Fee Structures and Productivity Output

Greg Wines , 6 November 2014

How do we improve practice profitability? Job-by-job, day-by-day. Greg Wines reports on the ACA – Qld/NT’s November event, where the discussion focussed on the critical role of leadership. 

Andrew Geddes spoke recently at an ACA – Qld/NT event on the topic of Fee Structures and Productivity Output. Supporting presentations were made by Peter Caune, managing director of Ashburner Francis, and Robert Wesener, managing director of Fulton Trotter Architects. These three individuals, with three very different backgrounds, then participated in a Q and A-style session, which provided insight into the workings of a typical architectural practice and an engineering practice. 

In a preamble to the Q and A session, Geddes gave a brief presentation of statistical data relating to income and profit, gathered from more than 100 architectural practices. This data was used as the framework to discuss what differentiates the top profit-earning architectural practices from others across all practice types, from very small to very large, and how a practice can improve profitability.

Geddes argued that, in order to maximize the profitability, practice directors must understand key elements about their business finances. They should also constantly update and maintain this knowledge in order to inform themselves about the financial health of the practice and to provide them with the tools necessary to make sensible, educated decisions regarding the fees on future projects and capabilities moving forward.

Ignoring the factors that contribute to a practice’s poor performance on projects is endemic in our profession. Too often we attribute our lack of profitability to poorly behaved clients, extended scope of work or market conditions. Geddes argues that, while these factors may be present on projects, architects should always be in a position to make an informed decision about undertaking the work, rather than rushing headlong into the minefield in which we have no control. He further argues that directors of architectural practices should be educators of their clients as to the value of the services architects provide. This critical to addressing situations where a client is reluctant to engage our services because of a perceived lack of value.

In order to undertake this role, we must first understand our production capacity as a practice. Understand the billable business hours that the practice can reasonably expect in a financial year and overlay this with your project proposals to determine a more accurate benchmark for profit. Understand your job yields. This means understanding your production capacity and determining the profitability of a project based upon the actual cost of the project against the income and avoiding under-recoveries on projects.

Under-recoveries are those elements of the practice that help to lower the profitability of the practice. This includes false project hours or recording fewer hours than are actually undertaken to complete the project. Past project performance  data is often used to benchmark and forecast future projects fee structures, but, more often than not, the figures we rely on are underestimations of the productive hours required. This results in projects being less profitable than anticipated or even unprofitable. In turn, increased production hours lower the moral and productivity of staff.

The financial health of an architectural practice has many facets and it is only when the directors of the practice educate themselves with regard to the financial workings of their own practice and the strengths of each of the team members can they really begin to understand their practice's benchmarks and profit targets.  Job-by-job and day-by-day the practice will begin to improve profitability.

Greg Wines is an architect at BVN. The ACA – Qld/NT event Fee Structures and Productivity Output was held at the United Services Club, Brisbane, on 5 Novembr, 2014. 

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