Profit at a price

Strategic direction
Caroline Cole analyses the results of the RIBA Business Benchmarking For Chartered Practices and finds signs of spring sunshine beginning to brighten the outlook

This year, for the first time, it has been mandatory for all RIBA chartered practices with a headcount of six or more to take part in the annual RIBA Business Benchmarking survey.  Figures in the report are drawn from 808 participating practices. Because the mandatory rule does not yet include practices with five or fewer staff, small firms are under-represented, although with more practices taking part, this year’s report is more detailed. It contains analysis against four sizes of practice and all but three of the 14 RIBA nations and regions.

Together, practices in this report employ more than 20,000 people and are working on projects for almost 36,000 clients; they have a combined income of £1.44bn and £286m profit. 

Some surprises
Perhaps the most surprising news in this economic climate is that 58% of participating practices have met the Colander Benchmark of achieving a 15% profit to turnover ratio. While this is good news for most practices, it is not necessarily good for the profession as these margins have often been achieved through hard-hitting redundancy programmes and voluntary pay cuts. And overall, 42% fall below the profit to turnover benchmark: a percentage that rises by size of practice so almost half the large practices fall below the mark. 
As in previous years, the smallest practices average a significantly higher profit to turnover ratio than the largest, suggesting they can operate more efficiently.  Of course, in real money, the profit earned by the larger practices is considerably higher: small practices in this survey average £100,000 profit compared to £1.5m for the largest – salaries for partners and directors are excluded from profit here.

As last year, turnover per fee earner averages around £7o,ooo, while profit per fee earner averages £16,800.  This year however, both these figures rise by practice size, probably as a result of the sharp reduction in staff numbers that has taken place in many larger practices. 

Staff numbers have dropped: salaries account for only 68% of expenses this year – down 3% on last year and 2% below the Colander benchmark of 70%.  For large practices in particular, the percentage is worryingly low at 67%, suggesting that many practices have cut extremely deep with their redundancies – although it also suggests that, for some, ‘other expenses’ have remained stubbornly high.

However, not all practices have been prudent with their salary bills and 58% of practices continue to allocate more than 70% of their expenses to salaries; the smaller the practice, the more likely this is to be the case.  We would urge these practices to review this expenditure.

Although average salaries are similar to last year, the value of add-ons has fallen quite considerably so most take-home packages have fallen: on average equity partners and directors take home £69,000, compared to just over £78,000 last year.  For a mid ranking architect the figure this year is £33,700 compared to £34,100 last year, including add-ons.  The larger the practice, the larger the average salaries and the value of add-ons, so this reported fall is all the more depressing, bearing in mind the high percentage of larger practices in this survey.  Both salaries and add-ons are probably falling more dramatically than it might first seem.

Interestingly, most practices are operating in remarkably flat hierarchies, averaging 11% of personnel at associate level, 13% architects and 17% assistant architects. We would expect practices working on traditional building projects to have a higher percentage of junior staff.  There are two possible reasons why this is not the case: first, the recession has seen practices shed their junior, less skilled staff, which means senior staff are probably doing work that would otherwise be delegated, with a negative effect on profit and morale.  Secondly, practices are doing more front end work, so there is less demand for large teams to churn out production information.  Either way, this is a worry for those starting out in the profession.

Glass ceiling
As in previous years, a third of personnel are women, although most are in support roles:  less than a quarter of fee earners are women. However, it is when you look at the breakdown of staff by seniority that the dominance of men is seen most clearly.  At the most junior rank of architectural assistant, 38% are women.  Regardless of practice size, this percentage falls steadily as you go up the ranks. On average 32% of architects, 21% of senior architects and 18% of associates are women; by the time you get to equity partners or shareholder directors, the percentage of women has dropped to just 9%.

Premises are a sizeable burden for many practices and this year the average percentage spend on premises has risen again to around 12%, regardless of practice size.  It is difficult to make rapid changes to leases, so these costs can become especially onerous as staff numbers fall.  Premises costs per head average £4,700. 

Continuing last year’s trend, average IT costs have fallen yet further, to 5% of expenses.  If this trend continues practices face a real danger of falling behind, at a time when integrated design packages are becoming a requirement for many large and international projects. Given that BIM may become mandatory on major public sector projects, architects that do not keep up will lose yet further influence.

Time to spend
In recessionary times, there is a strong case for increasing marketing expenditure, to help maintain market position, investigate new markets and promote new services.  With some notable exceptions, the profession has always underspent on marketing, so it is worrying to see marketing budgets slip again this year to a mere 2% of expenses.  Practices that continue to build their reputations during the downturn will benefit when the recovery starts.

Like last year, two-thirds of the practices met the Colander benchmark of winning 50% of the projects they chased.  Practices must continue to be selective in the opportunities they pursue, especially with these tight marketing budgets.  As expected in a recession, repeat work has grown this year, accounting for more than half of all new work for practices.

Only two sectors of work account for more than 10% of the fees generated by practices in this survey.  The largest is residential, bringing in a third of fees, although this year the larger the practice the faster this percentage falls.  Education accounts for 15% of the market, so the turmoil around procurement for public sector education buildings is critical, especially for larger practices.  Looking at practices by size, the only other sectors to top 10% of fees are health and mixed-use developments, each contributing 11% of large practices’ income.  Regionally, the picture is more diverse. Sectors contributing double figures include local and government authorities in Scotland; health in Yorkshire, the South West and the West Midlands; industrial in the East Midlands and retail in the West Midlands and Yorkshire.

Despite speculation to the contrary, the percentage of income from projects outside the UK remains in single figures across the survey, although there has been a remarkable leap in international work for large practices from 4% last year to 14% this year. International work accounts for 10% of London practices’ income; in most other regions the figure is below 4%.

Good for some
This survey shows a snapshot in time, in a year when many practices have already changed their businesses significantly to deal with the economic climate. It is encouraging to see that many have made the adjustments required to remain in business, but disheartening for the profession as a whole that its youngest members probably bear the brunt of this.
Although it is too late to be included in the main benchmarking report, practices can still send in data and receive their own comparative confidential report, which includes a measure of financial efficiency and shows performance against six Colander benchmarks. Chartered practices can take part at no cost. Contact (JavaScript must be enabled to view this email address).

Caroline Cole director of Colander which, in partnership with MRM Solutions, carried out the survey for the RIBA