5 Financial Considerations for Architecture and Engineering Firms
Working with walls, light, shadow and the properties of a nearly endless array of building materials, architects and engineers create the spaces in which we live and work. Some are dazzling, some are utilitarian, but all demand years of training, experience and professional discipline. In running your business, you may find yourself spending as much time working on the business as you spend working in it. Here are five financial considerations that will help you build an enterprise that lasts for you and for your employees.
1. R&D Tax Credits
Economists like the Nobel Prize winner Joseph E. Stiglitz say that investment in knowledge, more than just in plants and equipment, is what enables businesses to improve quality of life for everyone. Governments experiment with various incentives to reward companies that set aside resources for research and development and one of them is the tax credit.
Established to reward investment in innovation leading to jobs, the Research and Experimentation Tax Credit (often known as the R&D credit) is often misunderstood. A common myth is that only big organizations with big budgets and lab facilities can use it. In fact, many companies, regardless of size, can qualify for an R&D Tax Credit with the right documentation, and it may apply to past tax years.
Credits are in part based on wages paid to employees engaged in research and development work. The list of eligible activities is surprisingly broad and inclusive. In the architecture and engineering arena, these might include innovations in construction products or methods, new software applications, or enhancements to existing processes. The R&D Tax Credit is an often-overlooked opportunity to make substantial reductions in your firm’s tax burden.
2. Financial Dashboards and Scorecards
In any architecture or engineering firm, what gets measured is what gets done. This is especially true when it comes to your organization’s financial and operational goals.
The dashboard and the scorecard are two successful measurement tools to put in place. They serve two different but complementary functions. Dashboards dynamically reduce multiple sources of live data to an at-a-glance overview of vital metrics. Scorecards provide a static snapshot of your firm’s performance in any given period against an agreed set of key performance indicators or KPIs.
The metrics you choose to monitor on your dashboard or scorecard will be unique to your firm. These are developed in partnership between you and trusted individuals like a controller, CFO and in many cases an outside tax attorney or CPA. Firms that get the best results from these tools usually combine a thoughtful mix of both financial and operational measures. The financial metrics show you the results of past actions. The operational metrics show you your current performance against chosen standards.
3. Profitability Enhancement
One of the biggest enemies of profitability is hidden margin erosion. Buyers of architecture and engineering services have become increasingly sophisticated, so most firms have solid protections in place to address obvious profit threats like scope creep. Margin erosion can be tougher to catch. It can show up in things like mid-project pay increases, deviation from resource loading plans, travel or cost of living uplift, site conditions or a variety of unforeseen vendor or sub-contractor issues.
To run a successful (and consistently profitable) architecture or engineering firm, it’s vital to know exactly what’s in your multiplier. This includes not only your detailed fixed costs of doing business, but also your best forecast on variables like staff compensation and turnover, productivity fluctuations, external contingencies, supply disruptions and potential lean process opportunities.
A best practice to prevent margin erosion is to prepare a “margin profile” model that takes these factors into account each time you price out a project. A margin profile shows you how your effective multiplier can change when you test your assumptions against expected revenue over the life of a job. It also gives your project controls team a clear baseline against which they can monitor adverse trends in time for you to take early corrective action.
4. Business Succession Planning
The National Association of Corporate Directors reports that barely one in four privately held organizations have a documented succession plan. Building an architecture or engineering firm demands years of discipline, and the costs of not having a succession plan in place can be devastating.
A business succession plan helps you address contingencies that can impact the health of your firm. These include but may not be limited to your long-term growth potential, the valuation of the business, tax exposure and owner retirement prospects. Succession planning helps you objectively assess the talent in your firm and understand where you stand against your competition.
The most obvious and serious point of a succession plan is to protect the business should you become unable to fulfill your ownership duties. A succession plan may also provide for continuity of the top discipline leaders you depend on to attract new business. Beyond that, succession planning provides a secure and structured way out when you’re ready to retire or take a new direction in life.
5. Key Employee Retention
Employees are engaged when they’re willing to invest discretionary effort in the success of the firm. Creating this kind of engagement goes far beyond mere job satisfaction. Top performers want to know that their work has meaning and that they’ll be rewarded proportionately for their contribution.
Building a team that can earn client trust and win jobs takes long-term investment. In addition to their professional skills, your people have institutional knowledge and relationships that are very costly to replace. It’s vital to your financial success to monitor and prevent key employee turnover.
Architecture and engineering firms have a number of tools available to help with employee retention. Employee Stock Ownership Plans (ESOP) can incentivize key leaders to stay with you, while helping to balance concentration of ownership and support succession planning. Compensation plans and bonus structures can be enhanced to reward long-term service milestones. Cultural factors like support for employee philanthropic interests, continuing education and professional development can also boost retention.
The Important Thing is to Get Started
These five financial considerations are just a few of the measures that successful architecture and engineering firms put in place to build long-term organizational health. You don’t have to implement all of them at once but based on what we’ve observed with our most successful A&E clients, it’s important to start where you are with what you have and try the most impactful one first.
If you need support with these financial considerations for your architecture or engineering firm, we can help. For additional information, call us at 248.208.8860 or reach out today. We look forward to speaking with you soon.