E professionals have the expertise to properly evaluate contracts. Those that do have these skills rarely share the relevant details of that contract with the project team. Issues such as deliverables, schedules, reviews, etc. should be spelled out clearly in a good contract. Improved skills and communication could lead to increased profitability as well as fewer change orders (and happier clients).
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Time is Money
Many financial challenges begin because firms simply don’t discuss money with their project managers or teams. It seems, for example, there are plenty of project managers out there that do not see the importance of billing for services delivered in a timely fashion. Not to mention the fact that it’s hard to get many client’s to pay on time in ideal circumstances. These invoices pile up and firms end up with a shocking amount of money in accounts receivable (AR).
Project teams must also be trained to recognize work that is out of scope and work with project managers to identify when to issue change orders. To be clear, this is not about “nickel and diming” your clients. However, there are situations where clients ask for substantially more than what is defined in the contract and firms end up giving this work away for free!
In either case, firms can end up paying interest on the money they have not charged for or received. This results in firms effectively financing their client’s projects and providing interest-free loans. Sounds like a bad deal.
How many hours every month does your firm need to bill to keep the lights on? What about meeting the firm’s profitability or growth goals? How many hours does each employee need to bill in order to justify their cost to the firm? Most if not all architects and engineers begin in the profession for love of the work. However, it’s also critical to recognize there is a business aspect to delivering this work and understand the associated costs. Everyone at an A/E firm needs to know the answers to these questions. It is critical that firms, from the CEO to project managers to designers understand profitability and break-even calculations.
These challenges are common across the A/E industry. Discuss amongst your leadership team, invest in processes and tools, and meet with your peers to identify solutions. Your firm will see profitability and client satisfaction increase significantly as a result.
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