There is a relentless march toward commoditization within the architecture, engineering, and environmental consulting industry. Often, project owners base their selection on historical performance or reputation, but increasingly, price plays an important role.
Most fees are determined either on a percentage of the construction costs or straight off hourly billing rates, so firms need to be in sync with the industry and their competition to make sure their price is comparable to their peers. After pretty clear indications that hourly rates were increasing through 2012-2015, billing rates have continued to increase but with a slightly different trajectory. Zweig Group’s 2017 Fee and Billing Survey of Architecture, Engineering, Planning & Environmental Consulting Firms contains clear evidence of some changes in how firms are billing clients and collecting unpaid invoices.
Year-over-year billing rate declines never spell good news. Engineering firms want to command the highest fee possible and be reimbursed promptly for the work performed. In fact, 91 percent of respondents this year stated that they increased their rates during the last three years by an average of 9 percent. More than ever, triumphing over the competition doesn’t just require an impressive list of similar projects and an eloquent value proposition. Your cost and fee structure now seem to take a prominent position as deal breakers. However, slashing fees to be price competitive is not the only answer!
Careful procurement of historical project performance data can help firms find ways to remain price competitive. Depending on the type of contract being used, firms can take different approaches to budget time and money. For instance, to budget for a time and materials contract, using the net multiplier as a billing tool, firms can convert direct labor dollars to billable dollars. In this instance, the net multiplier becomes the project budget. For fixed-fee contracts, the net multiplier can determine the maximum amount of direct labor that can be spent on a project without eating into a firm’s planned profit.
Owners and managers need to remember that cash flow from billing is the fuel of the business engine. When that stream is cut off or constricted, the firm’s financial health is compromised. Sixty percent of respondents stated that they had written off unpaid invoices as bad debt last year, with an average of 3.5 percent of their total invoices being written off. Smaller firms (sized 1-24 full-time employees) had the highest average at 4.8 percent and coincidentally had the lowest rate of firms that accept ACH payments (credit or debit transactions).
Zweig Group’s 2017 Fee and Billing Survey of Architecture, Engineering, Planning & Environmental Consulting Firms raises many questions about how firms deal with the pressure of providing competitive bids. The survey information provides some illuminating information and will help guide some of the most important decisions you make on a weekly and even daily basis. It includes billing rates for more than 300 job titles, market-level analysis of rates and contracts for 15 typical markets served by the AE industry, and some standard examples of how firms deal with the day-to-day struggles of collecting payments and issuing invoices.
The 2017 Fee and Billing Survey of Architecture, Engineering, Planning & Environmental Consulting Firms is available for purchase (print or digital version) at https://zweiggroup.com.
Will Swearingen is director of Research. He can be contacted at email@example.com.