Does anyone know of any good sources (books, websites, etc.) on what it takes to setup an architecture practice? specifically from a business point of view, i.e. insurances, accounting etc.?
yes, i recently bought The Architect's Guide to Running a Practice by David Littlefield.
Its not a very long book, but it has a lot of real life examples by some established firms that outline what you need to get started. Lots of good info from experienced people.
its cheap too! $19.99 used on amazon.com right now. think i got mine for $15.
Also, there's 'Architect's Essentials of Starting a Design Firm' by Peter Piven and Bradford Perkins, published by the AIA.
Skimmed it so far (too busy actually starting my office to read it).
Fred Stitt aka San Francisco Institute of Architecture aka Guidelines, has a book titled "Operating Manual for the Small Design Practice." I have it and it seems to be OK but a bit light on depth.
Do y'all starting your own practices have AIA memberships?
Can someone talk briefly of the pros and cons of starting your own practice? For example, is it like a restaurant where in two years if you haven't gotten decent business you're probably going to fold? If you are a good designer is it the only way to get your own designs out there? Of course it depends, but what pay differences can you expect between working for a firm and heading your own? Are all ambitious architects destined to start their own practice? And if so, what percentage stay afloat?
Lots of good questions - I'd love to hear answers from people who have been doing it a bit longer than we have, but here's one perspective:
We have been on our own full time for about 2 years - started doing small side projects maybe 4 years ago... 3 partners, we all met in school but have different backgrounds & degrees. We decided to officially jump in and start a company after my two partners (one of whom is my husband - the other his best friend from school) had left full time jobs in architecture they weren't satisfied with and started doing small remodel jobs. That combined with the small design jobs we had going led us to think we might make it as a design/build company.
First misconception : You will make more money on the construction side of things, thus if you do design/build you have a better chance of making it. For the moment, this is absolutely not true for us - the architecture side of the company is more profitable - not what we expected... I have since read that 95% of people that start their own construction companies quit after 2 years. Don't know about comparable statistics for architecture, but I imagine it's less. It's VERY EASY to lose money in construction, not so easy in design if you've got a good contract. If the construction side succeeds, we will eventually be able to make more money than we would just doing architecture (on the residential scale anyway). HOWEVER, it now looks like this will take 5-10 years, and we're not sure if we can stick it out - see below.
TIME: We work all the time. At least, we work, or talk about work, all the time. By this I mean 10-12 hours a day, 6-7 days a week. Of course we take breaks, long lunches, have fun, pet the dog, but lately we have no time for museums, movies, bars, or anything like that... now we're really busy this summer, and it's not consistently this bad, but in order to make it work as a small company you're looking at long long hours. Part of it is just the stress factor, you'll constantly be thinking of how to improve the company, how to do marketing, how to deal with clients, learning how to do the books, setting up a library, etc. At this point I am concluding the only way to own your own company and have a normal life (unless your spouse makes a lot of money and/or you live somewhere with a low cost of living, and even then I'm not sure) is to have employee(s), and you need a certain amount of guaranteed work for that, which most people starting out don't have (including us - after 4 years).
MONEY: You will likely make less than working for someone else, for a few years to even longer. Last year we made about a quarter of what we were making when we both worked in offices (no joke) - this year it's almost equal, but we got lucky and got a few big jobs. We have NO IDEA where we'll be at next year, and in all likelyhood we'll make less than this year. This is partly because the construction side of the company makes less money, so if you're doing only architecture you might do reasonably well after a few years if you have consistent work. As an example, in order to make the same amount of money I would make at a firm (maybe $65,000/yr - I am licensed with 6 years experience), I would estimate I need about 1 million worth of projects per year. This is very rough, and it assumes that is the value of the construction estimate for projects the billing for which stretches over a few years. It takes into account overhead (which is fairly small - no employees except a paid summer intern, office at our house, etc.) and a bit of money to keep in the bank.
I would really recommend if you are serious about starting a company, that you do a budget including what you estimate your overhead will be (and ours is a lot higher than expected), what your fees will be per project, how long it will take you to complete each project, etc., to attempt to determine how much revenue you think you'll bring in per month. As the bookkeeper for both the design & construction sides of the company, I have been surprised to find that the fees just don't go as far as it seems they should. Remember, you also have to pay self-employment tax, plus state income tax depending on where you live. Since we're in CA, we probably have one of the higher tax burdens, and though deductions help a lot, you'll still end up paying 25-30% of your income to taxes.
PROS/CONS: It's great to work for ourselves. It's flexible, there's no one to blame but ourselves (good & bad), it can be rewarding when things turn out well. We do get to accomplish our designs, but keep in mind that when you start out you're not going to get fantastic commissions right away. We often discuss whether we'd be better off working for an already established office that does good work, because then we would at least probably not have to work on tract houses or pseudo craftsman remodels. The reality is that most of America doesn't own, and doesn't want, ultra-modern design, nor can they afford it. If you have the good fortune to start out with a couple of modern restaurant designs, or a ground up modern house as your first commission (no one I know if in this situation but it must happen), go for it. Otherwise, you'll be looking at the work that more established firms don't want for several years. And you'll probably be doing small residential projects. We would love to do something commercial, industrial, anything, but referrals generally come from friends or family, and in our case it's all residential.
I have no idea what the statistics are for people who start their own companies staying afloat, but I can say that of the 6 or so people I know personally who have done it, probably 2/3 have gone back to work for someone else, and the others (besides ourselves) have been teaching as a way to supplement their incomes. I am looking into teaching myself, but don't know how I would honestly do it with a full design workload.
To make a long story short - it's been worth a try so far, but after two years we are tired and often talk about giving up. We're in it at least until next spring, and then we're having our first child (note:official archinect news exclusive), after which point who knows what will happen...
PS: I also bought the AIA guide to starting a practice and haven't even cracked it open. My best advice is find people you know who have done it and ask alot of questions...
I'm sure most have tried keeping their current arch job, and working small projects on the side till they make a name for themselves...however I remember a thread a little back of a couple that did design build for spec homes. They lived on site through the whole process... anyone remember the firm name?
Indeed, rar, that was an excellent and candid response (and a breath of fresh, reality filtered air after reading this: barrel of fun at 147 Essex) Most folks I've known who've survied starting out on their own have advised that one should be in a position to stay alive for the first year unpaid unless you're a. walking into a signed contract with a commission that is definitely moving forward, or b. able to supplement your meager fees with a decent teaching gig (i.e. unpaid adjunct assistant position at Columbia isn't going to help you), c. you are otherwise funded and are doing it as an intensive recreational pursuit - in which case going unpaid isn't an issue. The key seems to be moving projects and keeping the work coming in. Unless you have access to excellent clients, chances are good the work will not be great, but the more of it you can get and get done on time and on budget, the better your chances of keeping the shop open. If you don't have access to a relatively consistent client base, are not a particularly skilled salesperson (or working with a partner who is), you should think twice about giving up the stability of gainful employment in someone else's office. Sadly, at least in the short run, talent won't pay the bills or find new work all by itself.
Congrats ro RA Rudolph and crew. How nice of you to share your experiences. I agree with you on most of the points, having been there. A couple of things to add:
- If you start a firm with the idea that you want to create "signature architecture", then you probably will earn less money than in a firm. Most areas of the country just don't have a market for it, and thsoe that will hire you may let you have free reign on the design, but can't pay much. That's a trade off you pay for creative freedom. If you start the business like a business, then you will make more than you made in a firm. This may mean that you will have to take some redundant boring jobs, mundane jobs, stuff like interior office redos, developer stuff,etc. Personally, I have found that once you are established, you can do both- have some fun projects that give you creative freedom, and still have lots of work that pays well but might not be so exciting. Personally, I make lots more than I would have at a firm, have more creative freedom, and don't have to answer to anyone when I want to take off to go to my kids game. By the way, my employees have a lot of creative freedom on projects where the client will allow it as well. It is more a matter of how a firm is set up than if you work for yourself.
- "You will have no time" is true. You will also have responsibility that is sometimes crushing. Everything ends up in your lap ultimately. I have employees now, and sometimes stay up at night thinking about having enough work to keep them all busy. I worry about the screw up that one of my employees made, and how I am going to fix it. I worry about the little old lady that slipped outside one of my projects and thinks I should not have built it on a hill, and has her lawyer asking for money. I worry about meeting the ever shorter deadlines of my clients. I worry about who is going to take over when I retire. I worry that the set of drawings that just went out was not checked thoroughly. You get the picture. If you are good at what you do, and you care, you will end up spending too much time doing it, and having to deal withlots of stress.
- you need to leverage your work. It is hard to make it with three "chiefs"and no "indians" Just like lawyers use paralegals, you need to have some less expensive (also lower billing rate) employees to make yourself competitive. Yes, in the beginning, you will do everything: answer the phone, pay the bills, draw, empty the trash, call reps for pricing on materials, etc. etc. However, when you get larger and can afford support staff, and can have a blend of higher paid and lower paid employees, you can become more effecient. Otherwise, you will be basically paying yourself that $8 per hour that you could be paying a part time high school student to file, enter data in your accounting system, copy stuff, make blueprints, run errands, etc. Just like a carpenter who can make more money if he has a 'helper'- he is making a little bit on the helper, plus leveraging his time for the more complicated work that uses his skills and expertice. This can also be good for the 'helper'- as his skills grow, he either moves on, or if the company grows, steps into a role with more responsibilty.
- If you are not interested in the business end, especially the selling end, don't do it. You have to be good at the sales part. That doesn't mean like a used car salesman. But you have to have a personality that puts people at ease, inspires, makes them want to hire you. If you don't have it, it will be a long uphill battle all the way. Team up with someone who does.
I worked (as an employee) at a three person firm (incuding myself) for a little over two years and it completely shattered any romantic notions I may have ever had about starting my own office.
My two main disillusionments:
•The sheer amount of time that was spent on the money side: billing, haggling, paying the consultants, calling the clients. It was just depressing.
•The dullest things were the most profitable. No time for design, no budget to make a model, but I can stand in line for an hour at the building department and make money. We had a really bad lean period for the office and agrred to do a little permit expediting for another office. Soul-crushing work, but we were good at it and it effortlessly kept the office afloat (actually it was very lucrative). We had serious discussions on whether to just drop the architecture altogether and become a permit expediting office. This was when I knew it was time to go.
RAR: Quick question re: insurance. I know that General Contractor's insurance costs are astronomical compared to our costs (7 person, residential firm, 5 years old) and I think that my insurance premiums are high. I have toyed around in the past with whether or not to do some design/build and was wondering if your insurance premiums are significantly higher due to the "build" half of your business. Thanks.
Well, we actually only have general liability insurance for the construction side of the company. We started out as one company and quickly found out we could not get insurance as one single company. Basically, you have to separate the construction from the design side legally in order to get the insurance. It may be possible to get the insurance for a combined company if the contractor has had his license for a number of years and a good track record, but one quote I got for that premium was $15,000/year (that was before we found out they wouldn't give it to us anyway because we were a new construction company). Our insurance premium is about $4,000 per year for 500,000 per claim, 1,000,000 aggregate - similar to what we were quoted for E&O insurance for the design side. The construction company has two partners and no employees, so we also don't pay workers comp. The premiums are based on payroll and coverage, probably similar to professional liability insurance. I imagine as your payroll goes up significantly so would the insurance costs.
I have heard the workers comp premiums can be quite high for construction trades, and I'm sure it depends on your state as well.
wierd tip on reducing your premiums for construction insurance- drug test all your employees. Even if they're just office workers, it can get you a bit of a break. I used to work for a GC, and even those of us that sat in cubicles all day had to be drug tested on hire because of this.
a little more insight into Rudolph's $1million dollar number...
If you figure $1million dollars of construction costs and roughly 12% fees (residential) that is $120,000 fee. A small company with low overhead can get it's multiplier down to 2. I've worked at a big company who had a multiplier of 3.8 (yikes!) to cover rent / HR / IT / marketing / secretaries, etc...
How are you calculating your multiplier? I have always thought of it as
Amount an employee generates in billing per hour / amount you pay the employee per hour (including benefits).
Under this method the higher the multiplier the better. We try to get to a multiplier of 3 and as a rule of thumb, 1/3 goes to the employee, 1/3 goes to office overhead and 1/3 goes to the partners. Unfortunately, most employees do not get to that high of a multiple (more like 2.5).
Also, while $120K might sound like a lot in fees (and it is a nice fee, don't get me wrong), to design a high-end house well, takes between 9 months and a year, then about a year for construction. That fee starts to get spread pretty thin.
there is a multiplier that reflects your overhead (the lower the better) and a multiplier that you can charge your clients. (the higher the better). Lets say you pay an employee $20 per hour. You may need to charge a 2X multiplier to break even ($40 pre hour). but the market allows you to bill that employee out at $60 per hour (3X multiplier. That gives you a profit margin of $20 per hour. Of course, it is not really that high in most firms. You need to be careful when you calculate your overhead multiplier.Most people forget to inculde lots of things, like the value of your time in marketing, running the business, etc. That's all overhead. So is part of each employees salary- their sick time, vacation time, time spent on non billable office stuff, is all overhead. A support person like a book keeper is all overhead. The only thing that is NOT overhead is the wages for people when they are actually working on a job, and costs related to that such as payroll taxes, unemployement taxes, etc. Benefits like health insurance are overhead. If you want to run a business, you need to understand the financial statements- there are many places in most cities where you can get free coaching, or attend seminars for free on setting up financial systems, understanding them, etc. It sounds boring, but if you want to have a strong architectural practice, and keep strong talented staff, you need to be financially strong and profitable. There is no sin in giving people bonuses, good benefits and pension plans!
kinda true tyvek... the equation is as simple as you make it (billable / cost).
The way I understand it is if I'm getting paid $40,000 a year ($20/hour), and my billable rate is $60 an hour, if the office multiplier is 2, I need to generate $80,000 in fee to break even. That 80,000 covers my costs + benefits, the amount of power I use, my new aeron chair, and my portion of the HR / secretary / IT consultant peoples salary.
$80,000 / $60 = 1333 billable hours.
So if I bill the maximum of 1880 hours (47 billable work weeks + holidays, vacation time, etc...): 1880 * $60 = $112800 - 80,000 = $32,800 is about a 30% profit. But like archie said, the profit margin is just not that high..
many firms have high multipliers because they have grossly high overhead costs... so controlling the overhead costs is key.
If you have high overhead costs you may need that high multiplier just to break even!
The other way to look at would also be:
$112,800 (maximum billable time) / $40,000 (my salary) = 2.82 multiplier where the multiplier includes both overhead and profit..
As a project manager, understanding this helps your jobs make money. I want the fastest and cheapest people in the company on my job so I can not only ensure my jobs make money but this allows me to spend more time on design issues and details that I want..
Aug 23, 05 2:16 pm ·
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Setting Up an Architecture Practice
Does anyone know of any good sources (books, websites, etc.) on what it takes to setup an architecture practice? specifically from a business point of view, i.e. insurances, accounting etc.?
yes, i recently bought The Architect's Guide to Running a Practice by David Littlefield.
Its not a very long book, but it has a lot of real life examples by some established firms that outline what you need to get started. Lots of good info from experienced people.
its cheap too! $19.99 used on amazon.com right now. think i got mine for $15.
Also, there's 'Architect's Essentials of Starting a Design Firm' by Peter Piven and Bradford Perkins, published by the AIA.
Skimmed it so far (too busy actually starting my office to read it).
freq_arch, that's exactly where I am - too busy to finish reading that book, but it seems very valuable as a resource to have around.
Good luck Nerja.
Fred Stitt aka San Francisco Institute of Architecture aka Guidelines, has a book titled "Operating Manual for the Small Design Practice." I have it and it seems to be OK but a bit light on depth.
Do y'all starting your own practices have AIA memberships?
Yes, I am AIA. My partner is not.
Thanks everyone for your advice. I will check out some of the books you have suggested.
Can someone talk briefly of the pros and cons of starting your own practice? For example, is it like a restaurant where in two years if you haven't gotten decent business you're probably going to fold? If you are a good designer is it the only way to get your own designs out there? Of course it depends, but what pay differences can you expect between working for a firm and heading your own? Are all ambitious architects destined to start their own practice? And if so, what percentage stay afloat?
Lots of good questions - I'd love to hear answers from people who have been doing it a bit longer than we have, but here's one perspective:
We have been on our own full time for about 2 years - started doing small side projects maybe 4 years ago... 3 partners, we all met in school but have different backgrounds & degrees. We decided to officially jump in and start a company after my two partners (one of whom is my husband - the other his best friend from school) had left full time jobs in architecture they weren't satisfied with and started doing small remodel jobs. That combined with the small design jobs we had going led us to think we might make it as a design/build company.
First misconception : You will make more money on the construction side of things, thus if you do design/build you have a better chance of making it. For the moment, this is absolutely not true for us - the architecture side of the company is more profitable - not what we expected... I have since read that 95% of people that start their own construction companies quit after 2 years. Don't know about comparable statistics for architecture, but I imagine it's less. It's VERY EASY to lose money in construction, not so easy in design if you've got a good contract. If the construction side succeeds, we will eventually be able to make more money than we would just doing architecture (on the residential scale anyway). HOWEVER, it now looks like this will take 5-10 years, and we're not sure if we can stick it out - see below.
TIME: We work all the time. At least, we work, or talk about work, all the time. By this I mean 10-12 hours a day, 6-7 days a week. Of course we take breaks, long lunches, have fun, pet the dog, but lately we have no time for museums, movies, bars, or anything like that... now we're really busy this summer, and it's not consistently this bad, but in order to make it work as a small company you're looking at long long hours. Part of it is just the stress factor, you'll constantly be thinking of how to improve the company, how to do marketing, how to deal with clients, learning how to do the books, setting up a library, etc. At this point I am concluding the only way to own your own company and have a normal life (unless your spouse makes a lot of money and/or you live somewhere with a low cost of living, and even then I'm not sure) is to have employee(s), and you need a certain amount of guaranteed work for that, which most people starting out don't have (including us - after 4 years).
MONEY: You will likely make less than working for someone else, for a few years to even longer. Last year we made about a quarter of what we were making when we both worked in offices (no joke) - this year it's almost equal, but we got lucky and got a few big jobs. We have NO IDEA where we'll be at next year, and in all likelyhood we'll make less than this year. This is partly because the construction side of the company makes less money, so if you're doing only architecture you might do reasonably well after a few years if you have consistent work. As an example, in order to make the same amount of money I would make at a firm (maybe $65,000/yr - I am licensed with 6 years experience), I would estimate I need about 1 million worth of projects per year. This is very rough, and it assumes that is the value of the construction estimate for projects the billing for which stretches over a few years. It takes into account overhead (which is fairly small - no employees except a paid summer intern, office at our house, etc.) and a bit of money to keep in the bank.
I would really recommend if you are serious about starting a company, that you do a budget including what you estimate your overhead will be (and ours is a lot higher than expected), what your fees will be per project, how long it will take you to complete each project, etc., to attempt to determine how much revenue you think you'll bring in per month. As the bookkeeper for both the design & construction sides of the company, I have been surprised to find that the fees just don't go as far as it seems they should. Remember, you also have to pay self-employment tax, plus state income tax depending on where you live. Since we're in CA, we probably have one of the higher tax burdens, and though deductions help a lot, you'll still end up paying 25-30% of your income to taxes.
PROS/CONS: It's great to work for ourselves. It's flexible, there's no one to blame but ourselves (good & bad), it can be rewarding when things turn out well. We do get to accomplish our designs, but keep in mind that when you start out you're not going to get fantastic commissions right away. We often discuss whether we'd be better off working for an already established office that does good work, because then we would at least probably not have to work on tract houses or pseudo craftsman remodels. The reality is that most of America doesn't own, and doesn't want, ultra-modern design, nor can they afford it. If you have the good fortune to start out with a couple of modern restaurant designs, or a ground up modern house as your first commission (no one I know if in this situation but it must happen), go for it. Otherwise, you'll be looking at the work that more established firms don't want for several years. And you'll probably be doing small residential projects. We would love to do something commercial, industrial, anything, but referrals generally come from friends or family, and in our case it's all residential.
I have no idea what the statistics are for people who start their own companies staying afloat, but I can say that of the 6 or so people I know personally who have done it, probably 2/3 have gone back to work for someone else, and the others (besides ourselves) have been teaching as a way to supplement their incomes. I am looking into teaching myself, but don't know how I would honestly do it with a full design workload.
To make a long story short - it's been worth a try so far, but after two years we are tired and often talk about giving up. We're in it at least until next spring, and then we're having our first child (note:official archinect news exclusive), after which point who knows what will happen...
PS: I also bought the AIA guide to starting a practice and haven't even cracked it open. My best advice is find people you know who have done it and ask alot of questions...
oh, and back to work - Sunday 7:00 pm :-)
a dose of reality. there goes my design-build dream.
I'm sure most have tried keeping their current arch job, and working small projects on the side till they make a name for themselves...however I remember a thread a little back of a couple that did design build for spec homes. They lived on site through the whole process... anyone remember the firm name?
R.A. thank you for posting that, I think thats a valuable bit of information for anyone even dreaming of opening thier own shop.
Indeed, rar, that was an excellent and candid response (and a breath of fresh, reality filtered air after reading this: barrel of fun at 147 Essex) Most folks I've known who've survied starting out on their own have advised that one should be in a position to stay alive for the first year unpaid unless you're a. walking into a signed contract with a commission that is definitely moving forward, or b. able to supplement your meager fees with a decent teaching gig (i.e. unpaid adjunct assistant position at Columbia isn't going to help you), c. you are otherwise funded and are doing it as an intensive recreational pursuit - in which case going unpaid isn't an issue. The key seems to be moving projects and keeping the work coming in. Unless you have access to excellent clients, chances are good the work will not be great, but the more of it you can get and get done on time and on budget, the better your chances of keeping the shop open. If you don't have access to a relatively consistent client base, are not a particularly skilled salesperson (or working with a partner who is), you should think twice about giving up the stability of gainful employment in someone else's office. Sadly, at least in the short run, talent won't pay the bills or find new work all by itself.
R.A. Rudolph--great posting; lots of insight. Good luck! I hope you can hang in there past next spring. Congratulations on your first child :-)
Congrats ro RA Rudolph and crew. How nice of you to share your experiences. I agree with you on most of the points, having been there. A couple of things to add:
- If you start a firm with the idea that you want to create "signature architecture", then you probably will earn less money than in a firm. Most areas of the country just don't have a market for it, and thsoe that will hire you may let you have free reign on the design, but can't pay much. That's a trade off you pay for creative freedom. If you start the business like a business, then you will make more than you made in a firm. This may mean that you will have to take some redundant boring jobs, mundane jobs, stuff like interior office redos, developer stuff,etc. Personally, I have found that once you are established, you can do both- have some fun projects that give you creative freedom, and still have lots of work that pays well but might not be so exciting. Personally, I make lots more than I would have at a firm, have more creative freedom, and don't have to answer to anyone when I want to take off to go to my kids game. By the way, my employees have a lot of creative freedom on projects where the client will allow it as well. It is more a matter of how a firm is set up than if you work for yourself.
- "You will have no time" is true. You will also have responsibility that is sometimes crushing. Everything ends up in your lap ultimately. I have employees now, and sometimes stay up at night thinking about having enough work to keep them all busy. I worry about the screw up that one of my employees made, and how I am going to fix it. I worry about the little old lady that slipped outside one of my projects and thinks I should not have built it on a hill, and has her lawyer asking for money. I worry about meeting the ever shorter deadlines of my clients. I worry about who is going to take over when I retire. I worry that the set of drawings that just went out was not checked thoroughly. You get the picture. If you are good at what you do, and you care, you will end up spending too much time doing it, and having to deal withlots of stress.
- you need to leverage your work. It is hard to make it with three "chiefs"and no "indians" Just like lawyers use paralegals, you need to have some less expensive (also lower billing rate) employees to make yourself competitive. Yes, in the beginning, you will do everything: answer the phone, pay the bills, draw, empty the trash, call reps for pricing on materials, etc. etc. However, when you get larger and can afford support staff, and can have a blend of higher paid and lower paid employees, you can become more effecient. Otherwise, you will be basically paying yourself that $8 per hour that you could be paying a part time high school student to file, enter data in your accounting system, copy stuff, make blueprints, run errands, etc. Just like a carpenter who can make more money if he has a 'helper'- he is making a little bit on the helper, plus leveraging his time for the more complicated work that uses his skills and expertice. This can also be good for the 'helper'- as his skills grow, he either moves on, or if the company grows, steps into a role with more responsibilty.
- If you are not interested in the business end, especially the selling end, don't do it. You have to be good at the sales part. That doesn't mean like a used car salesman. But you have to have a personality that puts people at ease, inspires, makes them want to hire you. If you don't have it, it will be a long uphill battle all the way. Team up with someone who does.
PROS: you are the boss
CONS: no time for archinecting on the boss' money
I worked (as an employee) at a three person firm (incuding myself) for a little over two years and it completely shattered any romantic notions I may have ever had about starting my own office.
My two main disillusionments:
•The sheer amount of time that was spent on the money side: billing, haggling, paying the consultants, calling the clients. It was just depressing.
•The dullest things were the most profitable. No time for design, no budget to make a model, but I can stand in line for an hour at the building department and make money. We had a really bad lean period for the office and agrred to do a little permit expediting for another office. Soul-crushing work, but we were good at it and it effortlessly kept the office afloat (actually it was very lucrative). We had serious discussions on whether to just drop the architecture altogether and become a permit expediting office. This was when I knew it was time to go.
RAR: Quick question re: insurance. I know that General Contractor's insurance costs are astronomical compared to our costs (7 person, residential firm, 5 years old) and I think that my insurance premiums are high. I have toyed around in the past with whether or not to do some design/build and was wondering if your insurance premiums are significantly higher due to the "build" half of your business. Thanks.
Well, we actually only have general liability insurance for the construction side of the company. We started out as one company and quickly found out we could not get insurance as one single company. Basically, you have to separate the construction from the design side legally in order to get the insurance. It may be possible to get the insurance for a combined company if the contractor has had his license for a number of years and a good track record, but one quote I got for that premium was $15,000/year (that was before we found out they wouldn't give it to us anyway because we were a new construction company). Our insurance premium is about $4,000 per year for 500,000 per claim, 1,000,000 aggregate - similar to what we were quoted for E&O insurance for the design side. The construction company has two partners and no employees, so we also don't pay workers comp. The premiums are based on payroll and coverage, probably similar to professional liability insurance. I imagine as your payroll goes up significantly so would the insurance costs.
I have heard the workers comp premiums can be quite high for construction trades, and I'm sure it depends on your state as well.
wierd tip on reducing your premiums for construction insurance- drug test all your employees. Even if they're just office workers, it can get you a bit of a break. I used to work for a GC, and even those of us that sat in cubicles all day had to be drug tested on hire because of this.
great topic!
a little more insight into Rudolph's $1million dollar number...
If you figure $1million dollars of construction costs and roughly 12% fees (residential) that is $120,000 fee. A small company with low overhead can get it's multiplier down to 2. I've worked at a big company who had a multiplier of 3.8 (yikes!) to cover rent / HR / IT / marketing / secretaries, etc...
Take the $120,000 fee / multiplier (2) = $60,000
How are you calculating your multiplier? I have always thought of it as
Amount an employee generates in billing per hour / amount you pay the employee per hour (including benefits).
Under this method the higher the multiplier the better. We try to get to a multiplier of 3 and as a rule of thumb, 1/3 goes to the employee, 1/3 goes to office overhead and 1/3 goes to the partners. Unfortunately, most employees do not get to that high of a multiple (more like 2.5).
Also, while $120K might sound like a lot in fees (and it is a nice fee, don't get me wrong), to design a high-end house well, takes between 9 months and a year, then about a year for construction. That fee starts to get spread pretty thin.
there is a multiplier that reflects your overhead (the lower the better) and a multiplier that you can charge your clients. (the higher the better). Lets say you pay an employee $20 per hour. You may need to charge a 2X multiplier to break even ($40 pre hour). but the market allows you to bill that employee out at $60 per hour (3X multiplier. That gives you a profit margin of $20 per hour. Of course, it is not really that high in most firms. You need to be careful when you calculate your overhead multiplier.Most people forget to inculde lots of things, like the value of your time in marketing, running the business, etc. That's all overhead. So is part of each employees salary- their sick time, vacation time, time spent on non billable office stuff, is all overhead. A support person like a book keeper is all overhead. The only thing that is NOT overhead is the wages for people when they are actually working on a job, and costs related to that such as payroll taxes, unemployement taxes, etc. Benefits like health insurance are overhead. If you want to run a business, you need to understand the financial statements- there are many places in most cities where you can get free coaching, or attend seminars for free on setting up financial systems, understanding them, etc. It sounds boring, but if you want to have a strong architectural practice, and keep strong talented staff, you need to be financially strong and profitable. There is no sin in giving people bonuses, good benefits and pension plans!
kinda true tyvek... the equation is as simple as you make it (billable / cost).
The way I understand it is if I'm getting paid $40,000 a year ($20/hour), and my billable rate is $60 an hour, if the office multiplier is 2, I need to generate $80,000 in fee to break even. That 80,000 covers my costs + benefits, the amount of power I use, my new aeron chair, and my portion of the HR / secretary / IT consultant peoples salary.
$80,000 / $60 = 1333 billable hours.
So if I bill the maximum of 1880 hours (47 billable work weeks + holidays, vacation time, etc...): 1880 * $60 = $112800 - 80,000 = $32,800 is about a 30% profit. But like archie said, the profit margin is just not that high..
many firms have high multipliers because they have grossly high overhead costs... so controlling the overhead costs is key.
If you have high overhead costs you may need that high multiplier just to break even!
The other way to look at would also be:
$112,800 (maximum billable time) / $40,000 (my salary) = 2.82 multiplier where the multiplier includes both overhead and profit..
As a project manager, understanding this helps your jobs make money. I want the fastest and cheapest people in the company on my job so I can not only ensure my jobs make money but this allows me to spend more time on design issues and details that I want..
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