Inflation and the Covid-19 pandemic have inevitably impacted the profitability of architecture practices. According to the annual RIBA state of the industry, Business Benchmarking Summary, overall practice revenue was down by 15% in 2021 compared to the 2020 report.
Unsurprisingly, there was nearly a third in reduction of revenue from work on offices, culture and entertainment, and sports and leisure. International business saw a 14% revenue reduction, with larger practices being particularly hard hit.
While these figures are stark and make plain some of the challenges that practices are facing in trying to remain profitable, the picture is actually more complex than it might first appear:
“There has been a downward trend in profits for many practice sizes in recent years, but in 2021 average profits per practice have fallen across most practice sizes. In the 100+ practices, average profits are 1 per cent higher than in 2020, while in the 50-100 practices average profits have grown by 16 per cent. For all other practice sizes, average profits are lower. This continues a longer term downward trend which has seen average profits fall since 2015.” [source: RIBA Business Benchmarking Survey 2021]
So, how can practices respond to short and longer-term challenges to profitability?
Productivity/Resource Planning
There is no standard operating model for a profitable architectural practice, but all successful professional services businesses are dependent on the performance and productivity of fee-earning staff.
When professionals in a practice are working productively, profitability follows. This isn’t just about the performance of the individual. It is underpinned and supported by staff allocation to projects. Tracking time (and costs) spent against each stage’s fee, being able to recover costs on variations and effective new business development will also be critical factors for profitability.
While design expertise and reputation are crucial for success, smaller practices have long been accused of relying too heavily on reputation while neglecting other productivity factors, particularly compared to other professionals.
In brief, this means:
- Focusing on productivity and costing in addition to practice reputation to deliver profitability.
Completeness of time recording and all associated costs
As mentioned above, a critical aspect of productivity in any professional services business is the accurate recording of time spent on projects relative to the fee earned. Architects love to go above and beyond to deliver solutions for their clients – but this extra effort is effectively being funded by your practice.
It’s essential to ensure that all expenses and overheads are accurately recorded. This might include aspects such as support staff who will contribute to ensuring that projects are properly completed, as well as fixed overheads such as rent, insurance, software licences, etc
Without having an accurate picture of the real cost of delivering projects, it’s impossible to work out an accurate break-even rate. Relying too much on estimates and guesswork, particularly if you’re subconsciously or deliberately attempting to reduce costs to make your quote more competitive, can seriously damage your profitability. Knowing the full picture as well as understanding the true cost of running your business will give you an accurate break-even rate and enable you to quote accurately.
How your staff use their time will be another crucial element when it comes to increasing your overall productivity. It’s important to look at how professionals within your practice allocate their time and attention by ensuring that both their fee-earning and non-fee earning work is tracked correctly. This will enable you to assess how effectively staff are spending their time. The key question to ask is: are fee-earning professionals spending too much time on non-income generating administrative and other tasks?
In brief, this means:
- Accurate recording of time spent
- Accurate and upfront quoting based on realistic costs
- Accurate assessment of your break-even cost rate for all staff.
- Measuring the amount of time professionals spend on fee-earning tasks compared to non-fee earning administrative tasks.
Communication and recoverability of cost over-runs
Failure to properly communicate some of the potential costs and over-runs of a project with a client can lead to misunderstandings. If you haven’t been upfront about some factors that can impact the overall cost, it can be much harder to recover those costs from the client.
Misunderstanding is a common occurrence between practices and clients, particularly regarding modifications that the client may request as the project progresses. It is therefore critical to have a detailed and agreed scope of works at the outset of a project. Any requested variations must be properly understood and costed, and these costs are communicated to the client. Make sure that additional time is allocated with a realistic completion date. That extra time should be properly costed.
Good communication skills are essential for success within the profession, so time and attention should be paid to ensuring your team are able to communicate clearly and effectively. It is always better to be upfront about any problems and realistic about additional costs upfront. Failure to do so will impact your overall profitability.
In brief, this means:
- Agreeing a detailed scope of works upfront
- Good external communications between the practice and the client.
- Being realistic and upfront about potential problems and likely additional costs.
Managing actual vs projected costs
Actual costs and projected costs are key components in any business budgeting system. This element is especially important in ensuring the profitability of architecture projects. The cost management process allows you to predict future expenses to reduce the chance of a budget overrun.
Depending on how you price your architecture projects, projected costs will be calculated during the planning phases and will be approved by the client before the work begins. As the project develops and is executed, expenses will need to be accurately documented and tracked.
Once the project is completed, the planned costs can be compared with the actual costs. This will help provide a benchmark for future cost management plans. By building up an extensive body of comparisons, you will be able to make better-informed costings for your future projects. The aim should be to reduce the gap between projected costs and actual costs.
In brief, this means:
- Thorough comparisons between planned and actual costs.
- Drawing on previous cost analysis to inform future project estimates.
Specialise in profitable niches
One of the best ways to increase your profitability and provide firm foundations for the future success of the practice is to establish and develop your own niche. By developing a strong reputation in a specific area of architecture, you can find yourself the first choice when someone is developing a project relevant to your niche.
Developing a niche is not just useful for its potential reputational value. Your niche should be based on the areas of the industry or specific sectors that consistently deliver greater profits for your practice.
Think about your past clients, the size of the company, the industry that they operate in and where they are located. What were they like to work with, and how profitable was the project? This will give you a better understanding of what your ideal client looks like and who you should be targeting in the future.
Finding a niche is important for smaller companies for whom it may not be realistic to cast their net too wide. For example, a smaller firm may only have the resources to specialise in one particular industry area, such as eco-buildings or smaller commercial premises and developments.
The most profitable firms will understand what projects deliver the most significant returns for their practice and will concentrate their efforts on securing and delivering them.
In brief, this means:
- Analysing completed projects by project size, industry and other custom variables to find the type of client and project that was the most profitable.
- Target projects and clients in your most profitable industry sector or architectural niche.
Internal communications
As well as robust, transparent and upfront external communications with clients, strong communications within your organisation are crucial. There should be clear communications throughout the whole project process with key members of staff. They need to understand the entire project pipeline, any issues that might be arising, and the allocation of resources to deliver the project within budget.
In brief, this means:
- Establishing strong communication practices within your organisation.
- Share expected resource budgets (i.e number of hours) allocated to complete each task
Offer additional services
Many profitable architectural practices offer their clients a number of additional services alongside their core activities. These will be related to the projects they work on and may involve working with other professionals to help the client achieve their particular goals with their building. For instance, an architectural practice may work with an energy firm to help embed renewable energy into a building design and construction.
Think about what services your practice could offer on top of your core business that will add value while providing a fuller service to clients. However, it’s important to ensure that you don’t spread yourself too thinly or lose sight of your core niche.
In brief, this means:
- Looking at extra services you could provide that complement with your core business and which clients would value.
Effective resource planning
Fresh Projects Resource Planning Software can simplify and optimise your project planning, helping you to manage staff, time and resources effectively. With thorough planning, you can increase productivity and profitability while providing superior service to your clients.
Why not book a no-obligation 30-minute demonstration today?