Average Income for architects [Canadian Construction]

Average Income for architects

key-financial-ratios-for-engineers-architectsBy Dave Wahby, Principal, Wahby & Associates

The income statement measures income relative to expenses for the period of time covered by that particular statement. The balance sheet examines the relative relationship between the firm’s accumulated assets, and its liabilities, and its owner’s equity as of the date of the balance sheet.

3 Key Ratios from the Income Statement Engineers and Architects Should Use:

• Direct labor utilization rate

• The breakeven overhead rate

• The effective multiplier

It would be my suggestion that all firms track and monitor these three ratios on a monthly and year-to-date basis in their accounting software to understand how financially effective they are at operating their firms.

The direct labor utilization rate is payroll charged to job numbers divided by total payroll. The industry average direct labor utilization rate is around 65%. The remaining 35% of payroll (indirect labor) is spent for paid benefit time-off, administration, marketing, training and all other activities not directly identified with any particular client project. Since payroll is by far the single largest cost to operate a firm, generally speaking, the higher the direct labor rate, the more efficiently managed economically is the firm.

This brings us to the breakeven overhead rate.

Breakeven overhead is total indirect expenses divided by direct labor. Indirect expenses include indirect labor along with all other general and administrative expenses such as payroll taxes, benefits, heat, light, rent, etc. incurred to operate the firm, but before any discretionary expenses such as bonuses, elective profit sharing contributions and incomes taxes at the business level.

The current average breakeven overhead rate for the industry is approximately 135% of direct labor. For every dollar of direct payroll firms spend on projects, firms on average incur an additional $1.35 of indirect expenses (overhead). The current industry rate of 135% represents a decrease from previous years. The primary reason for this decline is the fact that direct labor rates at firms have been increasing in recent years due to high workloads and tight schedules.

Since direct labor is the denominator of the overhead formula, as direct labor rises (reducing indirect labor and shrinking the numerator) you would naturally expect to see breakeven overhead rates fall as a result.

Our last income statement ratio architecture and engineering firms show monitor is effective multiplier. The effective multiplier is net fee income divided by direct labor. Net fee income is total income less all direct project expenses other than payroll. Stated another way, net fee income is the portion of gross fees billed that you get to keep for your effort on projects after subtracting out costs of consultants and other project specific expenses incurred to complete projects. According to the latest survey information, the average effective multiplier achieved is about 2.90. For every dollar of direct labor spent on projects, firms generate about $2.90 of net fee income. In essence, the effective multiplier measures the firm’s efficiency at converting direct labor spent completing projects into revenue dollars.

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