Matrix Design Build, LLC - Book Excerpt

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Excerpt from Profit by Design by Steven Lawrence Biegel, AIA
Page 202

Striking a balance between profits and producing quality design work takes time. In order to compress the learning curve and equip firm principals with background information on the profit side of this scale, the following list contains a specific set of recommendations to enable a firm to achieve higher profits. A successful and profitable A/E firm should:

1. have a well crafted business plan
2. have a profit plan as part of the business plan
3. have an enthusiastic attitude about profit
4. accept only the right commissions with the right fee
5. employ skillful negotiators
6. insist on well-written, clear and limited scoping documents
7. have a concise and thorough project management plans for each project
8. practice strategic project budgeting
9. treat profit as a project cost
10. use a detailed, automated time management system
11. generate invoices more frequently
12. have an aggressive accounts receivable collections plan
13. understand earned revenue
14. understand the relevance of financial statements
15. maintain consistently high staff utilization
16. create project reserve accounts as part of project budgeting
17. use a break even analysis with each budget cycle
18. control overhead expenses
19. shift indirect expenses to reimbursable categories
20. apply pressure to reduce DSOs
21. produce realistic estimates to complete (ETCs)
22. plan for backlog growth
23. outsource reproduction, graphic services and other equipment intensive functions
24. develop and enforce a once through design process
25. subscribe to an automated financial reporting system
26. provide PMs with immediate access to project management and project performance data
27. conduct periodic internal audits
28. teach staff about utilization, budgeting, contribution, reserves, overhead reduction and billable time
29. learn to say “no” when clients offer inadequate fees
30. develop a profit sharing plan with broad staff participation
31. reduce unbilled work-in-progress
32. have a checklist for booking new work
33. use design guidelines on all projects and tasks
34. avoid scope creep
35. perform work without mistakes
36. market services but sell time

Larger A/E firms, with many projects being performed simultaneously, may realize greater benefit from implementing these recommendations. However, smaller firms may find immediate improvement in financial performance by selecting and implementing just the first 6 or 7 items listed.

The search for a formula which adequately expresses the inter-relationships and aggregate benefits of multiple profit strategies continues. Eliminating variables is far easier than defining empirical boundaries and weighting the factors with an equation. One simplified algebraic expression intended to describe maximum gross profit might be:

Book expresstion

When viewed as a formula demanding many inputs to accurately reflect total profit potential, the importance of all profits in relation to Total Billings reveals that many profit strategies are necessary. The formula also shows that profit and billings are linked in a way that require maximum billing in order to derive maximum profit.

This formula results in a ratio expressed as the summation of all profit sources, net of expected losses or write off reserves, to Total Billings. The resulting factor is a percentage of total billed revenue. Successful firms should establish a goal relating to this factor and manage firm operations to achieve the goal.