How can we produce creative, dynamic, and inspirational architecture with both eyes on the ‘bottom line’? In an A/E practice, what should the rules be for navigating through uncharted economic waters?”

Last year, many firm principals doubled as magicians, managing their firms in such a way that they made bonuses disappear. Some blamed it on this recession we’re in now; others held September 11th responsible for the firm’s poor performance in the last half of the year. Even historically strong firms found themselves asking, “Is it possible to manage A/E projects successfully (and maintain profitability) during a global recession? How can we produce creative, dynamic, and inspirational architecture with both eyes on the ‘bottom line’? In an A/E practice, what should the rules be for navigating through uncharted economic waters?” Let’s look at the facts:

Fact:Many architects and engineers are poor business managers.

Fact:Managing a successful A/E practice is much more complicated than managing a pure “A” (Architecture) practice, mostly due to the multi-discipline nature of the practice.

Fact:The creative, artistic, quality driven practice of architecture, with emphasis on client satisfaction and exploring many functional options, is expensive. Choices and the complexity of thought comprising ‘flexible design alternatives’ are VERY expensive.

Fact:The business of providing design services to the public (or to specific client types) only makes sense if the level of compensation (fee) is sufficient to cover ALL costs and yield more “profit” than the partners could earn with a conventional CD, Treasury or Municipal Bond.

Fact:The business side of providing A/E services is not well understood by practitioners or even taught in Schools of Architecture or Schools of Business.

Fact:The tools for delivering quality design services from Pre-Design through Post-Occupancy are different from the tools needed (and used) to run a profitable business.

In the early 1970s, the American Institute of Architects embarked on an effort known as Cost-Based Compensation Guidelines. After dozens of committee meetings and the usual venting of frustrations, an interesting set of tools evolved. Included among these tools were the architect’s “Phase/Service Matrix” and related A/E specific cost accounting methodologies.

These tools were generally designed to help the “average” non-business oriented architect cope with the trauma of delivering services and getting paid for the time spent solving physical and environmental problems. The matrix was a useful, visual, organizational tool. It helped architects categorize service types and quantify administrative support time. The matrix was an integral part of what became known as Compensation Guidelines for Architectural and Engineering Services. As with most good ideas, the Guidelines were ignored for many years.

Later, the AIA Contract Documents were modified to embrace many of the ideas embedded in the Compensation Guidelines. Still later, organizations like Harper-Schuman (now Deltek) caught on and revised their cost-accounting procedures to offer more specific, automated accounting assistance, tailored to the A/E practice. Then, CNA/Schinnerer and DPIC began offering business-oriented advice and courses for architects and engineers, largely aimed at risk avoidance, but based in the historical data that architects are not always ‘good businesspeople.’

If, then, it is true that architects and engineers are generally good problem solvers, but poor businesspeople, how do good firms survive recessions? How do they survive canceled projects? Severe swings in market share? Mergers? Acquisitions? Ownership Transition? Moreover, how do good firms remain in business, produce quality work, earn good fees, generate profits for shareholders, and stay on the cutting edge of design and technology? Answer: They accept certain fundamental, empirical, tangible, measurable precepts.

To have a chance at being profitable, an A/E firm must:

  • have a business plan that is based on generating a certain ‘minimum profit’;

  • take care to accept only projects of a certain minimum potential profitability;

  • continually balance backlog with projected staffing;

  • maintain high utilization of all billable staff;

  • achieve a prescribed minimum multiplier for every hour devoted to the job;

  • control overhead and operational expenses;

  • minimize the investment necessary to secure future work;

  • collect the fees that are earned in a timely manner;

  • be vigilant in the allocation of manpower and consciously account for support staff time as it is applied to each project.

  • recognize ALL costs associated with producing the work…. reproduction costs and other reimbursable expenses;

  • produce a design product superior to that of competing A/E businesses.

What a novel idea! Produce innovative, lasting, notable architecture and engineering solutions while remaining profitable and “in business” long enough to accept the AIA 25 year award. How often does this happen? When does an A/E practice merit the Firm of the Year Award for “good business practices and profitability?”

When we dissect the way most firms practiced last year, it is likely that poor management and unrecognized opportunities lay at the root of diminished profits. It is probable that the following things occurred (in total or in part):

  • As the New Year got underway, many firms were still closing the books on last year and realizing that earnings did not meet expectations. So, what needs to change this year? What should the New Year’s resolution be for an A/E firm that began last year with high hopes and good profit expectations, but floundered somewhere along the way? After all, they say that “insanity is the practice of doing the same thing, time after time, expecting a different result.”

  • The firm didn’t have a business plan prescribing both revenue earning and profit targets.

  • Upper management relied upon the judgment of Project Managers who were once taught to minimize labor devoted to their projects (this is not a good practice).

  • Project starts were delayed by clients or through protracted contract negotiations.

  • Too many idle staff were retained in anticipation of new work on the horizon.

  • Insufficient attention was devoted to controlling overhead and production expenses.

  • Projects were canceled with little notice…and the total cost of the effort up to the point of cancellation were not recovered.

  • Consultant costs got ‘out of hand’ and invoices from consultants lagged way behind project closeout.

  • Internal cost-accounting systems were slow to indicate that projects were losing money.

  • Short-cuts may have been taken to minimize design and CD efforts, believing that ‘problems can be solved in the field’… the detriment of both quality and time.

  • The idea that ‘profit’ is an hourly and daily occurrence (not just at the end of the project) was ignored.

  • No effort was directed toward shifting true project costs (including clerical time and reproduction) onto the projects. Overhead was ‘way too high.’

  • The firm agreed to perform services and accepted projects for compensation far short of that actually needed to accomplish the job(s).

  • Collection efforts were too slow, and the firm borrowed too much money to float the client’s finances throughout the project.

More attention needs to be paid to insuring profitability and “planning for profits.” Profits are not accidental by-products of a good client-architect relationship. Profits should be considered “the reason” we are in business. In this recession, and in the foreseeable future, more structured project and office management is needed. A measure of success much different from design awards and name recognition needs to embraced by A/E firms. For the past several years the slogan has been “The work is out there.” But, profitable work has been harder to identify and many times harder to deliver. If the recession deepens and impacts projects now in design (which may be canceled), assuring “profit” is tantamount to assuring survival.

A “fully integrated” A/E practice can be profitable while producing notable, quality work. One key to this in a fully integrated A/E practice is the conscious, sometimes relentless, inclusion of engineering disciplines up front, in the early (schematic) stages of design. In this way, engineering ideas are integrated early into the architectural thought process, thus framing or even eliminating certain design alternatives that may not make sense in engineering terms. So, less time is spent in the iterative, trial and error feed-back loop. And, less time is spent frustrating the client with multiple options, some of which just won’t work.

In the classic A/E approach to a large design project, 60% of the fee can be spent achieving a satisfactory, client-endorsed 35% submission. This is often realized in government work. Then, with only 40% of the fee remaining, the M/E/P engineering effort is initiated in tandem with design development and construction document phases. Projects are far more likely to “go south” in the C.D. and Specification phase —with little or no fee left to correct problems and/or perform adequate Q.A./Q.C.

One of the most uncomfortable aspects of the usual “design it first —then, engineer it” model is that the customary engineering response to a schematic architectural solution at the “hand-off” becomes routine (stagnant)…the engineer simply determines…capacity (load), delivery system (piping & duct distribution), and controls (location of thermostat). It is no wonder that technology stagnates and every new building relies on the same old basic systems…VAV or some derivation thereof as the comfort delivery method of choice.

Evolving design theory and the innovative application of new technology can best merge at the front end of the design process. The truly “integrated” firm would approach every major project in this manner and subscribe to a set of “design guidelines” at the initial kick-off meeting to delineate the limits of schematic design exploration. Including engineering disciplines up front and using of design guidelines to provoke early decisions on materials, systems and cost parameters can be remarkably successful. This is a sure way to maintain control over project costs, assure the best thinking up front, and save schematic design time.

Obviously, this is the key to assuring the “planned minimum profit” on each and every job.

One notable impact of the Cost Based Compensation Guidelinesof the early 1970s was that architects and designers were suddenly able to recover the cost of clerical time and administrative support time on most projects (where allowable). According to a Case & Co. survey, just a subtle change like including administrative and clerical time in fee proposals, negotiations and contract clauses caused profitability to climb from 11% to 16% on most jobs because overhead had been reduced and billable project hours adjusted to reflect the “true cost” of labor needed to perform the work. Imagine that…profits increasing by 45%, simply be recovering clerical/administrative time on a project!

Similarly, the notion that reproduction costs can be charged off to the project (and borne by the client) is not a recent revelation…but, largely due to tracking issues, one which has been unstructured or avoided. The recent trend toward establishing FMs (Facility Management Service Centers) in the larger A/E offices is indicative of this. With reproduction on most jobs averaging 5-8% of all project costs….the planned recovery of those costs can significantly improve profits. Why should reproduction of drawings and specs be an overhead cost? Bottom line, they shouldn’t. Why should we give away money to help a client visualize our design solutions? Even if reproduction costs (including internal check-sets) were recovered on a direct cost basis (with no mark-up) our profitability goes up by enormous margins. If the average A/E job produces only 11% profit…..shifting that 5-8% cost from overhead (cost) to reimbursable (revenue earning) can improve profits by 50%. Now, we have doubled our profits for the coming year and found a way to better protect future staff bonuses…just by using common business sense.
It’s crazy to expect that you’ll achieve higher profits this year by doing the same things and practicing the same way as in years past. In the year ahead, stop and look back at last year’s earnings and costs. Then, do things differently.