If your firm is like most architecture and engineering firms, you have started growing again. Great. But is growth enough?
One way to raise your profits is by raising your price, but we all know it’s not that easy, or everyone would do it. So, how can you “test your pricing?” One way is to raise your fees and billing rates and see how your clients’ react.
However, there’s a more strategic financial management approach you can consider, using benchmarking and analysis.
First, are you maximizing profit on your current billing rates? Your financial statements can provide the answer. Compare your Target Direct Labor Multiplier (DLM) to your Achieved Direct Labor Multiplier, as reported in your financials. If Target DLM is greater than Achieved DLM then you may need to look deeper.
Is the difference due to project overruns, is it due to downward pressure from your clients on your fees, or is it due to incorrectly establishing a fee that reflects the true scope and effort?
Achieved DLM can be quickly calculated on a firm-wide level or a project level:
Achieved DLM = Net Revenue/Direct Labor Costs
Second, how much can the market bear? This is impacted by your firm’s value proposition to your clients as well as the overall economy. If the market sectors you serve are leading the economic recovery and access to capital is improving it may be time to consider increasing your rates. The impact can be quickly measured by monitoring backlog and client pushback on proposals.
Finally, do your billing rates and fees support your compensation strategy and overhead management practices? As the economic recovery continues, your staff will likely expect salary increases, which in turn puts upward pressure on overhead expenses and compresses potential profit if billing rates/prices remain unchanged.
Pricing is only one step in maximizing profit; operational practices and strategic initiatives can also dramatically impact profit. PSMJ’s 2018 AE Financial Performance Benchmark Survey Report can provide insight into key financial indicators that enables you to compare data against your industry peers and competitors, who are also looking to increase profits, lower overhead, and improve their bottom line.
Effectively managing pricing is just one example of what you learn to do at PSMJ’s Financial Management for AEC Firm Leaders. Some other valuable takeaways from this program include:
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See why labor utilization has a poor correlation with profitability and the only key performance indicator that has a 100% correlation with profitability.
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Permanently reduce your work-in-process and accounts receivable that are causing major working capital drags.
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Use the secrets that other AEC firms are using right now to achieve a 5.0 (or higher!) Net Direct Labor Multiplier.
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Determine the optimum price for your services in each of your market or service areas.
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Accurately forecast the cash demands that growth will put on your firm (and get the tips to manage them).
