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April '05 Build Business: Generating the Most Profitable Fees
by Eric P. Mott, Mott Associates, Inc.
April 5, 2005
Editor’s note: As a new monthly contributor to ArchNewsNow.com, the Society for Marketing Professional Services is sponsoring Build Business. This new series, written by industry experts, focuses on marketing and business development best practices to help you build business and advance your career.
The most successful firms in our industry generate their fees by value, not hours. However, these same firms start the process of generating the most profitable fees with a non-billable exercise! This is an analysis of hourly rates and overhead performed at a minimum of once a year, and sometimes quarterly.
Financial analysis must include salaries, employee benefits, your overhead rate, and the ratio of administrative to technical employees. Care should be given to define what the breakeven point is for the firm and then build up the goals for the year from this starting point. Comparisons can then be made against peer firms through commercially available financial surveys to see how your firm stacks up to the competition. Once these building blocks have been examined, scrutinized, and become comfortable, proposals can be written with confidence.
There are three important parts to any proposal that can impact your profitability:
1) scope of services
3) fee for services
The client can have control of two out of three, but never have control over all three. Successful firms know and manage this process through negotiating the details of the project into the contract. No work should be completed before a contract is signed. Scope and fees should be developed by those who will be working on the project and, separately, by others such as engineers/technical staff who are not intimate with the project for a clear view of the tasks, and/or the accounting group who would be familiar with similar projects in the past and the over- or under-budgeting of such projects. These independently created fees then can be compared, examined, and hashed out between the writer(s), the second set of technical eyes not tied to the project – and always include the finance/accounting group. The final decision goes to those who will be working on the project, after the question is asked: “Can you complete this project scope on time and for those fees?” They must be able to take ownership in the project – only then can they be held accountable for the project’s success or failure.
Consider this: assuming a 10% profit goal, for every one hour a project goes over-budget, it takes 10 billable hours just to get back to breakeven. Mismanagement of just a couple of projects can have a devastating impact on your profits.
You may be saying to yourself, “In the opening statement, the author said that the most profitable firms are based on value not hours.” You are correct. Hours are just the internal measuring stick to develop and track the value you can bring to a client. You must have confidence in your services and how long it takes you to complete those services to generate the most profitable fees.
The three basic fee types are:
2) hourly, not to exceed
3) lump-sum/fixed fee.
These fee types all can have multiple variations as to expenses in addition, expenses included, expenses plus 10% markup, subs in addition, subs included, etc. What needs to be asked is: “What does the client want?”
As an example, last year I wanted to upgrade my HVAC on an investment property. This also necessitated an entire upgrade of the electrical system. I solicited bids and selected the one that satisfied my needs. What were they? To have one contractor be responsible for and complete the work for a specified price. I didn’t want to select my own electrician, coordinate the work effort, pay multiple parties, or pull the permits. Who won the bid? The one who said, “I’ll take care of everything, and you’ll only have to deal with me.”
What do your clients expect? Do they want to see a log of every hour you put in on the project? Do they cap your fee and also want to see every hour you spend on the project? These are the clients who are buying hours and not value and, dare I say, don’t trust you. The profitable fees lie in value-based contracts.
When managed properly, value-based contracts can build your bottom line. If you can negotiate a reasonable fee for services and schedule and then efficiently manage the project, any hours you save on the project go directly to the bottom line in the way of profits – dollar-for-dollar. Additionally, you can then use those saved hours on other billable projects.
For example, you budget a project at $10,000 and 50 hours to complete the services. The client agrees to the $10,000 fee based on the value you bring to the project and doesn’t ask, “How many hours will it take you?” Your project manager, working efficiently, then exceeds expectations by completing the services in only 40 hours. End result: a $10,000 invoice to the client, $2,000 pure profit to the bottom line in addition to the built-in profit in the hourly rate charged to the project for the $8,000. Plus you still have the 10 hours that can be billed to other billable projects and turned into additional fees and profit.
The most successful firms know and apply this, and you can too! The key is in creating value for your clients. Remember: Sell value, not hours.
Eric P. Mott founded Colorado-based Mott Associates in 2002. The firm specializes in developing effective management strategies and procedures for architectural, engineering, and professional service firms. Mott is a Past National President of the Society for Marketing Professional Services, and a frequent speaker for such groups as SMPS, American Institute of Architects (AIA), American Society of Landscape Architects (ASLA), and Society of Design Firm Administrators.
The Society for Marketing Professional Services (SMPS) was created in 1973 by a small group of professional services firm leaders who recognized the need to sharpen skills, pool resources, and work together to create business opportunities. Today, the association has 50 active chapters and a membership of 5,500 marketing and business development professionals representing design, building, and related firms. To learn more about SMPS and Build Business, the SMPS/PSMA National Conference (August 10-13, 2005), click on links.
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