A busy architecture practice isn't necessarily a profitable one. You can have a full diary and a healthy pipeline of projects, yet find that the profit at the end of the year doesn't reflect all the work going through the practice. Often, the problem is how much time each project takes compared with the fee agreed at the outset. In this blog, we look at how architects can keep track of project profitability and prevent additional work from eating into their fees.
I've been with Benson Wood since 1998, and a lot of that time has been spent building and running a professional services business. We don't produce drawings, but an accountancy firm and an architecture practice have a lot in common. We both sell our time and expertise, and we rely on skilled people to deliver the work, so many of the challenges architects describe to us are ones we've dealt with ourselves.
Why can a busy architecture practice still struggle with profitability?
When architects join our roundtables, the conversation often turns to the finances of running the practice. They're excellent at design and building relationships with their clients, but the numbers can get whatever time is left at the end of the week. I've never met anyone who set up an architecture practice because they wanted to spend their evenings on a cash flow forecast, so that's understandable.
A full diary can hide a lot. Revenue and workload show how much is going through the practice, but they can't tell you what each project returns once all the hours have been counted.
Winning work at a fee that still leaves a profit has also become harder. RIBA's latest research shows many UK practices are struggling to earn fees that reflect their expertise, with profits falling among the smallest practices.
How do you know if an architecture project is profitable?
The starting point is to compare the fee agreed for the project with the time and cost going into it. That means recording time against each project and understanding what that time costs the practice.
In professional services, the cost of delivering the work depends on who does it and how long it takes. Two people can spend very different amounts of time on the same task. Without time recorded against the fee, a project that seemed to go well can end up costing more to deliver than expected.
You don't need to wait until the project is finished to find out. If your fee is split across project stages, look at how much of the fee for each stage has been used against how much of the work has been completed.
If you've used most of the fee for that stage but still have a significant amount of work left to do, you've got an early warning that the project is heading for an overrun. You can then look at why it's happening while you still have options.
Capacity planning supports this. We use it at Benson Wood to see who is working on what, and the same principle can be applied in an architecture practice. Knowing who is committed to each project can help you spot where more time is being used than expected before the fee has gone. It also shows whether the team has room for more work before you recruit or take on another project.
How does scope creep affect architects' fees?
Every architect has heard the phrase "just one more tweak". It might be another option for an elevation or a client changing their mind about a layout.
Each request feels small, and charging for it can feel awkward. But those small amounts add up, and they're often why a project takes more hours than the fee allows.
The process for dealing with it is simple enough, as long as you use it consistently. Agree upfront how many rounds of revisions are included in the fee. When a change comes in that falls outside the agreed scope, record it and put a price on it before the additional work begins.
That makes the position easier for the client to understand too. They know what was included in the original fee and what they're now asking you to do beyond it.
A good client relationship works both ways. If a client regularly expects additional work without paying for it, you may need to consider the effect that relationship is having on the practice.
Why do architecture projects go over their agreed fee?
When a project starts using its fee faster than the work is progressing, the next step is to understand why. It may be that the original fee was too low. The scope may have changed since the proposal was agreed. A particular stage could be taking longer than expected, or more senior input may be required than you allowed for.
Finding this out during the project gives you the chance to deal with it, whether that means adjusting the resourcing or having a conversation with the client about the fee.
That information is valuable beyond the job you're working on too. If the same type of work regularly takes longer than you've allowed for, you have something concrete to use when pricing the next project.
When can an accountant help an architecture practice improve profitability?
An accountant comes into their own once the practice has grown past the point where the owner can keep the numbers in their head. That often happens when several projects are running at once and responsibility for delivering them is spread across the team.
We work with growing professional services firms, including architecture practices across Lanarkshire and Central Scotland. Our Growth Reports give you regular management information showing how the practice is performing during the year. That gives you the figures to look at project performance alongside the wider financial position of the practice. We go through the figures with you so you can use them when you're considering decisions about recruitment or the future direction of the practice.
If you'd like to start with the bigger picture, a Growth Vision Workshop is a day at our Bellshill office looking at where your practice is now and where you want it to go.
Get in touch with us to arrange a chat. There'll always be a coffee and a Tunnock's Teacake waiting for you.
Frequently asked questions about architecture project profitability
Should architects charge for design changes?
If a change falls outside the scope agreed with the client, there should be a process for agreeing the additional work and fee before it begins. Setting out what's included in the original proposal makes those conversations much easier when a client asks for further changes.
How often should architects review project profitability?
Review profitability while the project is underway rather than waiting until it's complete. If your fees are structured around project stages, comparing the fee used with the work completed at each stage can help you identify an overrun early enough to investigate it.
What is scope creep in architecture?
Scope creep is when a project gradually grows beyond what was agreed in the original fee, usually through small extra requests such as additional design options or changes to a layout. Each one feels minor, but together they can mean the project takes more hours than the fee allows. Agreeing on the number of revisions upfront and pricing changes before starting helps prevent it.
Can WIP affect the profitability of an architecture practice?
WIP is the value of work completed on a project that hasn't been invoiced yet. On its own, a high WIP figure doesn't mean a project is unprofitable, but it can show that a lot of work has been completed without being billed. Reviewing it alongside the project fee and time recorded can help you spot where a project needs attention.
