Why Should an A&E Firm Departmentalize? or Why Not?

Posted by Shari Gardner on September 27, 2016

AEC Industry

by Ian Denny

I got an email from an AE firm recently saying “I want to scrap my departments. I don’t need all this information.”

I said, whoa, cowgirl, let’s talk about this. There are some powerful tools at your disposal by using departments in your accounting and project management software. But, that doesn’t mean departments are for every architecture or engineering firm.  Since we just reached year-end, many A&E firms are considering the question of whether or not to departmentalize. 

Here’s a few things to think about.

1.  Discipline, Geography, or Both?

Traditionally, architecture and engineering firms have departmentalized by discipline. That is to say, an engineering firm with a civil, structural, and mechanical team might operate in three departments. Large firms may also want to departmentalize by office location if they operate in different cities, states, or regions. In this instance we may need to track profit and loss by tax jurisdiction. Some firms may also need both, to be able to assess profitability by department and location.

A good AE industry specific accounting software will allow you the flexibility to track profitability across these kinds of profit centers, and allow you to group individual departments together in different ways. For example you may want reporting across all architectural departments in all your states, or reporting across all disciplines in one state, or simply a consolidated company-wide profit and loss.

2.  People or projects? Or both?

When deciding to track project and general ledger profit by department, it’s important to decide between following the department of the project or phase and following the department of the person. Certain tax situations may automatically preclude or require one or the other, or you may decide that one or the other method suits your style of management better.

Don’t know how to answer this question?  Think about the following:

  • Do we want each department to have its own indirect labor costs, for admin, vacation and sick time?
  • If Civil borrows a structural engineer for a project, do we want that profit to go to Civil because they own the project, or to structural because that’s the department that had the expertise and the available staff?
  • If departmentalizing geographically, is the tax jurisdiction for our corporate income or excise taxes based on the state in which the work was performed, or other criteria?

The answers to these questions will impact your projects’ work breakdown structure, the detail with which you must budget them, and the workflow of entering time and expenses.

3.  What about administrative items?

After choosing among your various options for how to departmentalize, then we come to the question of what to do about items we don’t really have a department for. For example, if we’ve departmentalized by discipline, of course projects and phases and direct staff are going to have a department.

But what about Cindy in accounting?  Where do we capture her time, her payroll taxes, and her vacation? And what do we do about the company phone bill and office rent?

Here again there is more than one approach. We could create a “Corporate” or “Admin” department to capture costs that are not associated with any of our designated profit centers. A large firm might even find need for multiple admin departments if they are departmentalized both geographically and by discipline. We would then use groups of departments to create an effective way to report profitability across geographical units or across discipline units.

Another choice would be to say that we want to lump admin with our main department. For example, if we’re an architectural firm primarily with a small landscape design unit, perhaps corporate admin gets lumped with architecture for ease of use.

This provides adequate project-based departmental reporting, but does skew the profit and loss statements when compared to one another. This method may also be appropriate when a secondary geographic department has been setup essentially for tax reasons, and the profitability of an office is not a metric we’re concerned about managerially but simply for tax compliance.

Lastly we can also allocate expenses. Advanced software will allow you to choose certain overhead accounts, like phone or rent, which you would like to distribute proportionally among your departments. This raises the question of how to determine the distribution, which should be consistent and transparent to stand up to an audit.

And now, for the summary.

Good accounting software for engineering and architectural firms will make it easy for you to view your income statement in a consolidated or departmentalized fashion. Setting up and properly using departments is a delicate process, and you should seek the advice of industry, accounting, and software experts before making any change toward or away from more departments.

In some ways, departments make life more complicated, for example, from a data entry point of view. But they can be extremely powerful reporting tools that will allow you better insights into your projects’ profitability, and better compliance with complex tax and government contracting concerns.

 

To learn why firms are moving to A&E industry specific accounting solutions read the whitepaper “Top Considerations for Adopting an A&E Industry Specific Accounting Solution”.<Download Now>

Note: This article was originally published on the Axium.com A&E Blog, which is now the Deltek.com Architecture and Engineering blog.To learn more about Deltek Solutions for the A&E industry visit the Deltek Ajera and Deltek Vision product pages.