A Clear View

Financial Data Shows That Firms are Profitable, Public-Sector Work is Healthy

By Will Swearingen

Zweig Group’s 2019 Financial Performance Survey of AEC Firms gives firm leaders a clear view of industry trends and financial metrics that can help them effectively manage their resources. A great way to improve profitability is to have a strong understanding of financial metrics and accounting activities. This report isn’t only for executive-level leaders, either. AEC professionals at all levels of the organization can benefit from understanding what metrics are tracked and how their performance helps improve overall firm performance.

Many of the metrics tracked by Zweig Group over the years have ticked back. Pre-tax, pre-bonus profit on net service revenue bounced from 12.7 percent last year back up to nearly 14 percent. This is certainly a positive indicator as year-over-year growth metrics for gross revenue and full-time staff equivalents also moved back up. Firms operating predominantly in the public sector enjoyed strong growth coming off a relatively flat 2017-2018. Firms operating predominantly in the public sector grew revenue by 11 percent, compared to 6 percent for firms in the private sector, and grew their staff count by 4 percent where private sector firms were relatively flat.

Net service revenue per full-time equivalent (NSR/FTE) again reached a 10-year high. It is encouraging to see the year-over-year growth in NSR/FTE (2.2 percent) outpace inflation (1.8 percent) this year, after not doing so in 2018. NSR/FTE was $144,434 last year and this year that number reached $147,790. Over the last five years, the growth of NSR/FTE for AEC firms was around 15.3 percent, nearly seven points above the average US inflation of 8.6 percent for that time frame.

Analyzing staffing ratios, very high-profit firms have nearly seven (6.9) technical professionals to each administrative staff. When comparing this to their revenue factor (2.18), the same trend is seen based on firm profitability. Zweig Group believes that the revenue factor is the strongest measure of a firm’s overall performance (calculated: NSR/total labor or chargeability x net multiplier). Low-profit firms have a staffing ratio of 3.8 and a revenue factor of just 1.76. The same trend is not found when comparing staffing ratios to chargeability or utilization, indicating that the fee charged and total labor utilized are more important than just looking at hours charged to projects.

The report also analyzes operating costs, looking at group insurance, vacation, and PTO as well as payroll and labor expenses. One area with an interesting divergence was group insurance as a percentage of total costs. The publication shows this figure decreasing over the last two years where data in Zweig Group’s 2019 Policies, Procedures and Benefits Survey of AEC Firms clearly shows insurance costs going up. So, what gives? As part of total costs, vacation and PTO costs are included, which have jumped from 5.7 percent to 6.3 percent of total costs. As firms look to satisfy the flexible work environment that the market demands, their costs structure is also changing.

Zweig Group’s 2019 Financial Performance Survey of AEC Firms and its accompanying Benchmarking Tool show how firms performed on nearly 100 indicators. Each measure is described in detail, so you can better understand the implications of being excessively high or low on any one measure. Firms can use this to target internal initiatives, investment opportunities and improvement efforts to match their best performing peers or simply determine if their metrics are moving in the right direction.

Will Swearingen is Director of Ownership Transition at Zweig Group. He can be reached at wswearingen@zweiggroup.com.