Industry Outlook: A Rising Trend in Efficiency and Profitability

By Will Swearingen
Director of Research for Zweig Group

To be average is acceptable, but not optimal. A great way to improve profitability is to have a strong understanding of your firm’s financial metrics and accounting activities. This information isn’t only for executive-level leaders, either. Engineers at all levels can benefit from understanding what financials are tracked and how their performance helps move specific metrics.

But having this understanding within a company will not always reveal how that company compares with others, or what is driving the market. Unless you have an advisor already on board, how do you determine how your firm is doing? What are your best indicators of profitability? That’s where it’s helpful to find some analysis already done for you.

Zweig Group recently released the 2017 Financial Performance Survey of Architecture, Engineering, Planning and Environmental Consulting Firms. Overall, the survey shows a three-year trend of rising efficiency and profitability in the A/E industry.

More than 100 firms were surveyed across nearly 100 indicators. In the report, each measure is described in detail to better reveal the implications of being excessively high or low on any one measure. Firms can use this information to target internal initiatives, investment opportunities and improvement efforts to match their best performing peers, or simply determine if their metrics are moving in the right direction.

The survey found net service revenue per employee (NSR/FTE) reached a 10-year high this year, with the efficiency of firms’ labor continuing to outpace average inflation rates in the U.S. NSR/FTE was $137,113 last year, and this year that number reached $141,891. Over the last five years, NSR/FTE growth was around 12 percent, five points above U.S. average inflation of 7 percent for that time frame. However, with improvements in technology, firms are continuing to find ways to make more money with the staff they have. If your firm’s revenue per employee is not increasing each year, you need to take a good look at your operations.

Since 2013, pre-tax, pre-bonus profit as a percentage of gross revenue has risen each year. This year, profits grew from 9.9 to 11.6 percent of gross revenue. As a percent of net service revenue (NSR), profit rose from 12.7 to 14.6 percent. Firms saw growth in 2016, and there was ample opportunity for leaders to invest in their firms.

One way to measure profitability is by looking at a firm’s breakeven multiplier. This shows the dollar amount a firm must generate through direct labor to cover all labor and overhead costs. The overall median was 2.54, meaning a typical firm needs to generate $2.54 for every $1.00 spent on direct labor. As expected, high-profit firms led the way with a breakeven multiplier of 2.45 and low-profit firms lagged the sample with a breakeven multiplier of 2.91.

The last few years, lower interest rates across the U.S. have provided opportunities for firms to take advantage of low-cost capital. Debt-to-equity values moved up to 1.04 this year from 0.80 last year. Researchers were pleased to see that the average collection period for accounts receivable came back to earth from last year’s nearly three-month collection period, down to around 75 days. But this is still a bit high. Extended collection periods can have a great impact on cash flows, bad debt write-offs and eventually impact a firm’s liquidity position.

Backlogs continue to increase year-over-year, with an average of 7.2 months. Firms working predominantly in the public sector reported higher backlogs (8.2 months), compared to predominantly private sector firms (6.1 months). Public sector firms also grew staff at a higher rate than private sector firms, adding 11 percent to their headcount where private sector firms grew by less than 7 percent.

To quote the great John Wooden, “Success comes from knowing that you did your best to become the best that you are capable of becoming.” Use this year’s Financial Performance Survey and Benchmarking Tool to identify opportunities, set goals and develop the action plans to meet those goals.

About the author:

Will Swearingen is director of research for Zweig Group. He has worked as the lead researcher for Zweig Group’s industry research team for the last year. He received his M.B.A. from the University of Arkansas and his B.S. in Biology from UNC- Asheville. He can be reached at wswearingen@zweiggroup.com.

Zweig Group is a leading research, publishing, and consulting resource for architecture, engineering, planning, and environmental consulting firms. With a mission that focuses on improving the business performance of consulting firms in the industry, the Zweig Group consists of experts in strategy, mergers and acquisitions, business valuation, ownership transition, marketing, business development, market research, financial management, and project management. The Zweig Group also provides a comprehensive suite of products including newsletters, industry reports, executive training, business conferences and more. Visit zweiggroup.com to learn more.