Accounting Mistake Made by 
Architecture and Engineering Firms

Executive Overview
Few architects or engineers have taken any accounting courses and even fewer have taken the time to earn an MBA. So when it comes to the accounting side of running our business it most likely is not our strong suit. We also tend to rely on our accounting software to do the dirty work for us.

Since the huge majority of Architecture or Engineering firms are small businesses they have chosen to use the number one small business accounting software, QuickBooks. According to surveys done by PSMJ nearly 80% of AE firms in the United States are using QuickBooks.
When QuickBooks creates the accounts for a new company using the template for Architects and Engineers it fails to set up what is needed and the mistake is already made. Read on to discover what the mistake is, why you should care, and how to correct it.

Only One Account for Payroll Expenses
When QuickBooks sets up the Chart of Accounts it creates a single expense account for all of your payroll expenses. The challenge with this is you can’t separate your direct costs from your indirect costs (overhead).
With this set up there is no way to calculate three critical factors:
Overhead Rate - the number of dollars of overhead for every dollar of direct labor.
Billing Multiplier - net revenues divided by direct labor
Utilization Rate - direct labor divided by total labor
 

Second Account for Overhead Payroll
You will need to create a second expense account to track indirect labor payroll costs. These include all of the other payroll expenses including Taxes, Benefits, Holiday, Vacation, PTO, Medical, etc.
But don’t stop there. You also need to include overhead labor for Marketing, Business Development, Continuing Education, Accounting, Administration, etc. The labor costs for these activities are overhead. Once you have a second account set up you will be able to generate your critical factors.
Depending upon how you manage your fees and whether or not you have sub-consultants you may elect to have your Direct Labor be a Cost of Goods Sold rather than an Expense.
 

The Importance of Net Fee
Calculating and utilizing your net fee enables you to measure all of your projects on an even playing field. It also allows you to look at national averages and compare your firm to others regardless of discipline.
You see, if you have sub-consultants for most of your projects as part of your gross fee and you calculate your profit as a percentage of the gross fee you are misleading yourself to believe that your profit percentage is rather low. Then you have a project where the sub-consultants contract directly with the owner so your gross fee is much less and you will see a much higher net profit percentage.
By removing the sub-consultants and reimbursable items from the equation you get a much more accurate view of your performance.
This also allows for firms who have a great number of sub-consultants to compare their ratios to firms who have few sub-consultants or none at all.

Conclusion
None of these very important indicators can be calculated if you have only one payroll expense account. These numbers are the life blood of your firms and should be studied carefully and often. Keep your project managers in the know so they are aware of where their projects stand.
To stay up on these reports you will need to routinely export your numbers out of QuickBooks and into a spreadsheet  where you can run the calculations. While this can become tedious, it is necessary. Our practice and project management software, Praesto AE, integrates with QuickBooks does this work for you.