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A/E Firms – One of the most complicated businesses to run – Seven steps that will help us overcome this complexity

November 30, 2023

Insight 2
Architectural and Engineering Firms are leading and planning projects worth hundreds of millions of dollars. Their professional services affect the quality and success of each one of those projects.

You would think that this type of business is supposed to make a lot of money, but that’s not always the case. Some A/E firms have a reasonable profit margin, but why too many A/E firms are not as profitable as they should be, and some are even really struggling?

After working with 750 A/E firms around the world in the last 20 years, I can say that there are many reasons why. One of the main reasons is that A/E is a very competitive market. There are a lot of A/E firms and in many cases, it’s difficult for the client to identify and understand the difference in the quality of these firms. Once a client can’t tell the difference, the choice is based on price, and in this case, it will be hard to be profitable. Therefore, you must distinguish your firm from the other firms. It can be various aspects: design, service, obtaining approvals and permits, accelerated schedule, controlling cost of construction, or higher value in sales for the client. You need to think about why a client would agree to pay more for hiring your services and not your competitor’s services.

Of course, this is not just a marketing issue. First, you need to be professional and provide brilliant design work. My point is that this is not enough.

There are more reasons why A/E firms are not profitable enough, but the main reason that I want to address is financial management.

Financial Management in an industry that is characterized by uncertainty.

Every A/E firm works on dozens, sometimes hundreds, of projects. Each project has its own complexity and schedule. Uncertainty is what makes everything complicated. The complexity of each project depends on many different variables. In a lot of these cases, the complexity can be recognized only while you’re in the midst of the project. It can be a professional complexity, it can be the decision-making process of the client, it can be the integration of other consultants, etc. There could be a business conflict between the client and the A/E. The A/E cost is recognized in hours. In order to protect the firm from a loss, the A/E will want to bill on an hourly basis. The client, on the other hand, needs to have a design budget. Therefore, the client will want to have a fixed price (or hourly with a cap). Usually, the client wins…

So, the A/E firm needs to estimate how many hours/staff is needed to complete the project. Because of the uncertainty, this is not easy to do. Anyhow, it’s very important to review your initial estimate and check how accurate it is. From my experience, there are significant differences between the A/E’s estimate to the actual hours that were spent on the project. Check for yourself – what is the percentage of profitable projects in your business?

A/E Firms – One of the most complicated businesses to run – Seven steps that will help us overcome this complexity

Even if you can estimate the exact number of hours/staff on a certain project, it doesn’t mean that you are going to be profitable. There are a lot of variables that affect your hourly cost. Let’s say for example that when you started a project, your firm had 50 professional employees. Now due to unfortunate circumstances, you downsized to 40 employees. The consequence of that downsize is that your overhead went up by 25%. Did you take that into consideration?

So, how can we manage dozens or hundreds of projects with all of this uncertainty?
Well, it’s not easy, but there are some things you can do. The key is to realize that you’re managing a business that is changing every day and you need to have a real-time decision-making process based on real-time data.

  • Pricing – Use your experience. It is not just about market rates – learn about your own business and try to understand how many hours you spent on similar projects.

  • Monitor your projects on a real time basis – Monitor your projects’ profitability adjust your staff according to the latest developments on each project and recognize changes and additional services on a real-time basis. Projections – You need to have an accurate projection for all of the projects in the firm, and you need to review it on an ongoing basis.

  • Firm Staff Allocation – You need to allocate your staff according to the projections.

  • Working with objectives and budgets– Monitor your firm according to financial and efficiency objectives and make your decisions according to the performance and projections.

  • Process – The firm needs a financial process to support financial management. This project needs to be pushed forward and this needs to slow down, the billing process, change order process, collection process, etc.

  • Focus – Micromanagement can be as bad as no management. With a lot of projects and staff, it is easy to get lost in micromanagement. In order to be efficient, you need to be focused and spend your management efforts on the things that make a difference and help you meet your financial objectives.

Finally, Architecture and Engineering firms are one of the most complicated businesses to manage. You need a high-level person that understands both the design process and the financial management process, and who will be in charge of your financial performance. The good news is that firms that adjusted their management process according to those guidelines had a substantial improvement in their efficiency and profit.
Don’t be the lumberjack who doesn’t have enough time to sharpen his axe.

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