Financial Management

“PSMJ not only helped us develop benchmarking metrics, but in the process enabled us to strengthen our financial systems. I would certainly do business with PSMJ again!”

 – Alice Tutunjian, Director of Marketing and Strategic Planning, Chambers Group, Inc.

Six Classic Ways to Lose Money

1. Getting sucked into the Commodity Trap. There is no intellectual property in a commodity – it can only be consumed. This means that if your design services are treated as a commodity, you have zero chance of differentiating your offer, or of value adding without doing it for free. You can’t win in this game, because there will always be a competitor more desperate, or more stupid, who will get the job. Don’t join the race to the bottom.

2. Failing to measure and track rework. In most design firms, the cost of rework exceeds profit – often by as much as double. Not tracking it (on time sheets) prevents you from doing anything more scientific than just guessing. And makes improving it impossible.

3. Setting design fees as a percentage of construction cost. Although this is the most commonly used method on the planet, it is also the most illogical. If you work extra hard to design a great project at less than the project budget, should you be paid less for your effort? In certain circumstances, such as a rising construction cost market, percentage fees will work to your advantage. But there is no real correlation between construction cost and design cost.

4. Tracking progress by hours rather than dollars. Some principals, not wanting to be open with staff about profitability, assign the number of hours allowed for design and documentation. Besides ignoring the complex relationship between experience, efficiency and salaries, this tactic psychologically denigrates the PM’s sense of overall project responsibility. It’s delegating responsibility without authority – always a bad idea.

5. Not allowing time for quality checking. An hour spent finding and fixing errors before a project goes to tender is worth ten after the contractor gets hold of it.

6. Charging unwarranted principal time to projects. In some firms, principals try to increase their “changeability” by loading hours onto projects that are running under budget. This does zero for increasing firm profitability, and it is highly demoralising for project managers who conscientiously try to bring in projects under budget.

Great Financial Mgt Resources

Dollars & Sense:  PSMJ’s Guide to A/E/C Financial Management

Dollars & SenseInsufficient cash flow is the primary cause of 92% of bankruptcies. Yet, 40% of design firms do no financial planning at all. Many of these firms have no idea how to increase cash flow, manage cash, or use cash to their best advantage.

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The Value Pricing Imperative for Design Firms

vpinew-2013-add1For a better way to think about firm and project profitability, read Frank Stasiowski’s classic work The Value Pricing Imperative for Design Firms.

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Cartoon of business plan that only includes a dollar sign.