Dear Reader,
As an architect, you probably have a strong creative instinct, to design buildings and other constructions, to express your personality in your work.
Have you thought about your architecture firm as your work of art?
Well, we may not help you with your creative urge, but we can help you with the technical part of designing a great business. In the following text, we will present you with 15 essential metrics for architecture firms, which will help you manage your business more easily.
So sit back, enjoy our text and we hope we can help you run your architecture firm more efficiently.
1. Total Revenue
Famous American businesswoman, Estee Lauder, co-founder of The Estee Lauder Companies Inc., once said:
‘’ I have never worked a day in my life without selling. If I believe in something, I sell it, and I sell it hard.’’
As a manager of your architecture firm, you probably worked your whole life to get into such a position. You studied architecture, dreamed of becoming an architect one day, succeeding in that, then becoming a good employee and then a good project manager.
Now, it is a different game: you need to focus on developing your architecture firm, educating your staff, and most importantly: to do sales. You need to sell the work, as well as knowledge and passion, of yours and your colleagues to others. You are responsible for the architecture firm’s income statement, beginning with total revenue.
2. YoY Revenue Growth Rate
It is very important to look at trends, i.e. to see how your revenue compares to the previous year. You should calculate the annual rate (YoY – Year Over – Year) using the following formula:
It is not anything new to say that it is preferable for YoY Revenue Growth Rate to be positive. However, the growth must be profitable (it must lead to higher profit) and sustainable – you need to set up a good infrastructure for the growth of your architecture firm.
3. Revenue Per Project
Since your architecture firm is a project-oriented firm, you need to track your sales per project:
There is not a single answer to whether Revenue Per Project should be higher or lower. If the number is too high, your sales are dependent on a small number of projects, and losing some of the projects, or not finding good replacements (new projects) after they are done, can significantly affect your revenue stream. However, if the number is too low, it may be a signal that your architecture firm is doing too many projects and your employees may lose focus.
4. Project Gross Profit
You know how much sales you make from each project. But, what about profit? Do you know how much profit each of your projects makes?
The first thing you would need to do is to calculate the Gross Profit of each project, using the following formula:
Why do we subtract project salary costs and costs of external consultants from project revenue to get gross profit? Let us get one step behind. When you look at an income statement of a manufacturing company, gross profit is sales of goods minus costs of goods sold. But, what about service firms, like your architecture firm, since you are not selling goods? Well, you are selling hours of work of yours and your employees to your clients, as well as hours of your subcontractors (external consultants). Therefore, project gross profit is project sales minus salary costs of employees engaged on a project and costs of subcontractors (external consultants).
But what if one or several employees do not work only on one project, but work on several projects simultaneously? You need software that would enable you automated employee and project time tracking for architecture firms.
5. Project Gross Profit Margin
In the previous point, we calculated Project Gross Profit as an absolute measure (in currency). Now, we go on the relative measure (in percentage):
Comparing absolute units of project profit may lead to wrong conclusions since the size of projects (in terms of revenue) can differ a lot, but profit margins are much better for comparison.
6. Project EBIT
EBIT (Earnings Before Income and Taxes) is a very important Income statement position since it shows the operating profit company makes. You can easily identify EBIT achieved at the level of your architecture firm. But what about EBIT on the project level?
You can departmentalize the architecture firm’s income statement on projects. You start with project sales and costs of salaries of employees and external consultants engaged in projects. Then, you allocate other operating expenses (marketing costs, costs of education of employees, rental costs, etc.). You may allocate them on the basis of the costs of salaries of employees engaged in projects.
7. Project EBIT Margin
Just as we wrote while discussing Gross Profit Margin, the same applies for Project EBIT Margin, which is more suitable for comparison:
8. Revenue Per Client
Just like we calculated Revenue Per Project, you can calculate Revenue Per Client:
Just like when calculating Revenue Per Project, there is no single answer whether Revenue Per Client should go up or down. If it is too high, you are concentrating on a very small number of clients. If it is too low, you may be dispersed on too many clients.
9. Profit Per Client
Just like we showed you how to calculate Project Profit, you can calculate Gross Profit and EBIT per each client.
10. Customer Acquisition Costs (CAC)
When calculating Profit Per Client or Project, please have in mind Customer (Project) Acquisition Costs (CAC). Those are costs that you spend in the process of acquiring a new client (project). Such costs are advertising costs, costs of preparing proposals, salary costs for working hours spent preparing proposals, etc.
You should compare CAC with potential sales you can make working with the client. Those costs should be included in calculating Profit Per Client or Project and should be kept as low as possible.
11. Revenue Per Employee
One of the measures of your architecture firm’s productivity is Revenue Per Employee:
However, our suggestion would be not to maximize this metric in short term. You should have in mind that along with professional architects, you will also need administration support, i.e. people who would do paperwork, so your architects would not have to and could concentrate on their projects.
12. Profit Per Employee
How to calculate Profit Per Employee?
You have 2 options.
The first option is to calculate Profit Per Employee in a similar manner you calculate Revenue Per Employee presented previously:
The second option is to estimate how much profit each employee makes you with his/her work effort. For example, you calculate sales this employee brings (projects he/she works on; if several employees work on the same project, you should divide or allocate total sales on the project) minus his/her salary costs and other direct costs, as well as allocated operating costs.
13. Project Efficiency
You should also track the efficiency of implementing the project, by comparing budgeted and actual hours, expenses and revenue:
14. Time Utilization Rate
We have previously discussed that your architecture firm sells billable hours to clients. Therefore, you should take a look at what percentage of total working hours is billable:
15. Overtime hours in total hours spent
You should take care of your employees, your people. From time to time, you would need to help them avoid burnout.
One metric which could prove helpful is the following formula:
We would suggest you calculate this ratio for each employee separately. On the basis of this ratio, you can make HR decisions like identifying needs for new employees, planning their work on projects, and appraising the work of your employees.
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