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Entrepreneur Architect Academy

007.2 | How To Become The Richest
Architect You Know (Part 2 of 3)
Warning! Were learning how to get rich (slowly) here. If youre not interested in learning
how to make money as an architect, carry on with your daily grind. For the rest of you
pay attention. Were going to get deep into the numbers now.
This is Part 2 of a 3 part guest post bySteven Burns, FAIA, theDirector of Product
Strategy and Innovations at BQE Software. Steve is the creator ofArchiOffice the
leading office, project management and time tracking software used in more than 1,000
small and mid-sized architectural firms. In the 14 years Steve managed Burns + Beyerl
Architects, the firm he co-founded in 1993,the firms earnings grew at an average rate of
24% per year (wouldnt that be nice?).
Please visit Steve atLinkedinandTwitter, or check out hisBlogand thank him for sharing
with us at Entrepreneur Architect. Mark
(This post contains spreadsheets, which may not view properly on some devices. You
may download a PDF version of this post here.)

Financial Management for the Small Architectural Firm:

Terminology and Examples

Terminology and Examples

In my previous article, I made the strong case
as to why your small firm needs to think like a
business and not just like an architect. Your
financial health starts with creating an
Operating Budget also known as a Profit
Plan. Why a profit plan? Because youre in
business to make money, that is profit.
Remember; no profit equals no business.
Im going to share with you how to develop the simplest, most bare-boned version of a
Profit Plan that is helpful to any small or emerging firm. So grab a pencil, a piece of
paper and a cup of coffee. Turn off your email and silence your phone. This is dry
material for an architect but important information you need to know.
There are three steps you need to do when creating a profit plan:
Step 1: Estimate your expenses. Dont include any of those that are reimbursed by your
client (e.g., printing, travel, pass-through consultant fees, etc.).
Step 2: Set a Profit Goal. This is generally thought of as your return on investment
(ROI). Its a percentage of your total expenses. All the effort, and money, you put into the
business should return you a profit. This is what you would expect if you invested the
money in something else like stocks, bonds or real estate. Whats the return you want to
see? I recommend 20%. Otherwise, take the money and invest it in the stock market.
Youre also pouring your life into these projects so the return should be commensurate
with the effort.
Step 3: Add your expenses with your Profit Goal to get the Net Revenue Goal. This is
called Net because it doesnt include those reimbursable expenses I mentioned earlier.
Your Net Revenue Goal is what you plan to invoice your clients for your services. In the
sample profit plan shown below, the Net Revenue Goal is $500,000.
(You may download a PDF version of this post here.)

SAMPLE PROFIT
PLAN

5 Person Firm
SALARIES

Principal

(1 @
$100,000)

$100,000

Project Architect

(1 @
$70,000)

$75,000

Intern Architect (2 @ 35,000) $70,000

Office
Administrator

(1 @ 25,000) $25,000

TOTAL
SALARIES

$270,000

PAYROLL TAXES AND

BENEFITS

$30,000

OFFICE EXPENSES
Rent

$50,000

Utilities

$5,000

Telephone

$2,000

Equipment

Purchase/Maintenance
Postage/Shipping

$12,500
$1,000

Publications

$667

Insurance (Auto, General

Office, Liability)

$12,500

Office Supplies

$5,000

Travel

$6,000

Printing

$7,000

Marketing Tools

$10,000

Miscellaneous

$5,000

TOTAL OFFICE EXPENSES

TOTAL EXPENSES

PROFIT GOAL

NET REVENUE GOAL

$116,667
$416,667

(20% x Total
Expenses)

$83,333
$500,000

Reaching Your Profit Goals

Now that we have created our Net Revenue Goal of $500,000 we need to understand

where this revenue is derived. Architects earn their revenue (and profit), by working on
projects. So it should come as no surprise that the most common denominator for
planning and measuring financial performance is the Direct Salary Expense (DSE). This
is the salary cost of the hours charged to projects (your billable time).
We can actually use the sample profit plan to easily calculate our DSE multipliers.
These are the numbers that will be used to determine the values such as the target
break-even, profit and revenue amounts. But in order to do this we need to know our
Efficiency Ratio.
Efficiency Ratio = Direct Salary Expense / Total Salary Expense
Or
Direct Salary Expense = Total Salary Expense x Efficiency Ratio
So how do we know the efficiency ratio for your firm? Well, I dont. But there are
statistical surveys which show that, on average, architectural firms achieve about 65%.
This averages all employees (principals and all employees). While Principals may only
be 50% efficient (spending 20 of their 40 hours/week billable on projects), Interns may
be 95% efficient. Please, no comments about the 40 hours/week. I know, I know.
I use ArchiOffice to help manage project finances. Among other things, Its able to
monitor your staffs efficiency daily, weekly and annually. You can set targets for them
and know if the Efficiency Ratio you are using is realistic. Understand that low efficiency
ratio equals low revenue potential and a high efficiency ratio equals high revenue
potential.
So lets modify the sample profit plan above by making adjustments to acknowledge
our estimated efficiency ratio:
(You may download a PDF version of this post here.)

SAMPLE
PROFIT PLAN

Using 65% Efficiency Ratio

DIRECT
SALARIES

($270,000 X
0.65)

$175,500

INDIRECT EXPENSES
Indirect
Salaries

($270,000 x
0.35)

Payroll Taxes and Benefits

Office
Expenses

$30,000

$116,667

TOTAL INDIRECT
EXPENSES
TOTAL DIRECT SALARES + INDIRET
EXPENSES
PROFIT
GOAL

$94,500

$241,167

$416,667

(25% x Total
Expenses)

NET REVENUE GOAL

$83,333
$500,000

In the chart above we know that our Total Salary is $270,000. But since we have a 65%
efficiency ratio our Direct Salary Expense is $270,000 x 0.65 = $175,500.
To Pay for DSE: $175,500 / $175,500 = 1.00
To Pay for Indirect Expenses: $241,167 / $175,500 = 1.37

Combined, these give you the Break Even Multiplier of 2.37.

Now, youll want profit: $83,333 / $175,500 = 0.47
Therefore, your Planned Net Multiplier is 2.85. This is that magic number, specific to
your firm.

Setting Ideal Billing Rates

The Planned Net Multiplier is an incredibly important number to help you determine
what the minimum hourly billing rates should be for your staff. So lets take a look at
each staff member:
(You may download a PDF version of this post here.)

COST RATE AND IDEAL

BILL RATE
Project Architect
Principal Architect
Intern
Gross Annual Salary

$100,000

$75,000

$35,000

Payroll Tax (15%)

$15,000

$11,250

$5,250

Health Insurance

$8,000

$4,000

$4,000

Retirement Plan

$3,000

$2,250

$1,050

$126,000

$92,500

$45,300

2,080

2,080

2,080

Net Cost/Year
Gross Hours/Year

Vacation

(120)

(80)

(80)

(80)

(80)

(80)

1,880

1,920

1,920

Net Cost Rate/Hour

Worked

$67

$48

$24

Planned Net Multiplier

2.85

2.85

2.85

$191

$137

$67

Holiday/Personal Leave
Net Hours
Worked/Year

Ideal Billing Rate

As long as your office maintains the 65% efficiency rate you must bill your Principal at
$191/hour, your Project Architect at $137/hour and your Architect Interns at $67/hour
to obtain the desired profit.
Granted, some firms dont like to look at the global efficiency rate, opting instead to
evaluate the Ideal Bill Rate for each employee based on their true efficiency levels. But
thats a discussion that I dont want to get us involved with at this time.
The final exercise well do at this stage is to calculate the Projected Realizable Income
from each of our employees.
(You may download a PDF version of this post here.)

Potential Realizable
Income
Principa

Project Intern Intern

Arch.

1,880

1,920

1,920

1,920

Actual Efficiency
Rate

50%

75%

90%

90%

Billing Rate

$200

$125

$75

$75

Net Hours
Worked/Year

Realizable
Income

$188,000

Total

$180,000$129,600$129,600$627,200

As we can see, the Total Realizable Income of $627,200 is greater than the $500,000 we
projected in our Profit Plan. In order to achieve the profit plan we only need to invoice
80% of our potential. This is a very common position for most firms. Obviously, we
would like to bill the full potential and hopefully you will. Considering that the Principal
will be spending half of his or her time working on non-billable things we would hope
that these efforts are what will continue to bring new work into the firm.
Our next installment will be to discuss the practical applications of your office financial
management.
***
photo credit: jirotrom via photopin cc
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Written by Mark R. LePage Categorized: Academy Blog Series, Business

Tagged: Billing Rates for Architects, Direct Salary Expense, Efficiency Ratio,

financial management, Profit Plan for Architects

Comments
Jerome says
February 19, 2013 at 10:21 am
Thank you for sharing this information. It similar to the information in the Architects
Handbook of Professional Practice but the author explains the method very well. Have
do questions. How do you apply this method if you are sole proprietorship and how do
you determine Overate? I have seen other methods to determine billable rate use
overhead rate.
Reply

Steven Burns, FAIA says

February 19, 2013 at 6:54 pm
Jerome,
The AIAs Handbook of Professional Practice is a great resource that is often
overlooked and in desperate need of updating. Im currently working with the AIA
Small Firm Roundtable on a project to create a Small Firm Toolkit which would be
the go-to source for small and emerging firms. Not as overwhelming as the
Handbook and also built for a new generation.
As to your question about overhead rate for a sole proprietorship. The basic
concept isnt any different than if you have 1, 3, 5 or 25 employees, so I would
continue to do the spreadsheet but adapt it for just the one employee (you).
You are correct, there are various methods used for calculating an employees
billing rate. I gave one good example. Many firms simply take the firms planned
net multiplier (overhead rate) and multiply that by the employee salary rate. That

may be fine in most situations but it could also depend on the realization
(efficiency) of the employee. As a sole proprietor, youll probably see a very low
efficiency rate. But there are other non-typical factors to a sole proprietor.
Overhead costs tend to be very low. For example, there may not be any rent if
youre using your home as the office. And the hours you spend/week may be
significantly different than if you had a partner or staff. You could spend more or
less hours depending on your lifestyle choice.
Reply

Mark says
February 19, 2013 at 8:57 pm
Thanks for following up Steve. So much information here. Thanks again.
Reply

nc says
February 26, 2013 at 1:26 am
All these should be taught at 1st year of architecture school. Architects should also get
involve in small construction or properties flipping projects as these will sharpen the
real world business skill even faster. After doing a few, one might not even want to be
an architect for hire anymore; instead you just want to do your own project as a builder.
Reply

christian fekete says

February 26, 2013 at 2:58 pm

Great beginnings, will look for the follow up at once.

Thank you
Question:
you mention ArchiOffice in your post. I use quickbooks and I am getting pretty good
with it although improvements can be made (for me) with cashflow projection. Any
comments?
Reply

christian fekete says

February 26, 2013 at 4:50 pm
Steve;
Again, thx for this info, really appreciate it.
I am going through the efficiency ratio but the profit goal jumped from 20 to 25%. is this
correct and what would be the reason for the change?
Reply

Alex Gore says

July 17, 2013 at 9:03 pm
Great article! The way you lay out cost, expense, and billing rates is so honest it is
refreshing.
Reply

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