The Ultimate Guide to Budgeting for Architecture and Engineering Firms Part 3

Part 3: Budgeting Architecture and Engineering Projects to Feed the Big Picture

By Ian Denny, A&E Industry Expert

In our first installment, we created an overview of an integrated budgeting process for architects and engineers, and in part two, we delved into making a rough sketch of what an engineering or architecture budget should look like.  Today, we’ll get a little deeper and talk about the most critical piece of a architecture and engineering budgets: projects.

Scope – Schedule – Budget

You could call these either the Holy Trinity or the Bermuda Triangle of the project budgets of architects and engineers.  The three points are always connected, and it’s virtually impossible to change one of these variables without also changing one or both of the others.

Fortunately for you readers, if you have a good industry-specific accounting and project management software for engineers and architects, these three variables that you maintain on your projects will help you immensely when trying to translate those project budgets into a company budget, especially in the near term.

Scope, of course, is what we hope our project will accomplish. While this is usually expressed in words and in a contract, the scope of a project will typically also have a major impact on its work breakdown structure, or the way the project is organized. For example, many architects bill a vast majority of their projects with phases such as schematic design, design development, etc. Each of those phases has a scope.

Additionally, one project may be scoped to go through only certain parts of the standard AIA phasing. Many of my clients also have projects where they may do some initial work with one scope, with plans to potentially be awarded additional scope later, such as a feasibility study followed by investigations, planning, etc.

The scope will lead directly into determining the budget and the schedule. While a small minority of firms in this industry do a lot of their work on an open-ended, time and expense basis, most architects and engineers do the majority of their work within the constraints of a budget and a schedule, even if it is only an estimate and not a hard cap or maximum.

It will be impossible for your accounting software to predict revenue on a job without knowing how much total revenue we expect the job will generate, and how long we think it will take to perform the work that will earn us the revenue.

So, long story short, be sure to setup your projects with a clear scope, a clear budget, and a clear schedule. They are often moving targets, but by providing these important details we can get back to the company budget with something a lot more concrete than a wish list of revenue dollars.

Resources: Finite, Schedulable, Accountable

What is a resource? Different project management software may call these different names, but here’s how I see this: a resource is something we need to call upon, to perform the work needed on our projects that is in finite supply, that is schedulable, and that is accountable.

An employee is the perfect example of what a resource is. That employee only has 24 hours a day, 7 days a week available to work on your project. Some of my architecture clients can appreciate that joke. But in all seriousness, there is a limit to what one person can do. So this is a good example of finiteness.

Another good example is an employee type – we may have only a certain number of civil, structural, or mechanical engineers in our firm, so we need to make sure, when we plan to take on new work, that we do not overextend that staff, or that we plan to add someone new in time to perform the work. Otherwise the quality of work will go down, or we will be stuck using the wrong kind of staff for the work, such as having a principal or project manager have to pitch in on something we could do at a much lower cost rate.

They are also therefore schedulable. They can’t do 500 hours in one month and none in the next. They have to keep their workload within a certain range, or all the Starbucks in the world can’t help them.

But guess what else good examples of resources are? Expenses and consultants.

While we are not in complete control of a consultant’s time, much as we might like to be, we do need to make sure that we can schedule them as they are indeed in finite supply. They are also accountable for delivering a service to us, like our employees are, within a timeframe, within a budget, and with a certain goal achieved. (Scope-schedule-budget)

So, an Electrical Consultant is a resource. A drafter is a resource. How about expenses?

In delivering a project, we will inevitably incur some expenses that we need to either bill to the client as reimbursable, or that we really ought to have included in our fee estimate if we are billing on a percent complete or fee/lump sum basis. Good examples of this kind of resource are mileage, photocopies, travel expenses, permits, etc.

For the big picture we’re working towards in this blog series, why should we care about something as specific as resources?

It gets back to the difference between labor and other types of revenue in the Architecture and Engineering industry. Labor is where we will make or break our firm’s bottom line. Expenses and consultants, while they may sometimes represent a large volume of the dollars that flow through our books, do not typically contribute a major source of profit to the bottom line, even if we’re charging markups, because of the administrative time associated with passing those items through.

We need to clearly identify the resources we plan to use on our projects, at the very least at the level of labor vs. expense/consultant. Otherwise our efforts to predict revenue and direct labor cost will ultimately be fruitless. Or at best, they’ll die at the top-down stage of the process.

Accounting managers are often, historically, left in the dark in this very important area. Clients will tell me “I don’t know how much we’re going to spend on expenses or consultants on this project.” All the more reason to get your project managers more involved in your integrated accounting software.

I have found that 90% of the time, project managers actually did budget for expenses and consultants. That information simply didn’t make it all the way to the back office. Or the accounting system in use didn’t have a place to put it.

Business Development Forecasting

Here’s another term that not everybody may be familiar with. Other terms used for this are proposals, job development, project development, client development, or direct marketing. Business Development is prospective work.

Over the last three or four years, I have seen a huge upwelling of interest in tracking this. Architects and engineers, due to the economy, are spending vastly more time on business development than in the past, and many firms are pursuing a broader range of projects than they have historically. There is also an increased interest among firms in doing business with the government at various levels, which often requires a more intense business development process than doing business in the private sector.

As a result, firms are looking to integrate business development tracking with project management and accounting, and they want to forecast their revenue and costs based upon the progress of those business development efforts.

I’m going to come out and say it. Deltek Ajera  does an incredible job at integrating business development, project management, and accounting in a way that minimizes input and maximizes output.

Best practice: Have one job setup in your database from proposal to project. You need to capture the cost of that proposal in connection with the actual job, which will therefore give you much better insight into market sectors, clients, project types, and competitive situations where you do well and not so well. You may even have multiple BD efforts within one job, if as I mentioned above, you have an initial job followed by the possibility of additional scope.

Most importantly for the topic of the day, this practice of connecting proposal costs to the actual job will allow you to forecast your revenue based on business development efforts in progress in conjunction with projects already under contract.

To accomplish this, during the business development process you will want to establish the scope, schedule, and budget of the potential project. Of course these variables are subject to change as you progress from a request for qualifications to a proposal, interview, etc. But, an estimate is much better than a blank.

Lastly, on your business development efforts, you can assign a percent chance of winning. This value will factor the potential budget of the project, allowing forecasting to take into consideration the likelihood that various proposals will actually turn into jobs. If you have only one proposal underway, this is somewhat irrelevant, but when assessing a broad range of BD efforts as most firms are, this factored forecast is a powerful tool.

Read Part Four of the Ultimate Guide for Budgeting for A&E Firms Now!

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