Managing Expenses for Architects and Engineers

Executive Overview

Managing a successful Architecture or Engineering firm is more complicated than drumming up new business, generating revenues, and hiring the “A” team to fulfill contracts. You also have to manage the finances and unless your firm is large enough to employ a CFO and/or an accounting team, the burden of managing the income and expenses rests solely with you, the firm principal.
In tough economic times we may not be able to increase our revenues but we can manage our expenses. Managing architecture expenses and engineering expenses is much more than paying your bills on time. The goal should be to reduce your expenses without jeopardizing your operations.
This paper discusses the basic exercises you can do to locate areas where you may be able to cut your expenses ~ you can always find five percent.

Annual Review of Vendors
This is the first place that you will want to look. One of the things that we did at our firm and we encourage you to do, is to take a hard look at who you spend money with on an annual basis.
The best way to do this is to create a report that lists each of your vendors and the total dollar amount you spent with that vendor. Don’t worry about the category of the expense at this point, just the amount per vendor.
Now that you have this list, sort it by dollar amount with the greatest amount at the top. Go through this list one by one and ask the following questions - be sure to give honest answers.
Is this vendor the only provider or might there be an equal competitor who could provide a better price?
Is this vendor giving us their best price or can we negotiate better rates with this vendor?
What are the payment terms with this vendor and can we get better rates?
Is this a service that we can get by without or do in-house?
These are tough questions that you need to ask even if one of the vendors is your best friend. You owe it to the share holders of your practice to get the best deal.
Now the work comes. You need to pick up the phone and call any vendor that you think just might give you a better rate and ask for it. It never hurts to ask.
Let them know that times are tough and you are doing everything you can to keep the doors open. Yes you understand that times are tough for them too, but if you are not able to cut your expenses then they may loose all of your business when you close the doors.
Not every vendor will be able to cut their prices, but I am sure that you will be able to find at least a five percent decrease overall.
Why did I ask you to sort the list by dollar value? Because I want you to start at the top of the list as this is where you will have the greatest gains. If you have a vendor that you spend $500 a year with and you get a 50% discount that is great but it is only $250. However if you have a vendor that you spend $100,000 a year with and you get a 3% discount that is an annual savings of $3,000. Get the point? Start with the place where you have the most to gain.
 

Caution - There are Pitfalls
Some of your vendors may go to bat for you from time to time. They may also go the extra mile to help you meet an important deadline. So when you go asking for better rates, make sure that you ask nicely and be respectful. Also evaluate the total value of the relationship. The last thing you need to do is get left out in the cold over a few dollars.
 

Employee Health Benefits
I believe that your good employees are your greatest asset and that many employees stick around because of the wonderful work environment you provide along with your benefits package. However, for small businesses these can be a real burden.
With the way that health insurance rates have gone up over the past decade it is a wonder that we can afford to provide this benefit at all. So what can you do without just plain cutting health insurance all together?
The first thing you can do is have the employee participate in the cost. Depending upon your location and employment pool you will have to make some judgement calls. We had our employees pay 20% of the employee and 100% of additional family members.
In our early days we paid 100% of the employee and 50% of the additional family members. When we modified the employee portion, 10% of our employees dropped the coverage because they had coverage from their spouse. (We did offer a one time pay increase to help cover the employee portion)
I am not advocating putting your employee’s finances in jeopardy, but you need to take a hard look at what your company can afford to pay for. Nearly 30% of the workforce has secondary coverage from a working spouse, by making a small copay in your plan you can have a significant cut in your expenses. You always have the right to share a portion of the savings in a bonus plan. This is not about taking away from the employee, but about making your company lean so you can accommodate economic changes.

The second thing that you can do is review your existing plan and rates. When we went looking for group coverage we found the best coverage/rate combination came from joining our local builders association. Where we failed was in not continuing to look around on at least an annual basis. Five years later we discovered that by moving to a PEO (Professional Employee Organization) where our employees were actually employed by the PEO and leased back to us we were able to save over 25% on the family plans and around 12% on the individual. The PEO also became our HR department and managed our payroll so we were able to consolidate from the existing vendors we had been using.
Just because a vendor had the best rates last year does not mean that they will have the best rates this year. Shop around.
Monitoring Staff Salaries
Just as you did with the vendors you need to do the same with your staff. Now we want to look at what each employee is costing the company - you included. Labor is the greatest cost to AE firms which makes it imperative that we look here. I know that this is not fun and this is one of the hardest tasks to take on.

As you review each of your employees ask yourself the following:
If this employee left, would we need to replace them?
Can the remaining staff pick up their work load?
Is this employee a bad apple that needs to get pruned?
If an employee would not be replace if they were to leave it may be time to let them go.
The format of your staff compensation can have a huge effect on your firms viability. At our firm nearly twenty percent of an employee’s compensation (benefits not included) came from our bonus program. This program was tied to profits. It helped us keep our monthly nut down and gave great upside potential to our staff if the firm performed well.
 

Conclusion
Remember that it is your money and you have the right to spend it how and where you want. Make sure that you are getting value for every dollar you spend.
Make it an annual process to review all of your expenses by vendor and expense category to make sure that the dollars you are spending are returning the best value.