Episode 116 - Business Resilience in Architecture Practice

This week we will be talking about Business Resilience in Architecture Practice. This episode content meets PC4 - Practice Management of the Part 3 Criteria.

Resources from today's episode:

Book:

• Good Practice Guide: Business Resilience

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Transcript

Episode 116:

Hello and Welcome to the Part3 with me podcast. 

The show that helps part 3 students jump-start into their careers as qualified architects and also provides refresher episodes for practising architects. I am your host Maria Skoutari and this week I will be talking about Architecture Practice Resilience. Today’s episode meets PC4 of the Part 3 Criteria.

Business growth and resilience is key to a practice’s survival and architectural businesses need to grow like every other business, which means the requirement for attracting new projects, taking a bigger share in the Market they trade in and building resilience in a way as to mitigate risks. Therefore, to be resilient, a practice needs to have a clear sense of purpose and direction. With a structure of sound decision-making, backed up by evidence, the business will have more of a chance of remaining stable. 

First, identifying the sectors in which the practice should expand to will be greatly valuable for its growth:

Throughout the year, a list should be assembled outlining the projects worked on and categorising them into different sectors. This will typically also be requested by the practice’s professional indemnity insurance every year to assess the sectors the practice has worked in so its generally useful to have such a list prepared as it is also a useful tool when preparing marketing plans.

When preparing the sector list, it should be kept simple and appropriate to the work the practice does and seeks to do. For example, ‘residential’ can be broken down to a granular level, but how many different types of residential projects do you actually work on? How different from one another are they? How different do they need to be for you to be able to make use of the data? Once you have your own list, you can establish a simple table that cross-references your descriptions against those on the published lists and in forms that you will need to return annually. This will not only speed up the process of filling in the forms, but will also help in other ways.

Each time a new enquiry comes in, it should be assessed based on what sector the project is likely to fall into and attach the practice’s agreed sector name to the details. Then this will provide the practice with a growing register of searchable sectors, allowing them to access any other information they collect within job folders, such as fee quotes, time spent and invoices issued. 

Sector information may also come from social media activities by keeping a record of the amount  of likes, engagements or impressions a certain sector post has received. This will be the business’s unique information and monitoring it regularly to see if it changes and, when it does, to be flexible enough to adapt the business plan to accommodate it. 

So once the sectors have been identified, then the scale of projects will be the next important step to determine as part of the business’s plan:

This is mainly determined by the capacity the practice has to take on projects and ensuring adequate resource is allocated to the work agreed to be undertaken. For example, if a large project is secured this means a number of staff can be kept busy for longer, and while large projects require more drawings, more staff and more resources, they don’t tend to waste as much time proportionally as small projects. When a project takes a long time to complete it can put severe downward pressure on profitability. It is difficult not to waste time on small projects, and even harder to get paid for all the time taken. This is because small projects have the same points to consider along the way, such as client approvals, local authority permissions and costings, resulting in disproportionately long periods of time waiting for other parties between short periods of time spent working on the project. To assess the contribution that small projects can make to the practice, their value should be assessed from different perspectives and then define what part they have to play in the business plan. 

For example, micro-projects might not increase the business’s fee income substantially but they have a role to play in the education of students, as trainee staff will learn a lot from doing them, although you may have to allocate a lot of their time to a ‘house account’ in their timesheet for their training. If a budget has already been set for this as part of the business plan, the value becomes worth it, but if not, it could become a drain, so it is key to balance the types and scale of projects the business decides to take on. 

So once the sectors and scale have been assessed and balanced, the next part the business should consider is selecting the right types of projects for the practice:

A useful way to monitor this is by mapping the practice’s past projects and identifying what types of projects make the most money and then the practice can choose where to focus their efforts to seek new works, whether on the basis of sector or scale, or potentially location. Then once a decision has been made to target a particular type of work, resources should be focused on making it happen.

The key question to consider is where the majority of money comes from and in what proportions. When this information is attributed to the projects it provides the practice with a powerful dataset on the potential growth of the business and assists in making an informed decision on where the business wants to go. Targeting projects that suit the practice’s specific skill sets, which have been borne out by the numbers, will drive up fee income and improve profitability.

A key element that feeds into all these items that are considered when selecting projects is Time Recording:

Probably all practice use timesheets to record the time spent on each project to be able to accurately inform if the allocated fee was estimated correctly or not and to inform fees for future projects based on similar sectors and scale. 

Most practices record time against the RIBA Work Stages so users can enter their time against each stage. This is important whether the billing is on a time-spent basis, a lump‑sum amount by percentage of work complete or any other method, because to be of maximum value the time record needs to be available for review in the future. It becomes the best method in determining how long a piece of work actually took. So if the work element recorded is broken down into RIBA Work stages, it is significantly more useful to the practice when reviewing the project or when pricing another similar job as mentioned.

It is also important to include an option for additional work on time sheets, assisting in undertaking a time analysis of the project to show if there is any overspend relative to project budgets giving the practice the chance to steer the project back on track. Keeping accurate time records is one of the most important things for a business as they show everything, from what you should charge on one project to how much to quote on another. They must be accurate, and the level of detail needs to be proportionate – they must also be useable and staff must be able to complete them efficiently. 

If the initial fee proposal is set out in a manner that can be reproduced in the settings of the time-recording software or spreadsheet – as a list of services the practice will be commissioned to provide – this will simplify the time-recording process. It will both limit the information that will need to be entered and ensure that time is recorded for each service the client has commissioned. The time records can then be transposed directly onto the client’s invoice, so they will see the cost for each service they agreed to pay for. This also makes it easier for timesheets to be completed quickly and invoices to be issued promptly, meaning there is more chance to be paid on time – which will increase assets, reduce working capital and make the business more profitable.

Timesheets also supply the information required for the preparation of a work-in-progress (WIP) calculation. This is critical in providing a picture of the practice’s profitability at any point in time because it quantifies the fees due (current assets). The WIP will need to be calculated annually, for the end-of-year accounts. However, calculating it on a more regular basis can provide helpful snapshots of where the practice’s efforts are being spent. The warning here is that, although it is the practice’s aggregate record of fees ‘earned’, WIP does not always equal the fees due. Unless you track and respond to the overspend on time recorded against a project minute by minute, the WIP figure will include this overspend. Tracking so closely is unrealistic, but monitoring the overspend through better use of timesheets can produce project analytics relatively quickly and easily. WIP is effectively a running total of the value of work waiting to be invoiced. The amount of WIP reflects the number of people working and how efficient they are.

Timesheets then feed into the requirement for keeping accurate records:

For architectural practice, keeping accurate records can be particularly important as there is always a possibility of being sued by a client for negligence. Having records will also help in day-to-day work and activities, not just when the practice is facing the threat of a claim. For example, keeping a daily note of the weather can provide a very quick way to assess a contractor’s claim for an extension of time due to inclement weather. Such records should be centrally located so that any member of staff can always access them. Any notes added to the project records must include the author’s name, the date and the specific project’s unique reference. Important matters to record include:

• changes in scope
• client’s instructions and questions
• builder’s requests and comments
• other specific items of information, such as feedback from the planning or building regulation authorities.

Resourcing is also a very important element to business development and resilience:

Analysing time spent by different staff members shows the business their true availability to work on projects and reveals how much time they spend on project work and how much time they are unproductive.

Choosing who will do what and when is a complex task. For instance, if work on site is delayed because you haven’t supplied information in a timely manner, the cost can be significantly more than if you miss a deadline for the submission of an application to the local authority. Essentially, practices must predict how much time each task or activity is likely to take, and then hope that it ends up taking no more than the amount of time esrimated, both in terms of physical hours on the clock and the remaining chargeable time left in the fee agreement. Depending on the scope and scale of the project, the increments of time being planned out may vary from a few hours to days or, even, months. In any given year, employees will have time off for holidays, sickness and training, be involved in non-fee-earning work and also waste a certain amount of time. This can be called  ‘unrecoverable time’, as no one can be expected to work 100% of the time every day – it’s unrealistic and, even if they could, it would only be for a short time because it’s unsustainable. Knowing what units of time are available among the paid staff to distribute between the different projects is step one in resource programming.

Resource programming is critical for forecasting the overall budget, whereby each fee-earning staff member’s total hours are multiplied by their utilisation percentage and their charge-out rate will show their basic fee turnover. If the practice’s overhead amount was added per year and distributed evenly between fee earners, the charge-out rates can be determined on what should be applied to each member of staff. If salary information is linked to the calculation even slight differences in the charge-out rates can affect their ability to deliver a profit. This method also allows the practice to test the effect on the accounts of apportioning part or all of their own cost of practice directors to the business as an overhead. This frees the director from the expectation of contributing a consistent daily number of hours to cover their portion of the overhead, because they themselves are accounted as an overhead.

Once the time available from the key staff workforce is known, the practice then needs to understand how much time each task will take. This is where time sheets and job records play their part.

And then in turn they become an extremely useful tool for invoices, which most practice use timesheets for invoicing purposes:

Sending out invoices is one of the most important tasks when running a business and practice owners should determine if they should carry out invoicing and it is really the best use of their time, or Im employing someone else to prepare them is more suitable. The chances of getting paid are increased if invoices are issued by someone from a finance role or department, rather than by a director.For a client, being confronted with a separation of these roles might help them, as they may respond differently to a director and to another person in from the practice.

The financial activities a practice is likely to encounter in running a business also deserve the time and skills that specialists can bring to them. Apart from the preparation of invoices, tasks related to purchase orders, payment of bills, subscriptions, loan interest, bank reconciliation and cash flow forecasts, as well as calculation of VAT, can all be undertaken by someone else. 

This then leads to Payroll:

Organising the payment of salaries is the primary function of a payroll department. The confidential nature of a person’s salary can raise issues about the security of information if wages are calculated and distributed within the office, although this is not a reason on its own to hire someone specifically

to manage payroll. Workers’ salaries are calculated according to their individual circumstances, and people are not all the same. Qualified staff may need to have student loan payments deducted. Even if one person is a practices employee, the practice must then put certain staff into a workplace pension scheme and make contributions to it. Tax deductions will also vary, and sick pay, maternity leave and holidays all bring additional layers of complexity. 

These layers of complexity may lead the practice to conclude that there is value in employing a separate payroll department or subscribing to an online service provider, depending on the scale of the operations. Such an arrangement can also provide additional value. Someone whose skills and expertise are centred around the calculation and payment of salaries can offer advice on appropriate

salaries for different grades, pay rises, procedures relating to time off for sickness, maternity or paternity, and so on. 

Ensuring that all these items including project allocation, time allocation, resourcing, invoicing and payroll are effectively planned and monitored throughout the year is key to maintaining a practices resilience and ensuring its smooth operation. 

To sum up what I discussed today:

• Business growth and resilience is key to a practice’s survival and architectural businesses need to grow like every other business. 
• They should first start by assembling a list throughout the year outlining the projects worked on and categorising them into different sectors.
• Then once the sectors have been identified, then the scale of projects will be the next important step to determine as part of the business’s plan
• Then the next part the business should consider is selecting the right types of projects for the practice. Targeting projects that suit the practice’s specific skill sets, which have been borne out by the numbers, to drive up fee income and improve profitability.
• These will then feed into the key elements of running the logistics of the business which include, time allocation, resourcing, invoicing and payroll - all key aspects in running a successful and resilient business