Practice Management Member Conversations

Does anyonne know of an industry resource that gathers and publishes direct salary multipliers (DSM) for architectural firms? I know the AIA publishes salary information by size of firm, region, and classification. However, I am looking for multipliers. This gets into the cost of doing business and profit margins. We have some large institutional clients who want to cap the multiplier and we need data to defend against or at least limit their position. Ideally, it would be similar to the AIA salary research that divides the data into size of firm, region of the country, type of firm, etc. Big thanks to anyone who has this kind of data or knows where to get it.

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Stephen Harrill AIA
Vice President
Reynolds, Smith and Hills, Inc.
Jacksonville FL
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Probably the best source for that information is ZweigWhite's annual Financial Performance Survey - but DSM is not what you need! And what you describe is one of the most important current issues in the A/E industry.

 

As I said, you do not need DSM information. You need overhead rate multipliers, which, along with hourly wage costs, provide your firm's actual 'cost of doing business'.

 

However, as far as defending your, or limiting their, position, try this one on them: Different companies' OH rates are not comparable! They are very dependent on what accounting system a firm uses, and, even given the same system, how that firm's costs are recorded.

 

You will need to talk to your own CFO to get information on the firm's actual hourly wage and OH rates, upon which you add a profit margin.

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Michael Webber
CFO/Principal
A/E Finance
Downers Grove IL
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Probably the best source for that information is ZweigWhite's annual Financial Performance Survey - but DSM is not what you need!

 

What you describe, large clients and government entities trying to cap multipliers, is one of the most pressing issues in the A/E industry. However, multiplier-based billing applies to T&M-type contracts, and should not apply to fixed-fee-type contracts. Further, government entities should be using quality-based selection (QBS), and not fee-based selection.

 

As I said, you do not need DSM information. You need overhead rate multipliers, which you can also get from the ZW Survey and elsewhere. OH rates along with hourly wage costs, provide actual 'cost of doing business' information: Hourly rate time (1 + OH rate) = Breakeven Rate, in other words, the 'cost of doing business'.

 

However, as far as defending your, or limiting their, position, try this one on them: Different companies' OH rates are not directly comparable! They are very dependent on what accounting system a firm uses, and, even given the same system, how that firm's costs are recorded.

Mike Webber
CFO/Principal
A/E Finance
www.aefinance.net
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Stephen, I agree totally with Mike Webber's comment about not using DSM as a metric to assist your firm.  The best way, as Mike has suggested is to first determine your firm's 'true' overhead (total indirect expenses/total direct labor).  I use the term 'true' b/c all too often this critical metric is derived by all sorts of other means having nothing to do with the overhead rate.  The basis for the two factors in the formula come from the accrual-based profit-loss statement.  Preferably, the latest version for the year-end, to-date, 2010.  The target range for the overhead rate is 1.30 to 1.50, or 130% to 150%. 
Once calculated the break-even rate for the firm is simply 1.00 + the overhead rate, with the 1.00 representing the unit cost of an hour of salary.  Therefore, if the overhead rate were calculated as 1.38, the B-E rate would be 2.38, or 238%. 
Most of this is explained in detail in the book I co-authored with Michael Tardif, in 2006, titled "Financial Management for Design Professionals: The Path to Profitability".

Respectfully,

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Steve L. Wintner, AIA Emeritus
Founder-Principal
Management Consulting Services
The Woodlands, TX 77380-1414