Sound project management is the centerpiece of being able to run a successful Architectural and Engineering (A/E) firm. While financial metrics for firms have been relatively constant, achieving a higher level of profitability still remains a top priority of management at these firms.
Key Performance Indicators (KPIs) are common measurement tools used to assess qualitative or quantitative aspects of an operation. Data collected can assist in identifying strengths or weaknesses on financial or operational matters and this assessment can be performed firm-wide or at a department level. KPIs are dependent upon current and quality data. A/E firms rely on accurate timesheets, up-to-date invoicing, budgeted project costs, contract information, and proper allocation of overhead and project costs incurred. This data is captured and summarized to provide valuable information to management’s business decisions.
Withum’s A/E Benchmarking Survey
KPI Monitoring Frequency
KPIs that are monitored on a weekly or monthly basis typically revolve around labor productivity, profitability, and backlog. Utilization Rate and Net Revenue per Employee are two specific indicators of labor productivity; it is a measure of the staffing balance between project work and general, administrative, and marketing efforts. Low rates can be indicative of a lull in project work on a short-term basis or too many professional staff not being utilized effectively over a long-term basis. Some firms will drill down on this metric at the staff level to ensure that direct project work is being balanced with marketing and other administrative responsibilities. For instance, project managers (PMs) would typically have lower utilization rates in comparison to a design associate because of the PMs responsibilities for client relations, business development, and staff development.
Our team recently sat down with a mid-sized A/E firm based in the Philadelphia region. During our discussions, the controller emphasized the focus on backlog as a projection of cash flows and staffing level needs. The firm schedules out backlog in billings per month which are compared against actual billings to help meet targeted Net Multipliers, Net Revenue per Employee and other metrics. This reinforces the importance of having accurate estimates of future billings in order to best manage cash flows.
Aging receivables are important to keep an eye on for all size companies, particularly those in growth mode. Project managers will put more time and effort into servicing their clients and let certain administrative things fall through the cracks, such as following up on overdue invoices. It is important for PMs and the accounting/finance department to communicate and maintain a good relationship with project owners and general contractors to make this function less of a burden. A recent industry study performed by Deltek indicated that one of the biggest challenges facing growing companies is collections. The median collection days was 72 for 2017 however the ‘top performers’ in the industry were collecting in 65 days on average. The study indicated that the issue is stemming from companies not properly accounting for uncollectible receivables and lack of automation in the billing and collection cycle.
Some KPIs may fluctuate too frequently for weekly or monthly monitoring, therefore, making it difficult to identify trends. In order to present an accurate picture of the firm’s operations, certain KPIs should be tracked quarterly or annually. These include:
- Overhead Rate
- Net Multiplier
- Total Labor Multiplier (also known as Revenue Factor)
- Profit Ratios
The Net Multiplier, sometimes referred to as the Net Labor Multiplier, can be thought of as the return on investment in its professional staff. Many of Withum’s clients use the Net Multiplier as their best gauge of overall firm profitability and performance. It’s important to consider the overhead in this analysis and then adding in a profit margin to determine a target range. While the nationwide average falls in the 2.75 to 3.25 range, it’s important to benchmark your firm against similar in size, discipline and geographic region. Should your firm’s net labor multiplier fall short of the benchmark, improvements in project management or fee increases may be needed.
Conclusion
All of the abovementioned KPIs are elements of financial planning and work hand-in-hand. The ultimate goal is profitability but managing the individual components makes the big picture a bit easier. Those more tech-savvy firms rely on the integration of data from payroll, billings and project information to provide a dashboard of the metrics most important to them.
If you’re interested to see how your firm’s metrics stack up against others within the industry, Withum’s proprietary benchmarking tool can summarize your performance with the most utilized KPIs. Based upon discussions and research with our top A/E clients, we have come up with our top 10 KPI’s for firms to use in monitoring their own performance and benchmarking against their competitors. If you would like a complimentary benchmarking report using these 10 Industry KPI’s, please visit our website to request a personal benchmarking report for your firm.
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