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KPIs (Key Performance Indicators) are measures you can use to understand the performance of your architecture firm. When you have your nose to the grindstone in the constant cycle of completing work for clients, it can be difficult to keep your eye on the bigger picture of the business. KPIs are simple formulas and numbers you can use to gauge performance from month to month - they keep you on track and alert you to potential issues before they develop into actual issues.
KPIs are designed to be simple numbers that you can easily report on through project management software like WorkflowMax. By keeping your KPIs the same from month to month and year to year, you’re able to measure trends in your architecture practice and in the marketplace, and see where you need to improve and where you’re doing well.
So, as an architecture firm, which KPIs should you be looking at? Here are five I think are essential:
1. Overhead Rate
Formula: Total indirect expenses / total labour cost
Knowing your overhead is probably the most important KPI for an architecture firm. In order to know the correct rate to charge for your services, you need to understand how much those services are costing you to produce. Overhead takes into account costs like paying your rent, paying for software, telephones, and stationery.
2. Net Revenue Per Employee
Formula: annual net income / number of staff
Net revenue per employee helps you to measure the past performance of your company. It isn’t a way to single out employees who are slacking off (this can be done via the reporting functionality of WorkflowMax), but a way to judge how you are growing. Even though you might be earning a higher profit, in terms of the number of staff you employ, is your net revenue up or down?
3. Break even rate
Formula: overhead + unit cost of salaries
Every architect at your firm has their own break-even rate (their hourly salary + the overhead rate) - the actual amount it costs you to employ them. If you know this rate, then you know what each employee needs to be bringing in in order to cover the cost of hiring them. If you multiply your break-even rate by your desired profit margin, you’ll arrive at the hourly-rate you need to charge out in order to meet your goals.
4. Pending Proposals
One way you can measure this KPI is by dividing any un-won business into prospects (jobs you have a 50% or higher chance of winning) and suspects (less than 50% chance of winning). When you add these numbers together and compare them to the firm’s annual budgeted revenue, you know you’re on track if you see a number that’s 2.5-3x higher, with prospects making up at least a third of that total.
5. Backlog Value
How much work have you got on right now, that you haven’t billed for? Backlog value measures the value of the work you’re doing right now. Because you’re always invoicing for projects and shuffling them off your plate, you’ve got to constantly add new projects to your pile. When looking at backlog value, a good target to keep in mind is equal to, or greater than, your annual net operating revenue.
With these KPIs, you can get a snapshot of your firm’s financial performance and measure certain aspects of your business. These are only five of the many possible KPIs you could choose to track - you can see some more examples in this article on KPIs from Entrepreneur Architect. But whatever you choose to track, it’s important that you run the same numbers in the same way every month, and that you look for patterns and issues, so you can be proactive about improving your business … before something goes irreversibly wrong.
What KPIs are you tracking in your architecture firm?