Useful metrics to watch

October 2011 » Columns » OPERATIONS MANAGEMENT
Stephen C. Evans, AIA, NCARB

The previous "Operations Management" column (CE News, August 2001, page 30) ended with a short discussion under the heading "Past, present, and future." This column delves deeper into this subject using a model of an engineering firm with three disciplines – structural, civil, and MEP engineering – and one location. The goal is to have a few financial metrics that everyone in the firm can easily understand and use.

Multipliers work better than profit percentages and dollars. Profit amounts certainly come into the picture along with several other measurements when you get to the detail. However, consider the multiplier as a way to communicate within a firm's culture supported by strong business acumen: This firm does great work and makes money at the same time. This all works the same with a different number of disciplines, market sectors, and even locations. As long as the overhead multiplier is the same for the firm, you can combine the locations and do the same analysis.

As shown in Table 1, start with the payroll associated with each group. The three amounts that total $3,500,000 represent staff that is "mostly" project chargeable. To keep this example simple, staff utilization of 85 percent is used for each group. Take the time to look at the utilization targets for each person in the firm to determine the real number to use for each group. This could vary by a small amount from group to group, but if parity is the rule, then the Project Target Multipliers can be different, but the Annual Revenue Targets are not recalculated based on utilization and multiplier targets. The firm is committed to making a 20 percent profit at the end of the year, and this will happen if these targets are viewed as the "floor" for project and overall group performance at the same time. An overhead multiplier of 1.60 and profit target of 20 percent may be a thing of the past for many firms in today's world; however, use your numbers and it still works the same.

Table 1: Payroll, Revenue, Targets
Discipline
Annual Payroll
% of Firm Payroll
Annual Revenue Target
Staff Utilization @ 85%
Project Target Multiplier
Structural Engineering
$1,000,000
29%
$3,250,000
$850,000.00
3.82
Civil Engineering
$1,500,000
43%
$4,875,000
$1,275,000.00
3.82
MEP Engineering
$1,000,000
29%
$3,250,000
$850,000.00
3.82
Firm
$3,500,000
100%
$11,375,000
$2,975,000.00
3.82
Firm Overhead @ 1.60
Break-Even
Firm Profit Target @ 20%
Annual Revenue Target
 
 
$5,600,000
$9,100,000
$2,275,000
$11,375,000
 
 

Table 1 has two main steps:

  1. Calculate the The Annual Revenue Target using project chargeable payroll, overhead, and profit targets.
  2. Calculate with parity in mind the Annual Revenue Targets and Project Target Multiplier needed to meet the firm's Profit Target of 20 percent.
Table 2: Monthly and Year-To-Date Performance
 
Structural
Civil
MEP
Firm
Annual Chargeable Payroll
$850,000
$1,275,000
$850,000
$2,975,000
Monthly Chargeable Payroll
$70,833
$106,250
$70,833
$247,917
3.50 Multiplier
$247,917
$371,875
$247,917
$867,708
3.82 Target Multiplier
$270,831
$406,247
$270,831
$947,909
4.00 Multiplier
$283,333
$425,000
$283,333
$991,667
January Actual Revenue
$240,000
$415,000
$255,000
$910,000
February Actual Revenue
$295,000
$440,000
$280,000
$1,015,000
March Actual Revenue
$275,000
$405,000
$265,000
$945,000
Year-To-Date Actual Revenue
$810,000
$1,260,000
$800,000
$2,870,000
YTD Over/Under Target
-$2,494
$41,259
-$12,494
$26,272

In Table 2, the Annual Chargeable Payroll is converted to monthly amounts for each group and the firm. The idea with this table is to provide four multiplier amounts as a guide, but remain focused on the firm's Target Multiplier of 3.82.

In this example, the three groups are doing "okay" after the first quarter revenue is counted. Civil is balancing out its partners in Structural and MEP who are down a little from target, but the firm is $26,772 above the overall target.

In addition to bringing the firm's culture together around the idea of sound business acumen supporting the services provided, this enhances accountability in a measurable way for everyone in the firm.

Stephen C. Evans AIA, NCARB, is operations consultant for ZweigWhite. He has 30 years of experience, including as senior project manager with Populous, director of risk management for HOK Corporate, director of operations for HOK North Central Region, and director of operations for Treanor Architects. He can be contacted at sevans@zweigwhite.com.


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