As architects, nearly everything we do is associated with a project. As a project-centric business, understanding which key performance indicators (KPIs) are meaningful and can provide accurate and actionable results is one of the most important decisions you can make when starting any new project.
One of the main goals of tracking KPIs is being able to measure your progress toward specific goals and long-term objectives. This means your KPIs can serve as a benchmark for improvement and advancement.
Read on to learn more about the KPIs you need to use to measure growth, along with the technology to make tracking these KPIs easy.
Key Performance Indicators, or KPIs, are an important part of measuring the success and failure of your firm. KPIs allow owners and managers an overview of how their firm is performing at any given time.
So, what are some of the most important KPIs every architecture firm should know?
We put together a list of the top 8 for you:
The overhead multiplier is the cost of non-project-related expenditures (such as indirect expenses including indirect labor) expressed as a percentage of total direct labor.
This is one of the most vital KPIs because it’s required to accurately determine a firm’s profitability. A lower overhead multiplier means a higher profit margin and vice versa. Some firms choose to calculate overhead multipliers every quarter, while others do it annually. To calculate the overhead multiplier, follow the formula below:
Overhead Multiplier = Total Indirect Expenses / Total Direct Labor
If you want to reduce the overhead, you’ll need to manage indirect expenses more carefully. Aim to keep your overhead rate at or below 175% of total direct labor (also expressed as 1.75). If your overhead multiplier is greater than 1.75, you should take immediate action to resolve it.
Architects and management can use this metric to make informed decisions, improve resource allocation, and ensure the firm's long-term sustainability and success in a competitive industry.
The utilization rate is the percentage of hours spent on billable projects vs. the total number of hours worked.
Utilization is important for firms that charge their time to clients and need to maximize the productive time of their employees because it helps determine the overall productive use of an individual or firm.
Let's say your architecture firm wants to assess the productivity of one of its project teams over a quarter (three months). The team consists of three architects who each work 40 hours per week, resulting in 480 available hours per architect for the quarter (3 architects x 40 hours/week x 12 weeks).
During this period, each architect logs their hours on various tasks, including client meetings, design work, site visits, and project coordination. After the quarter ends, the firm calculates the total number of billable hours worked by the team. Let's assume the team has accumulated 350 billable hours in total for the quarter.
To calculate the Utilization Rate, the firm would divide the total billable hours (350) by the total available hours (480 x 3 = 1,440) and multiply the result by 100 to express it as a percentage:
Utilization Rate = (Total Billable Hours / Total Available Hours) x 100 Utilization Rate = (350 / 1440) x 100 Utilization Rate = 24.31%
In this example, the Utilization Rate for the project team is approximately 24.31%. This means that the team utilized roughly a quarter of their available working hours on billable tasks during the quarter. Your firm can use this metric to evaluate the team's efficiency and identify potential areas for improvement, such as increasing billable work, optimizing project allocation, or addressing any productivity issues that may affect the team's performance.
An effective cost rate is the actual cost of each person’s employment based on the work they do.
This metric is important because it gives you a true picture of what an employee costs on an hourly basis, and it can help you determine what you should bill for each employee’s services to stay profitable.
Costs and pricing structures vary from job to job and project to project. Looking at the individual costs can give you valuable information about that job, but what about your employee’s overall performance? The effective cost rate shows you the average cost of an employee.
Let's consider a specific architectural project that has been completed. The total direct costs for this project, which include labor, materials, and any project-specific expenses, amount to $100,000. The total revenue generated from the client for this project is $150,000.
To calculate the Effective Cost Rate, the firm would divide the total direct costs ($100,000) by the revenue generated ($150,000) and multiply the result by 100 to express it as a percentage:
Effective Cost Rate = (Total Direct Costs / Revenue Generated) x 100 Effective Cost Rate = ($100,000 / $150,000) x 100 Effective Cost Rate = 66.67%
In this example, the Effective Cost Rate for the project is approximately 66.67%. This means that for every dollar of revenue generated by the project, $0.67 was used to cover the direct costs. The remaining $0.33 represents the gross profit margin.
By analyzing the Effective Cost Rate, architects can evaluate the financial success of individual projects and the firm as a whole. A higher Effective Cost Rate indicates better profitability, as more revenue is available to cover overhead expenses and contribute to net profit. Conversely, a lower Effective Cost Rate might suggest that the project's costs were higher than anticipated, which can prompt the firm to review cost management strategies, contract negotiations, or project estimating processes for future projects. Monitoring Effective Cost Rate helps architects make informed decisions to enhance financial performance and improve project profitability.
Net Multiplier
The net multiplier is the ratio of net operating revenue to total direct labor.
If you think of direct labor as an investment, the net multiplier is a measure of your return on this investment. It shows you how many dollars of revenue you generate for every dollar you spend on direct labor and measures your actual performance. To calculate net multiplier, follow the equation below:
Net Multiplier = Net Operating Revenue / Total Direct Labor
The net multiplier is a good gauge of your firm’s financial health. Your net operating revenue should be greater than total direct labor. If total direct labor is greater than net operating revenue, you should investigate why your costs are so high.
Work in progress (WIP) refers to the value of the billable hours and expenses that a firm hasn’t billed yet.
WIP is valuable in that it can help you forecast expected revenue. It can also help managers understand how far along work is, and firm owners can use WIP, along with their accounts receivables (AR), as a booster when applying for a commercial line-of-credit. Some firms track WIP as an asset on the balance sheet, and once invoiced, it shows up as revenue on the income statement.
You want to make sure you have a consistent cash flow. If one week’s WIP looks significantly lower than others, that could be a signal that not everyone is making the most of their time.
Some architecture firms will require a more sophisticated calculation to determine WIP since not all projects bill hourly. It is quite normal for architecture firms to have contracts that are based on a fixed fee or some other form of a stipulated sum (i.e. a percentage of the cost of construction). In situations like this, projects that are subject to this form of contract should look at their earned value (EV).
Accounts receivable aging shows unpaid customer invoices and unused credit memos by date ranges.
This is a valuable tool when trying to determine which invoices are overdue for payment. Calculating your average aged accounts receivable will show you the average number of days it takes to get paid from the invoice date. To calculate your aged accounts receivable, use the following formula:
Aged Accounts Receivable = Annual Average Accounts Receivable / (Net Operating Revenue / 365 Days)
Architecture firms should do their best to collect all outstanding invoices within 30 days of the invoice date. If your average aged accounts receivable is greater than 30 days, it might be a signal that it’s time to reexamine your invoicing process and develop a better way of collecting what’s owed.
The profit-to-earnings ratio indicates a firm’s effectiveness in completing projects profitably.
The profit-to-earnings ratio is determined by dividing the profit (after expenses and salaries have been accounted for but before non-salary distributions and taxes) by the net operating revenue. To calculate your profit-to-earnings ratio, use the following formula:
Profit-to-Earnings Ratio = Profit Before Distributions and Taxes / Net Operating Revenue
The higher the number, the more profitable your firm is. If your profit-to-earnings ratio is low, you could be spending too much internally.
The net revenue per employee shows, on average, how much revenue each of your employees generates.
This metric is a meaningful analytical tool because it measures how effectively your firm utilizes its employees. It can also help you forecast a more realistic range for future annual net operating revenue.
Let's use an example of an architecture firm that operates with 50 employees. Over the course of a fiscal year, the firm generated a total net revenue (revenue after deducting any direct project costs) of $5 million.
To calculate the Net Revenue Per Employee, the firm would divide the total net revenue ($5,000,000) by the number of employees (50):
Net Revenue Per Employee = Total Net Revenue / Number of Employees Net Revenue Per Employee = $5,000,000 / 50 Net Revenue Per Employee = $100,000
In this example, the Net Revenue Per Employee for the architecture firm is $100,000. This means that, on average, each employee contributed $100,000 to the firm's net revenue over the fiscal year.
Monitoring the Net Revenue Per Employee can help the firm understand the productivity and effectiveness of its workforce. A higher Net Revenue Per Employee indicates that the firm is generating more revenue per staff member, which can imply better efficiency and resource utilization. On the other hand, a lower value might prompt the firm to assess its operations, project management, or staff allocation to identify potential areas for improvement.
Comparing the Net Revenue Per Employee over multiple periods or against industry benchmarks can also help architects gauge their firm's performance relative to competitors and take proactive measures to enhance their profitability and overall financial health.
Your number one priority when tracking these KPIs must be to implement a technological solution within your firm that cannot only collect real-time information about the work your staff is doing but also has full real-time integration into all your business and project finances.
The system your firm should use must be in the cloud with built-in business intelligence rather than relying on managers to pull data from disconnected sources and try to make sense of them in a spreadsheet. This type of process is also costly, prone to many human errors and is delivered far too late to make “firm management” effective.
If you recognize that every project is really its own little business and the person charged with managing that project is like the CEO of their own little company, then you will recognize that they must have tools at-hand which will not only make the project profitable but enable all members of the team to participate in that mission. When each project has the likelihood of being real-time profitable then the firm is also profitable.
While it may seem daunting to track all of these KPIs, they're crucial to the financial health and success of architecture firms.
Understanding which project management KPIs your firm should measure is only half the equation. You must also utilize them in a way that provides you with clarity and focus. Information for information’s sake is useless.
For an even deeper understanding of these high performing KPIs, we invite you to watch our free on-demand webinar hosted by Steven Burns, FAIA, Founder of The Well-Designed Firm. Here you’ll unlock the power of real-time analytics for sustaining a profitable architecture practice. Gain comprehensive insight into your employees' productivity, ongoing projects, and overall firm financials through the seamless use of dashboards, reports, and scorecards.
With consistent tracking, you can easily identify evolving trends, providing you with the valuable data required to make calculated decisions surrounding staffing, business development, and even firm culture.
Join us for this enlightening session as we guide you through the crucial KPIs to focus on. We’ll further introduce you to a robust system for month-over-month tracking, offering a clear reflection of your firm's performance trends.