Telltale signs of a shy recovery

July 2013 » Features » SURVEY
While performance numbers are scraping the depths, operational efficiency indicators continue to improve and hiring is rebounding among design firms.
João Ferreira

Design firms are growing, but their profits are shrinking. ZweigWhite's "2013 Financial Performance Survey of Architecture, Engineering, Planning & Environmental Consulting Firms" shows that net pre-tax, pre-bonus profit/loss on net service revenue hit its lowest point since 2004 in 2013, at 7.8 percent. For reference, in 2007, just before the Great Recession, that median was 14 percent.

Nevertheless, firms reported a growth rate of 6.8 percent between 2011 and 2012. That compares with 9.9 percent negative growth between 2008 and 2009 but is still shy of sky-high pre-recessionary growth rates of 13 percent between 2005 and 2006.

Together with signs of leanness and increased operational efficiency, improving backlogs, a rebound in hiring, and even more employee mobility, the 2013 survey seems to paint a picture of a healing industry – still taking medication but soon to be off it.

The profit story
Firms are seeing smaller profit margins, but that's when you look at it before bonus payments are doled out. After smaller bonus payments, profit medians are the highest they have been since 2006 – 4.5 percent now versus a median of 5.6 percent in 2006.

Looking at things from the gross revenue side, net pre-tax, pre-bonus profit on that benchmark isn't exciting either in 2013, remaining at a median of 7.5 percent from 2012, but better than a low of 6.1 percent in 2010.

The all-important EBITDA (earnings before interest, taxes, depreciation, and amortization) margin on gross revenue is at its lowest point since 2010, at 7.9 percent. EBITDA margins on net service revenue are even lower, falling to the smallest percentage since 2004, to 9.8 percent. That's after a glimmer of recovery for the stat in 2011, at 12.1 percent from 10.6 percent in 2010.

The dollar amount of net pre-tax, pre-bonus profit or loss generated for each employee (including professional/technical and administrative employees) also reached the lowest level since 2004 this year: $9,009. The median was $10,533 last year and $7,733 in 2004. In 2007, it was $14,796. Net pre-tax, pre-bonus profit/loss per professional/technical staff was similar– the lowest since 2007 with a precipitous $6,000-plus drop from $17,961 to $11,697.

With that, contribution rates are holding steady at 66.3 percent, a negligible change from last year.

Increasing efficiency
While the above news wasn't that encouraging, other statistics point to the increased operational efficiency of design firms. Utilization rates, for example, continue to improve. The 2013 survey utilization rate is 59.2 percent, a nice recovery from the 52.8 percent rock bottom number in 2011 and getting closer to pre-recession numbers in the low 60 percentage range.

Chargeability (also known as "utilization rate") is the percentage of total raw staff labor charged to projects. It indicates the percentage of a design firm's labor expenses that are charged against billable projects, and is a good indicator of how well a firm is using its "production line." It includes all staff, both professional/technical and administrative.

Overhead rates (the ratio of total overhead including indirect labor, general and administrative overhead, and payroll expenses to direct labor), continued to drop slightly to 172 percent in 2013 from 174.3 percent in 2012.

Net service revenue per total staff continued to recover after a 2010 and 2011 dip, sitting now at a median of $127,000. Net service revenue per technical and professional staff also continued its ascent – $154,928 in 2013 from $151,302 in 2012.

Average collection periods are holding at 73 days, much better than a median of 82 days in 2008. Backlogs also are improving, now sitting at a median of 6.2 months, up from 5.5 months in 2012 and closer to the high of 6.8 months in 2006.

Indicating that competition for jobs in the industry may be heating, turnover rates are starting to edge northward. The 2013 turnover rate is 11.8 percent; a sharp upturn from a low of 9.2 percent in 2012. Staffs also grew a median of 3 percent as reported in the 2013 survey, compared with zero growth last year and a decrease of 6.8 percent in 2010.

The "2013 Financial Performance Survey of A/E/P & Environmental Consulting Firms" is available for $395 at www.zweigwhite.com/p-2155-financial-performance-survey-2013

João Ferreira is managing editor for Structural Engineer and The Zweig Letter. He can be contacted at jferreira@zweigwhite.com. This is an abridged version of an article that first appeared in The Zweig Letter, Issue #1011, published June 10, 2013.


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