Designed for Success
Managing your residential design business for success means that you have to monitor and make decisions based on many different variables, each of which can be critically important to you at different times. However, the most critical constant you must track in any design business is job cost.
When I use the term “job cost” I am specifically referring to what it costs for your firm to produce one specific project. How many hours of design and meeting time were logged, what was the production drafting time and check time, what prints, engineering costs, etc. were needed to complete the project and how did all of the time spent and expenses accrued compare to the contract amount and/or your estimate?
It may be that as a designer you don’t feel it is necessary to track this information: you’ve always made money and you look at your P&L fairly often, so what’s the problem? You may know (or think you know) on a gut level when a job is profitable, but unless you do exactly the same type of project every time, you could, for instance, be losing money on remodels and making up for it on new homes. The trouble with this scenario is that when new house work slows down, your bottom line can be red instead of black very quickly. As an experienced designer friend of mine says (jokingly, I think), “he loses a little money on every project but he makes it up in volume!” Instead of trying to make a profit on volume maybe you should be analyzing each and every project to determine where you’re profitable and where you need to improve your process or production. After all, what gets measured gets improved.
Everyone approaches job cost measurement a bit differently and there is no right or wrong way, as accumulating the actual time and materials costs is pretty easy. You can use a low-tech approach and track your time daily on a piece of paper or you can use a software application such as the timer included in your accounting package or your drawing software. Even more sophisticated options are available for managing your entire business in the cloud such as ArchiOffice, gProjects or any numbers of iPad apps.
More difficult, perhaps, is breaking down the way you put your estimates together so that you can compare your initial numbers to your actual. Some designers price on a square foot basis, others work hourly and still others take a more detailed approach and estimate each phase and piece of work by the hours required to produce it. I started out using the square foot method but quickly found that it only worked if I was doing the same kind and complexity of project over and over; but I wasn’t. I could produce a 3000 sq. ft. house that was a simple builder colonial, or the same square footage could be a developed as a cascading hip roof multilevel plan. I found that I did not want to pass up the more complex job because of the experience it gave me, so I eliminated my square foot price sheet and changed my estimating methods to price each project individually.
Working by the hour is easy to quote and very predictable, unfortunately while this method covers your costs, it doesn’t reward you for being faster than your estimate. Using this method means you’ve capped your income at the maximum number of hours you can work and, in my opinion, you’re simply leaving money on the table.
What I find works for me is a very detailed Excel spreadsheet, because every item that has to be done on any kind of project is listed and there is a place for me to enter the estimated time to complete each task. There is a cell for zoning research time, a cell for reviewing window and shop drawings and line items for each sheet of the set and each phase where we touch it. We track our work in three phases or steps, conceptual design, design development, and construction documents, and we invoice in the same format. I have found that some months we bill predominately only one phase of work; if that phase isn’t profitable then I have a cash flow problem to bridge in 30-45 days.
As I review my job costs with each invoice I am asking myself the following questions: did I price the project correctly and did I produce it within the hours I estimated? Were there extenuating circumstances that caused this particular project to exceed budget (client indecision, changes or scope creep) and was I able to recoup those additional costs? If you have employees or if you outsource some of your work, this job cost process will also allow you to track their profitability.
Yes, this takes a little time each week, but it is not a significant amount and the process helps me continuously improve my business management skills. I firmly believe that with a few changes in the way we each manage our businesses, we can all increase our bottom line profitability.
Jim Wright is principle and lead designer at Residential Designed Solutions, Inc. and The Plan Drawer, Inc. A Certified Professional Building Designer, he has served in many offices and committees with AIBD including as National President. Jim encourages you to post comments and/or additional ideas you may use in your business. You can also reach Jim directly at firstname.lastname@example.org