Are you ready to run a super profitable project-based practice?
Running a profitable business is not about leaving things to chance. Those who succeed have implemented certain processes, monitor key metrics, and train their staff to think commercially.
In order to achieve this, you need to get a clear view of your bigger picture. You need to know:
-Which projects are making you money and which ones are costing you money,
-If there is enough work coming in to keep your staff on fee-paying work, and
-Are there enough invoices lined up to pay the bills?
In this blog, we will discuss the PETAL Framework in more detail to help your architectural practice start to think critically about how you quote, scope, manage, invoice, and review the success of your projects so that you can achieve exceptional profits and consistent business growth.
Why are some practices and projects unprofitable?
Let us introduce you to the evil twins of project management...
Evil Twin #1 goes by the name of “Underquoting”.
Evil Twin #2 goes by the name of “over-delivery”.
Underquoting and over-delivering on projects mean you reduce your profitability, and can ultimately end up making a loss.
For architectural practices, we notice time and time again that a major problem is underquoting. Often leaders and project managers do not always fully think through everything that is going to be included in the service, which leads to low fee quotes and a client expecting more than you have planned for. Because of the uncertainty with what is included in the service, clients request or expect additional requirements which they thought were included in the scope of the work and your staff end up doing additional work for free.
Not defining the brief properly and scoping out all aspects of the project leads to underquoting. Your team then over-delivers in order to complete the job, costing you more money than the project is worth.
Because these projects cost you money, you lose “creative freedom” - i.e the ability to pick up projects that interest you or will make your practice stand out in the industry. Ultimately, you need to be profitable to take on the more creative projects that you’re happy to accept will either only break even or might even cost you more in time and resources.
In order to rid your business of these Evil Twins, you need to quote accurately, be clear about what is included in the price to your clients, and make sure your team knows exactly how long they’ve got to deliver.
How do you banish the evil twins and start delivering profitable projects?
We’d like to introduce you to our PETAL Framework - a 5 step process that will allow you to make sure all your projects are profitable and will help to grow your practice. These 5 steps are:
Following these 5 steps will significantly reduce underquoting and over-delivery in your practice, meaning your schedule is filled with work that has a much higher chance of being profitable and helping you achieve business growth.
The first part of the PETAL framework is Plan. This requires you to:
- Scope out the project accurately
- Calculate profit margins
- Clearly quote the project cost to your client and set expectations
Getting this first stage correct is vital. This is what will set your project up to be successful and profitable, or a money drain straight away.
If you’re doing a detailed bottom-up budget, you’re more likely to arrive at an accurate quote.
The reasoning is simple. If your starting position is thinking through exactly what needs to happen i.e., the tasks you’ll need to complete, the types of roles you’ll need to deliver them, how much of their time you’ll need, etc., etc., you’ll end up with an accurate resource demand and, therefore, a fee that’s based off this demand and factors in the desired margin.
Very often though, sometimes exclusively, we start by doing a top-down budget. This is where the majority of mistakes tend to happen as fees aren’t always sense-checked. For example, if you imagine the scenario where a client tells you their budget, and you calculate your numbers based off educated guesswork for typical profit margins for that type of work e.g., for this type of project we normally target a 20% margin. If you crunch the numbers and stop at the point where you consider whether it looks like it’s in the right ballpark, you’re missing the key ingredient—resource demand i.e., the bottom-up bit.
If you don’t sense check your fee to a resource demand tailored for that specific project and the level of service the client is expecting, you don’t know if the margins you’re discussing are anywhere near accurate. In order to determine a reliable margin, you need to plan out the resource demand i.e., splitting the project up into its individual stages, defining the roles that are going to be required and how much of their time you’ll need. Once you’ve done this, you can multiply the demand by the cost rate to calculate the true cost to deliver. Once this is established, you can compare that figure to the fee and establish what the genuine expected margin is.
Once you know that, you’re in a much better place to take appropriate action e.g., increasing your fee, changing the resource profile, limiting the level of service, etc. Action that is unlikely to take place had you not sense-checked the fee with the resource demand.
Given that you’ll no doubt have some form of spreadsheet or system you use to project the resource requirements of projects/the practice, often a better starting point is to resource the project first, and use that data to inform your fee. The benefits of this approach are twofold (1) your cost to complete is going to be highly accurate (2) your project is already resourced, so minus some tweaking, it’s ready to include in your reporting giving you much more accurate demand projections.
As a slight aside, accurate margins are reliant on accurate cost rates. We recommend that you review and update your cost rates periodically. Usually, once every 6 months is about the right balance. If you’re unsure how to go about this, we have a handy guide that explains how to calculate them:
Whilst companies don’t tend to forget to include big budget external costs e.g., models, sub-consultants, etc. Something that regularly gets excluded are the cost of expenses. If you don’t recharge expenses, the solution is to deduct a nominal % (e.g., 2–5%) from the fee.
Doing this creates a pot to cover expenses, rather than just eating into your profit, and ensures that you don’t consume it in your resource spend.
When you’re ready, you need to deliver your proposal to the client. The key challenge here is setting expectations and making sure your clients understand exactly what is included in the scope of work so that additional requirements don’t crop up and take more of your time and resources.
Be absolutely clear about what your team will deliver. Once your client has agreed to the quote, your team can start!
This next step in our PETAL framework is getting your team engaged.
All the previous planning you have done now carries through to delivery.
However, to stop over-delivery happening you need to develop a “how long have I got?” culture. This means that before your staff start the first question on any project should be “how long have I got?”.
Make sure your team knows exactly what is expected of them and in what time frame. That way they can plan their time accordingly.
Communicating this at the beginning of each project is key in creating a culture where you allocate “personal budgets” that individuals feel empowered to own and responsible for, to avoid over-delivering.
The reason this is especially important in a creative field is it helps your architects reign in their wilder flights of fancy, and instead focus on delivering something mind-blowing within the boundaries set by the budget.
This might sound easy, but this is a cultural change that might take time for your staff to get used to.
As your staff start to work on the project, it’s vital that you monitor budget vs actual time spent. This will allow you to see if you’re over-delivering and reducing your profit.
Timesheets are essential in giving us the ability to compare how long each task takes compared to how long you quoted for.
The key with tracking time though is to do so against specific deliverables, not just the project as a whole. Doing so allows you to pinpoint any problem areas, and rectify any issues where necessary, whereas it’s hard to see the wood for the trees if time is only consolidated at the project level.
Keeping up-to-date timesheets is essential in monitoring the profitability of your projects. If people are weeks or months behind, you’re blind to the current position. Not only will they lose track themselves of how they’re tracking versus their personal budget, it means that you lose the ability to spot problems early and take action before it’s too late.
Interestingly, the biggest obstacle to timesheet adoption (other than most timesheet software being painful to use!) is that people often think the purpose of timesheets is for ‘Big Brother’ to keep an eye on them.
The real purpose of timesheets is to ensure the company receives an accurate picture of profitability and its successes and challenges, so it can do more of what’s positive and less of what’s not so positive.
Giving your employees the responsibility of their own personal budget means they suddenly discover the importance of timesheets as they need to ensure that they’re completing work whilst staying within their own budget.
By following this 5 step process, you stand a much greater chance of identifying if you are over-delivering on your project. If you’re over budget you need to find out why and work out the best way to adjust it.
For many projects, scope tends to expand the further in you get and the more clients move the goalpost. This expanding scope is commonly known as “scope creep”, and means the final project ends up being a lot bigger than you initially thought and quoted for!
However, creep tends to be the result of not properly defining the scope of work in the first place.
Extra revisions, expanded projects, or uncertainty about the level of details can decimate your project profitability if you’ve not made it clear those things will incur an additional fee.
As we have previously mentioned, you need to give your client an exact breakdown of everything that is included in the fee.
Thanks to the power of personal budgets, you’ll find more conversations like, “I’ve already used up 50% of my budget, but it’s going to take me more than another 50% to finish,” take place. This awareness and commercialisation of your employees is massive, and it’s what separates practices that have great design, and practices that have great design and strong profits.
If you identify over-delivery and/or scope creep early enough, you can make a decision:
- Quote more for the extra time that’s been spent or will need to be spent (especially if it’s due to clients moving the goalposts)
- Hurry up! / Adjust the future - Talk to your team, set expectations, make sure they’re managing their own budgets efficiently, or see what you could do down the line to the resource profile to get the project back on track
The final stage in PETAL is to review your projects, learn from them and apply learnings to your next project so the same mistakes don’t happen again.
Looking back at a completed project can help you identify what went well (so you can replicate it going forward) and any areas that went off-track (and need to be corrected next time).
As with most things in life, when you’re running a practice the best lessons you learn will probably come from the mistakes you make. Making mistakes and learning from them is a key part of becoming an experienced leader.
To achieve profit and consistent business growth, you need to be able to review your projects and learn from them, or else you risk making the same mistakes time and time again.
How can you learn from your previous projects? This can be achieved in four parts:
- Part 1: Gather quantitative data for analysis
- Part 2: Subjective elements
- Part 3: Bonus gains
- Part 4: Cost review analysis
First, you want to gather as much quantitative data as possible (budget - ideally broken down into stages, timesheets, expenses, and any external costs that you might have incurred from third parties).
This data will tell you the “financial success” of the project by comparing how long you thought it would take compared to how long it actually took.
Next, you should also gather subjective feedback from your team, including what went well, what didn’t work well, and what lessons were learned.
A great way to build a strong library of case studies is to discuss it during your project reviews. Did the project go well? Is the client happy? If so, would this project make for a good case study?
Finally, template your review process so that it makes it easy for you to review and compare across projects. This will help you spot patterns and readily identify issues that need to be addressed in future projects.
CMAP Pages allows you to save templates for different reasons (e.g. different markets, different project types, different client types, etc.) and within those templates set expected margin targets for each of them. This means when you come full circle and are ready to enter the “Plan” stage with a new client/project you now have a super-accurate template to start from!
After completing project reviews you should also be able to periodically compare projects side-by-side to see which types of projects are more profitable to you and which ones cost more.
In order to work on the more exciting and creative projects, your practice should first be able to make a good profit margin on the regular projects that cover the bills and keep your practice growing upward.
How can you apply the PETAL framework to your practice?
Now you know what you need to do, how are you going to apply PETAL in your practice to maximise your profitability?
Don’t worry, we’ve got you covered! Download our free guide: “From Pain to Profit: Using the PETAL Framework to Transform your Business into a Highly Profitable Architectural Practice” and we’ll show you how.
- How to increase profitability in your practice so you can afford more creative freedom
- How to make quick and easy changes to your processes so that you can identify a costly project early
- Ways in which you can make sure your Practice is working efficiently to achieve consistent growth