Clarity on the Financial Metrics That Matter Most to Your Firm

Posted by Megan Miller on July 3, 2018

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Good news for Architecture & Engineering (A&E) firms large and small – financial performance remains stable across the industry as uncovered by the 39th Annual Deltek Clarity A&E Industry Study.  That being said, the environment is not without challenges.

Overall, firms reported an increase in operating profit, but they also saw an increase in overhead rates coupled with decreases in utilization, net labor multiplier, and net revenue per employee. All of this indicates a stable, but potentially challenging environment. Here are a few of the key highlights from this year’s study:

  • Average operating profit on net revenue was 13.2%, up just slightly from 13% last year
  • Utilization rates dropped slightly this year to 59.4% from 60.0%
  • The net labor multiplier saw a decrease to an average of 2.96, down quite significantly from a spike of 3.02 in 2018
  • Firms saw a change in direction for overhead rates for the first time in five years, increasing from 154% to 155%
  • The average collection period dropped by one day to 71 days

So What’s Keeping Financial Leaders Up at Night?

Increasing profitability and managing growth remain top challenges for A&E firms, but quite surprisingly, managing merger and acquisition activity dropped to the bottom of the list. All other indicators point to a busy year in the M&A space, so firms are either confident in their abilities to handle M&A activity or the industry is preparing for other types of ownership transition. That said, it is worth noting that succession planning and ownership transition rose a few spots this year. It is interesting that this showed up as a top challenge in finance, and not in HR, but the key takeaway is that it is critical for firms to be prepared for the financial impact of ownership transition. This impact goes beyond financial ownership, but can also impact client relationships and the ability to win projects if key relationships aren’t effectively transitioned.

 

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By the Numbers

Here’s a closer look at some of the key financial metrics, including operating profit on net revenue, utilization, net revenue per employee and average collection period (for full details on each of these sections and more, download the full report).

  • Operating Profit on Net Revenue: At 13.2%, the average operating profit on net revenue was up just slightly from last year’s 13.0%. This continues an eight-year gradual climb from a low of 8.4% in 2009. Since firms must achieve at least 15% operating profit on net revenue to be a high performing firm, it is expected that high performers excel in this category. But, high performers aren’t just reaching the minimum. They are outpacing all other firms by a substantial amount and are seeing numbers that are more than double those of all other firms.
  • Utilization Rate: Utilization rates dropped slightly for the second year in a row, declining to 59.4%. Firms may be having a harder time finding, onboarding, and retaining talent leading to new employees being able to demand higher salaries. Employees may also be tasked with key non-billable activities like business development that will pay off down the road.  
  • Net Revenue per Employee: Reversing a five-year upward trend, net revenue per employee dropped nearly $7,500 this year. This number flattened out sooner than expected, but aligns with the downward trends reported for utilization rate and net labor multiplier.
  • Average Collection Period: Continuing a downward trend since 2011, the average collection period dropped by one day to 71 days. This means that companies are turning labor into cash faster, a positive development for all involved. Large firms continue to find ways to reduce their average collection period and improve their cash flow.

Next Steps

So what’s impacting your firm’s bottom line? Are you tracking the right KPIs for all areas of your business? Are you tracking the KPIs that relate to your firm’s growth goals and initiatives? Do you know what’s included in your overhead rate? And finally, what are you doing today to help set firm up for financial success tomorrow? These are all important factors to consider given today’s challenging, yet stable environment. Moving forward, financial leaders at A&E firms large and small must devise a means of increasing firm profits while controlling talent acquisition costs and investing in their biggest asset: their employees. This will require better collaboration between financial and human resource professionals to understand the true cost of employee retention.

The 39th Annual Deltek Clarity Architecture & Engineering Industry Report provides critical benchmarks and insight for financial management, as well as project management, business development, and human capital management to help you assess the health of your firm and get it running as efficiently and effectively as possible. I encourage you to download a complimentary copy of the report today and be sure to register for our upcoming deep dive webinars taking place now through the end of July.