We Need to Talk about Money
Peter Raisbeck provides a snappy outline of the ten profit drivers of small architectural practice.
The ACA is here to help – to complement Peter’s text, we link to ACA resources and advice to help with the issues identified.
Profit can be a dirty word in architecture, but without it we can’t run practices that do great work and operate ethically.
Many practices struggle to be profitable – most architects are not taught how to run a business in architecture school, and it can be hard to pick up good skills on the job. The American Institute of Architects’ 2016 Firm Survey reports that 9.7% of American firms were not profitable in 2015. In the same year, 21.5% were very profitable with profits above 20% of revenue, and 27.6% had profits between 10% and 20%. However, 41.2% – everyone else – had profits of less than 10% of revenue.
In Sydney the other week, I mentioned this to another MBA graduate who was managing a large firm. It was the usual architects-with-MBAs conversation, bemoaning the financial knowledge of architects. This person suggested that there would only be a “few firms” in Sydney that were making a profit of more than 10%, or even 5%. If that’s all you are doing, then you might be better off putting your money in the bank or buying some shares that will give you a 5–6% dividend.
The following is for you – the under-10% architects – for the architects wanting to get out of the doldrums of low-margin profits. There is no one silver bullet for making your small practice, or even large practice, more profitable. Unfortunately, managing a practice is about getting a whole range of little things correct to make it profitable.
1. Don’t guess or make up your charge out rates
Don’t guess it or make it up. I am thinking maybe there are still people who actually don’t bother to work out charge out rates. Your charge out rate has to cover your own salaries, superannuation and all overheads.
ACA: Use the Architects Time/Cost Calculation Guide to understand the true cost of undertaking a project, and the appropriate charge out rate.
2. Charge for everything (and I mean everything)
Don’t give anything away for free. Not your Intellectual Property, not your time and not anything else. Think like a lawyer and charge your clients for copying, printing, travel and especially your EXTRA time. Charge for EXTRA time expended on a project as a result of client backtracking, indecision, planning or other stuff-ups outside your control.
ACA: Once again, the Architects Time/Cost Calculation Guide is here to help you.
3. Fix (or actually have) your office systems
Ever get the feeling you are spending your life trying to find bits of information, no matter the format or the storage method? The essential bit is being able to find information quickly and efficiently. Having in place databases, filing structures and systems that make workflows quicker is important given that your time is the biggest cost in a practice.
ACA: Check out the result of the Business Systems Survey and read some of the excellent articles on managing your practice for profitability.
4. Negotiate: Say no and be willing to walk away
Don’t take on a job at a low price because you need the work. What’s the point of doing a job at such a low fee that you are either making a loss or you cannot pay your staff to do it? That’s like you are actually paying the clients to let you do the job.
ACA: Read Ian Motley’s series of articles on negotiation tactics, how to recognise them and how to respond.
5. Be vigilant about cash flow
Sadly, this can be almost a full-time job and requires constant vigilance. Get a bookkeeper. Cash flow is volatile. If you think architectural practice is about a steady stream of cash or revenue coming in, you are very wrong. You need to manage the volatility of erratic and chaotic cash flows. Use the dreaded Excel sheet.
Figure out when your bills or expenses are coming in and when you will get paid. Try and understand the concepts of Free Cash Flow and Economic Value Added. Managing your cash flow means you will not crash and burn and always be lurching from crisis to crisis because you have no money for stuff. There is great advice and techniques about cash flow management for small practices at Panfilo.
6. Look after the talent
Don’t underpay your staff. That can be illegal. Don’t discriminate. Don’t treat your staff like shit. You will reap what you sow. It takes a lot of time and money to employ new staff. Don’t yell at them, don’t give them conflicting messages or information. Manage staff in a timely manner. Recognise if you are employing less experienced people who are cheaper to hire, then please help them to be more experienced.
This is a huge subject, and it goes without saying that the better you can mentor, manage and treat your staff the more profitable you will be. Take the time to be with them and provide them with everything they need to get things done for you. Managing and empowering your staff so they can do the boring stuff means more time for you to design.
ACA: We have a huge amount of material to help. At a minimum, familiarise yourself with the Architects Award and your legal obligations as an employer. Use the ACA Salary Calculator, and other resources on salaries. We also have many articles on retaining great staff, managing performance and generally building great teams. (The Parlour Guides to Equitable Practice are another useful non-ACA resource.)
7. Manage your portfolio of projects
Don’t try and design everything. Spend design time on the projects that matter to you. Decide which projects are trash-for-cash. Don’t waste your time on these to get them done. For every five projects in an office, one will be great, one will be a nightmare and three will bring in the dollars.
8. Have a competitive strategy
Having a strategy means you know what you are doing and what it is you will design. Don’t waste time designing things that don’t matter.
Every small practice in Australia does housing of some sort. Every architect says they are into sustainability. How are you going to market yourself so that you are seen to be different? How is your practice going to deliver its services to clients in a way that makes them want to come back one day in the future?
ACA: Read Lindy Johnson’s article on marketing and branding for architectural practices.
9. Research
Do some research or design research (maybe the odd competition or speculative project) that will build design knowledge in your firm. Work on it when the drudgery of everything else gets to you. Build expertise in something you are passionate about and this will help you differentiate yourself and win work.
ACA: Read Peter Raisbeck’s own articles on research in practice.
10. Prioritise to build capability
One thing at a time. Do you have an operational plan? A plan that helps you to prioritise the next three to six months? Do you have projects in the office that will make you more productive? Projects that build capability. Like sorting out the material samples, reviewing the marketing stuff, getting some new software?
ACA: Read Robert Peake on strategic planning and Charles Justin on ten steps for building a successful business.
Finally: Andy and Philip
For those of us who drank the architecture Kool-Aid when we were young architecture students, the future seemed rosy. Imbued with the Kool-Aid toxin I was convinced that I could make a go of it. I would live the jet-setting architecture lifestyle and hang out in the art galleries in NYC with the New York 5, Nico, Andy W, Lou and the Velvets, and go to a loft dinner with Fischerspooner and Laurie Anderson. We were spoonfed this stuff and these days the star-architect’s dream seems embodied in Bjarke, Rem and Schoomie.
The more efficient and profitable your firm is, the more time you will have for design. In a strange way, design is actually all about the money. I am definitely sure Andy Warhol (and this most subversive of architects) would agree with this proposition as well.
Dr Peter Raisbeck is a senior lecturer in architectural practice at the Melbourne School of Design, University of Melbourne. He has had over 20 years of professional experience as an employee and contractor in architecture and project management, and has an MBA in finance. Peter’s research interests focus on the points of convergence between global finance, construction management and architectural design and practice. He believes that architects must grow their profession by understanding that research, practice and theory are inextricably linked.
This article was first published on Peter’s blog Peter Raisbeck: surviving the design studio. It is republished with permission. We thank Peter for the opportunity to add ACA resources.