How do architects gauge and implement KPI’s?
What are KPIs?
More commonly referred to as KPIs, Key Performance Indicators cover crucial elements of an organisation’s achievements over a particular period of time.
The benefits of having a KPI system are clear. It makes it easier for everyone to manage and measure goals and targets, provides a snapshot of how a business is performing against its aims, and keeps everyone who needs to know about performance up to date. Equally, all relevant data is then conveniently located in one place, rather than, say, over multiple spreadsheets.
The results can be viewed online at any time, so performance at all levels becomes highly transparent. Individual, team and business contributions can be easily tracked, as can the impact of any new initiatives.
A KPI is a concise management tool which can highlight any organisational weaknesses, and really lend a business a keen advantage over the competition.
Finally, KPIs don’t have to be complicated. In fact, they are really just simple numbers and formulae used from one month to another so that you and your business stay on track and become aware of any potential issues before they become big problems. The measures used should be the same from year to year or month to month, so that you can clearly see your strengths and areas for improvement.
KPIs and architecture – the challenges
When it comes to the architectural profession, KPIs are crucial given the intensely competitive nature of the industry. Yet a KPI solution isn’t always easy to implement.
For one thing, it can be hard to quantify what exactly makes a development project a success as far as an architect is concerned. As with any creative industry, these things are subjective. For one person it may be rental yield; for another, it may mean how long it takes to sell units; for yet another, it may mean completion to deadline and within budget. Still others may place more importance on awards or testimonials.
Additionally, when you are caught up in the endless cycle of finishing and delivering multiple projects for different clients, it’s not always easy to have an eye on the larger picture.
At the same time, productivity is not an easy thing to assess in a professional service such as architecture.
So how can an architectural practice consider introducing a culture of KPIs which drives quality and efficiency, rewards staff and is universally accepted by everyone involved? Especially in terms of a practice’s financial performance, KPIs should assess quantitative measures for evaluating how the company is doing, allowing for comparison with the competition and showing where savings can be made.
Which KPIs should you measure?
A critical aspect of launching your KPI culture is to know what elements exactly are worth measuring for KPI purposes in the first place. Here are our suggestions:
Work in progress
This is the time you can bill for projects and expenses incurred on work completed, but which you still haven’t invoiced. Track this as an asset on your balance sheet and as an income, to gauge how far a project has come (and has to go before completion.)
Earned value
This breaks down how much a project has been earned to date. Divide the amount earned by the contract sum for a reliable forecast of the project’s future success as far as both time and money are concerned.
Profitability
This is a simple yet vital KPI, and refers to your outgoings compared with what has been billed and the profit that’s left. It’s obviously essential to know how profitable a project is while it’s still ongoing, so that you can guarantee a good outcome. Furthermore, it’s also the ultimate lesson in what you should and should not do next time.
Utilisation rate
This is the ratio of time spent on projects (i.e. direct labour) to total number of hours worked (or total labour). It’s expressed as a percentage of the total hours and effectively serves as an indication of how efficient your firm is, in that it shows you that you are using your most important resource (your people) optimally.
Ideally, an architectural practice would achieve a utilisation rate in the region of 60 to 65% for both the professional and technical staff in the firm.
This is such a useful KPI because it shows you how efficient and effective your firm is overall. If the resulting rate falls within a reasonable range (i.e. the 60 to 65% mentioned above), it’s a great indicator that you have been using your primary resource (in other words your labour) effectively.
Overhead rate
Calculate this KPI by dividing total indirect expenses by your total direct labour. After that, multiply the result by a hundred to get the figure as a percentage of direct labour. Overhead rate is essentially the ratio of a company’s indirect expenses to its direct labour costs. It’s vital for identifying profit and loss based on the right rates being developed.
Put simply, overhead rate is just the ratio of total indirect costs to overall direct labour cost, and it’s actually a pretty important one to measure. Once you know it, you can set accurate, profitable rates for billing, and the fees charged for your architectural services. If you don’t know your overhead rate, or calculate it inaccurately, the reality is that you can’t reliably determine how profitable or otherwise your firm is.
If a practice finds its overhead rate has risen, appropriate action should be taken.
In many ways, this is actually the most important KPI of all, and you need to know it to set out the right, profitable billing charges for what you offer your clients. If you either don’t know your overhead rate, or it is calculated inaccurately, there is no way of knowing how profitable or otherwise your firm is.
Profit to earnings ratio
Like any business, an architectural business wants to maximise profit.
This calculation measures how much is left after spending. It’s a ratio that can tell you how effective an architectural business is in completing various projects. The higher the ratio, the greater the profits for the business once a project has been signed off.
The profit to earnings ratio measures net earnings plus operating revenue to pinpoint exactly how efficient the firm is in the performance of different activities.
Break even rate
This offers a representation of actual costs as incurred by every member of staff within an architecture company. You can measure it based on the actual work an employee does plus the use of various resources. You will then able to compare actual labour costs per hour, the salary paid to a team member, and the hours that they work.
Net multiplier
This compares direct labour and net operating revenue. If your practice views direct labour as a capital investment, then net multiplier represents the Return on Investment or ROI.
This KPI allows you to identify how much of your earnings are spent on direct labour. If the result shows that the net multiplier is more than the break even rate (as explained above), then your practice is making a profit. If it is less than the break even rate, then unfortunately you are making a loss.
The net multiplier is a measure of actual performance – i.e. earnings from every pound spent on direct labour. So it’s a measure of results rather than costs, and a gauge of your firm’s financial well-being. It should not be used to set billing rates.
Net revenue per employee
This one may not be a leading indicator, but it measures past, or actual, performance. Use it to assess how realistic or otherwise your projected net operating revenue for the coming year is. Clearly, the higher the number you come up with, the better. You will also be able to have a better idea of your goals as you work on your profit plan for the year ahead.
It’s worth keeping an eye on this one – so that you understand whether, even if you’re earning a greater profit, your net revenue is up or down in terms of the number of people who work at the practice.
Pending proposals
Divide any business you haven’t yet won into those jobs you believe you have a more than 50% chance of landing, and those you have a less than 50% chance of winning (i.e. prospects vs. suspects). Combine these numbers and compare to your yearly budgeted revenue. Prospects should constitute a third of the total as a minimum.
What we offer
At alsecco UK, we offer a commercially consistent, high quality and aesthetically pleasing product which architects can use to help ensure that KPIs are met. The end result is likely to be a better-looking building, higher rental yield, and a high-quality project that is delivered on time and to budget, with a higher sales value to make it even more appealing.
Find out more about how we could help your practice by getting in touch with the team today.
