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Should Your Firm Experiment with Value Pricing?
Should Your Firm Experiment with Value Pricing? - BQE Software
As many A&E firms have started automating and streamlining their workflow process, projects are getting done quickly and more efficiently.
If you run an architectural or engineering firm that still bills primarily by the hour, you may have noticed a catch-22: becoming more efficient means completing projects in fewer hours. But getting a project done in less time means fewer hours you can bill.
Sergio Pecori, president and CEO of Hanson Professional Services in Springfield, Illinois, says that profitability based on hours worked can lead to profit margins which are slowly squeezed over time.
“We (engineers) need to be compensated for the value that we bring, not necessarily the hours that we generate,” Pecori told MS Consultants, Inc. on their website.
So how can A&E firms tackle this challenge? How can you continue getting more efficient at completing projects without hurting your bottom line? Let’s first discuss why value pricing is an important tool in your toolbox.
Why value pricing?
For firms that bill by the hour, there's only two ways to increase profits: either increase the number of hours billed or reduce the cost of delivering your services.
The problem with reducing expenses is there are only so many costs you can squeeze from the bottom line before cost-cutting measures become unsustainable. You could of course hire more workers to increase the overall number of available hours that can be billed out to clients. But even this strategy assumes you have enough work to warrant hiring additional employees.
Value pricing allows you to increase your firm’s profit margin without needing to drastically reduce expenses or bill out a higher number of hours.
How to implement value pricing
The first step in implementing value pricing is understanding the importance of timesheets. Just because you may not bill by the hour anymore on certain projects doesn’t mean you stop tracking your employee’s productivity. You’ll never know if a project is profitable unless you know how long it took your employees to complete it.
The second step in implementing value pricing is to specialize in a niche. How do you decide a niche to pursue? It could be based on a specific industry you may be familiar with or the technologies used to complete a project. For example, there are engineering firms that now use drones primarily for geomatic purposes.
Diving in-depth into a niche also allows you to become the recognized expert in a specific area. Companies from around the world will actively seek out your firm because you understand their business. And because you specialize in your new client’s industry, they will likely be more willing to pay a premium for your services.
The third step is assessing your accounting software. The program you use should be able to provide realization and utilization reports to help keep track of profit margins by project. Together, your accounting and time entry software will provide vital insights into which projects and clients are most profitable.
Becoming a more efficient firm doesn't mean you have to sacrifice profits. Instead of billing all your clients by the hour, consider specializing in a niche and experimenting with value pricing.