Architecture Project Profitability

What project profitability means for a practice

Project profitability is the fee a project has earned less the full cost of the time spent earning it. Measured stage by stage, it shows which work makes money for the practice and which work quietly loses it.

Practice accounts show profit for the whole business, once a year. They do not show that one housing scheme made a healthy margin while a school extension lost money in Stage 3. Project profitability fills that gap. It uses data most practices already have, timesheets and fees, and adds one ingredient that is often missing: a realistic cost for each hour.

The aim is not to judge individual projects in isolation. Some projects are worth doing at a thin margin for strategic reasons. The aim is to know the margin, so those decisions are made on purpose.

Build cost rates that include overhead

A cost rate is what an hour of someone's time really costs the practice. Using salary alone understates it, because rent, software, insurance and non-fee-earning staff all have to be paid from project fees.

A full cost rate has two parts. The direct cost is salary plus employment costs such as employer's National Insurance and pension, divided by the hours that person can realistically spend on projects. The overhead share is the practice's overheads divided across all fee-earning hours.

Salary

An architect on £45,000 a year. Figures in this section are illustrative.

Employment costs

Adding 20% for employer's National Insurance and pension gives £54,000.

Productive hours

1,350 hours a year on project work, after leave, bank holidays, training and practice time.

Direct cost rate

£54,000 divided by 1,350 hours is £40 per hour.

Overhead share

£25 per hour, from overheads divided across all fee-earning hours in the practice.

Full cost rate

£40 plus £25 is £65 per hour. Every hour on a project needs to earn at least this to break even.

The 20% on-cost, the productive hours and the overhead figure vary from practice to practice. Agree the method with whoever prepares your management accounts and update the rates at least once a year. Productive hours are closely linked to utilisation, covered in architect utilisation rate.

Measure margin by project and stage

Margin is fee earned less cost of time, divided by fee earned. Measuring it by stage shows where in the project the money is made or lost, which is what tells you what to change.

For a completed stage, fee earned is the stage fee. For a live stage, it is the stage fee multiplied by the percentage complete. Cost of time is the hours logged to the stage multiplied by each person's full cost rate. The example below uses one blended cost rate of £65 per hour across the team to keep the arithmetic simple.

Across the three stages the fee is £60,000 and the cost of time is £52,650, leaving £7,350, a margin of 12.25%. A project-level figure alone would look acceptable. The stage view shows that Stage 3 lost £1,500 because of a planning resubmission that was never priced, which points to scope control rather than delivery.

Read the pattern across projects

One project's margin is a story. Margin across twenty projects is evidence. Look for patterns by stage, project type, client and team.

Review the portfolio quarterly and individual live projects monthly, alongside WIP. A project that is profitable on paper but carries a lot of unbilled work still needs attention, as covered in WIP and unbilled fees.

What to change when margin is low

Low margin has three main causes: the fee was too low, the scope grew without a fee, or the team cost more than the fee allowed for. Each has a different fix.

Pricing

If the same stage is under margin on most projects, the fee for that stage is too low. Use the hours similar stages really took to build the next proposal, as set out in how to calculate architects' fees.

Scope control

If losses follow client changes, planning or longer construction periods, the problem is unpriced extra work. Write clearer assumptions and use the routine in additional services and variations.

Team mix

If hours are close to plan but cost is high, more senior people are doing the work than the fee allowed for. Plan the team by stage and check allocation weekly, so juniors do junior work and directors review rather than draw.

Questions practices ask

Short answers to the profitability questions directors and practice managers ask most.

How do you calculate the profitability of an architecture project?

Take the fee earned on the project or stage and subtract the cost of the time spent, which is hours logged multiplied by each person's full cost rate including overhead. Divide the result by the fee earned to get the margin as a percentage.

What is a cost rate for an architect?

A cost rate is what one hour of a person's time costs the practice. It is salary plus employment costs divided by productive hours, plus a share of practice overheads. It is lower than the charge-out rate, and the difference is where margin comes from.

Which RIBA stages lose the most money?

It varies by practice, so the honest answer is to measure your own. Measure margin by stage across several completed projects, and price the next proposal from what you find.

How often should we review project profitability?

Review live projects monthly, alongside WIP and fee burn, and review the whole portfolio quarterly. Monthly reviews catch problems while a stage is still open, and quarterly reviews show patterns that should change pricing.

Do we need software to track project profitability?

A spreadsheet can work for a few projects if timesheets, fees and cost rates are kept up to date. As the number of projects grows, software that links timesheets to stage fees and cost rates saves the monthly rebuild and keeps the figures current.

Where Avoice fits

Avoice shows margin by project and stage from the timesheets, fees and rates already in the system, so profitability is a live view rather than a quarterly spreadsheet.

Timesheets roll up against each fee stage, and Financials and Cash Flow shows fees invoiced, unbilled WIP, margin and project profitability, checked against Xero with each month marked Verified, Provisional or Open. People and staffing shows capacity, utilisation and allocation by project, which is where team mix is managed. In Clients and CRM, a deal is priced by stage, team and hours, and winning it pre-fills the project's stages, fees and hours budget, so the next proposal can start from what similar work really took.

To see margin by stage on one of your own projects, book a demo.