My two partners and I disagree on the relationship between salary and billable hourly rates. We pay ourselves below-average salaries, according to reports we read, because my partners are afraid of having principal billing rates that are perceived as too high.
We bill out principal time at $80 per hour. Our company overhead factor on direct labor is about 120 percent, and we target a profit of 15 percent on top of that. This brings our billing multiplier to about 2.50. We then divide our $80 per hour principal billing rate (what we think is market acceptable) by 2.50, which sets our annual salary at about $66,000. Our overall annual compensation is more than adequate because we consistently have been able to pay ourselves substantial year-end bonuses, which more than make up for the low salaries during the year.
My partners' position is that billing rates must fully cover salary, overhead, and profit for accounting purposes. However, according to this year's CE News salary survey, the average salary for engineers with our level of experience is about $88,000—which far exceeds our salaries. Why can't we pay ourselves this much in salary (or some other number we agree on) regardless of the hourly rate we bill? Most of our work is lump sum anyway.
I see no reason why your salary has to be capped and based on the $80-per-hour billing rate you charge for principals.
It's quite common for the hourly billing multiplier used for principals (and other highly-paid individuals) to be lower than the multiplier applied to the hourly rates of lesser-paid individuals in the organization. They do not need to be the same. The key is to attain a top-to-bottom, across-the-board average multiplier that is sufficient to cover costs and produce a desired level of profit.
Your conservative salaries do have the benefit of conserving cash flow during the course of the year. Additionally, they insulate the firm in the event that business falls off by not having to deal with high, fixed salaries. Of course, you don't want to be so conservative that you feel personally deprived. Try to work with your partners to find a level of comfort you can all agree on.
Finally, your $80-per-hour principal billing rate and 2.50 billing multiplier strike me as being quite low. You might want to do a little research in your local market to see if you could work your billing rates up gradually and selectively.
About a year ago, we moved into a new custom building we designed and had built. The building has two floors; the bottom floor is available for lease to tenants, and our engineering firm is on the second floor. We arranged the building like this so that if we needed the extra space, we could take over the lower floor.
The problem is that none of us expected the growth we have experienced since the planning and construction began. Now we are about to run out of space on the top floor. Fortunately, there is available space on the lower floor. Our problem is deciding how to split up our company between the two floors.
We are organized into four engineering teams and an administrative team. Our first thought was to move one of the engineering teams to the first floor. When we brought this up for discussion, none of the teams were interested in being relocated away from the others, citing fears of becoming isolated. Some of the teams occasionally share projects or staff, and this would become more difficult if teams were spread over two floors. The engineering teams want us to move administration to the first floor.
However, moving the administration team would not gain us as much extra space on the second floor as moving one of the engineering teams would (the administration team is the smallest group in terms of area), and the cost would be high to relocate print rooms, files, a central computer room, et cetera. Also, if we did move the administration team, we could still end up needing more space on the second floor within a few years because of our growth rate. Based on my brief description of the issues, any ideas?
How about leaving the administrative team on the second floor and moving two engineering teams to the first floor? Yes, in the short term, you would end up taking on more space than if you moved only one team. But by moving two teams downstairs, you could lessen the isolation factor, keep administration where it is to avoid the disproportionately high costs of relocating that particular group, and create some extra elbow room for additional growth going forward. It's obvious you vastly underestimated your future needs. You don't want to do it again by making a decision that only satisfies short-term needs and fences your firm in by tenant leases when you run out of space in the future.
When selecting which two engineering teams should move down to the first floor, select the two that have the most history/potential of sharing projects and staff. Be sure that the first-floor space build-out is equal (or even better) in quality and comfort to the second floor, so that the teams that are selected to move don't feel diminished.
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Your name will not be used in connection with published questions. David Wahby is president of Wahby & Associates (www.wahby.com), a management consulting firm serving A/E clients. He can be reached at 1-616-977-9756 or via e-mail at email@example.com.