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DESIGN FIRM PROFITS AT RECORD HIGH Myra J. DiMasi The past year was a banner one for many architectural and engineering firms. The data collected from nearly 100 firms for the "1998 Financial Performance Survey for Design Firms" shows many profit measures at record highs in the 20-year history of this survey cosponsored by Birnberg & Associates, Axium Software and the Financial Manager's Group. Some problems remain, however, particularly in collecting outstanding accounts receivable. KEY FINDINGS The average collection period (the average time it takes to collect accounts receivable) lengthened in the past year. The 74 days reported is considered excessive. Exhibit I shows collection periods for recent years. EXHIBIT I AVERAGE COLLECTION PERIOD
Profit margins have improved significantly by most measures in the past year. Profit can be measured in many ways. Exhibits 2 and 3 offer historical profit data on both total and net revenues before discretionary distributions (profit sharing, bonuses, etc.). All profit measures have risen to record levels. EXHIBIT 2 PROFIT ON TOTAL REVENUES BEFORE TAXES AND DISTRIBUTIONS
EXHIBIT 3 EXHIBIT 3 EXHIBIT 3 EXHIBIT 3 EXHIBIT 3 EXHIBIT 3 PROFIT ON NET REVENUES BEFORE TAXES AND DISTRIBUTIONS
Overhead rates have dropped slightly in the past year. Overhead before discretionary distributions now absorbs 49.5 cents of every dollar of net revenues (40 cents of total revenues). Exhibit 4 highlights overhead rates before discretionary distributions. EXHIBIT 4 EXHIBIT 4 EXHIBIT 4 EXHIBIT 4 EXHIBIT 4 EXHIBIT 4 OVERHEAD RATES BEFORE DISCRETIONARY DISTRIBUTIONS
The net multiplier indicates the actual net revenue obtained from each dollar of direct raw labor charged to projects. According to the survey, firms normally budget 3.0 times raw labor for fee determination. Typically, some variation between budgeted and actual net multiplier is found due to poor front-end negotiating, jobs exceeding budget and unbilled extras and/or design change orders. In general, a firm's ability to reach its target net multiplier is a measure of that firm's negotiating and management ability. The 1998 finding shows a slight increase over the 1997 survey results, now reaching 2.96 times direct labor. Exhibit 5 provides net multipliers for recent years. Design firms should increase their investment in marketing. There has been a significant decrease in the investment in marketing in the past year. Exhibit 6 shows marketing expenditures for recent years. EXHIBIT 5 NET MULTIPLIER
EXHIBIT 6 MARKETING AS A PERCENT OF TOTAL REVENUES
As reported by many professional liability insurance carriers, errors and omissions insurance premiums have continued to decline as a percent of total revenues. Exhibit 7 notes this trend. EXHIBIT 7 ERRORS AND OMISSIONS INSURANCE PREMIUMS AS A PERCENT OF TOTAL REVENUES
The survey collected a wide range of other data. Cash resources are only 2.9% of design firm total assets while accounts receivable contained 53.0% of assets. Surprisingly, only 41% of firms charge interest on delinquent accounts receivable. Apparently, many firms still feel that if interest can not be collected, then it should not be charged. Those firms that did charge interest use 1.5% per month after a median of 45.0 days. More than two-thirds (67.5%) of participating firms regularly mark up reimbursables. The median percentage markup most often used on all items was 12%, although the range was from 3% to 50%. The survey also inquired about health insurance costs. The high cost to design firms of employees' health insurance is reflected in the finding that these premiums cost 2.49% (median) of net revenues. Payroll burden amounted to nearly 28.5% of total overhead. Based on direct labor, burden amounted to 39.9 cents for each dollar of direct labor. The largest marketing expense was labor. This cost accounted for nearly three-quarters (74.3%) of total marketing expenditures. The complete 55-page survey report costs $75 prepaid and is available from Birnberg & Associates, 1227 W. Wrightwood Ave., Chicago, 60614, 312-664-2300, fax 773-525-0444 with Visa, MC, Amex. Myra DiMasi is the Assistant Director of the Association for Project Managers. Return to the List of Articles Return to the Association for Project Managers Main Page Email the Association for Project Managers
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