This document provides an overview of key financial indicators and metrics that can be used to monitor the financial performance and stability of architecture and engineering (A&E) firms. It discusses metrics such as utilization rate, net effective labor multiplier, total payroll multiplier, overhead rate, and net revenue per employee. Benchmark goals are provided for each metric. Additionally, the document summarizes tax deductions and credits that may benefit A&E firms, such as the domestic production activities deduction, flow through business tax deduction, research and development tax credit, and energy efficient commercial buildings deduction.

1. May 10, 2018
LAYING DOWN
THE
GROUNDWORK
FOR FINANCIAL
STABILITY

2. 1
Presented by
Donald W. Doeg, JD
Principal
Updike, Kelly & Spellacy, P.C.
Scott Smith
Principal
Smith Brothers
Gil Watkins, CPA
Partner
Citrin Cooperman

3. A & E Financial Indicators and
Selected Tax Topics

4. • Utilization (Chargeability) Rate
• Net Effective Labor Multiplier
• Total Payroll Multiplier (Revenue Factor)
• Overhead Rate (Excluding Bonuses)
• Net Revenue Per Employee
• Profitability as a % of net fee
All should be based on accurate accrual basis financial statements.
3
A & E Selected Key Financial Indicators

5. Direct Labor $ / Total Payroll $ x 100%
• Indicator of how efficiently and effectively people are utilized.
• Productivity indicated by measuring the direct payroll dollars spent on billable
projects in relation to the total payroll costs (includes all staff).
• Can be tracked based on hours but the standard is to use dollars which reflect
the true labor cost for utilization.
Can also be tracked for technical/professionals only:
Direct Technical Labor $ / Total Technical Payroll $ x 100%
Goal: Overall 60-65%. For professional/technical only 70-85%.
4
Utilization (Chargeability) Rate

6. Net Fee Revenue / Direct Labor
• Indicator of productivity and project profitability.
• Measures net revenue earned for each direct labor dollar spent on projects.
• Includes the realized mark-up on direct labor.
Goal: 3.0 or better.
5
Net Effective Labor Multiplier

7. Net Fee Revenue / Total Payroll
• This indicator combines the Utilization Rate and Net Labor Multiplier.
• Probably the most consistent single indicator of operating performance.
• Provides a clearer measure of how well a firm converts all labor to revenue.
Goal: 1.8 or better.
6
Total Payroll Multiplier (Revenue Factor)

8. Total Overhead / Direct Labor x 100%
(Overhead includes indirect labor costs, general and administrative expenses)
• Indicates the overhead incurred for each direct labor dollar that needs to be covered
in your rates and fees.
• Critical in determining firm breakeven rates, billing rates and project fees.
Goal: 150-165% is a good range.
7
Overhead Rate (Excluding Bonuses)

9. Annual Net Revenue / Average Total Employees
• Good indicator of Firm’s financial performance and how efficiently employees
are utilized.
• Useful in projecting a realistic range of future annual net revenue.
8
Net Revenue Per Employee

10. Breakeven Multiplier = Total Overhead Factor + 1
Indicates the multiple required per dollar of direct labor to cover all overhead costs and
direct labor.
Target Multiplier = Breakeven Multiplier / (100% - Profit % Desired)
Used to determine hourly billing rates to achieve desired net profit %.
Current Ratio = Current Assets / Current Liabilities
Measures liquidity and the ability to meet short term liabilities.
Benchmark: 2.7
9
Other Useful Metrics

11. Working Capital to Net Fees = Average Working Capital / Net Fees
Measures how well a firm uses its working capital to support fees generated.
Benchmark: 20% to 25%
Average Collection Period = Average A/R / (Gross Revenue / 365)
Calculates the average # days it takes to collect A/R from the billing date. Also a measure of
liquidity and indicates the quality of A/R and current ratio.
Benchmark: 75 days
Debt to Equity Ratio = Total Liabilities / Equity
Measures how leveraged a firm is and its long term ability to pay its liabilities.
(The lower the ratio the better the firm’s ability to borrow)
Benchmark: 0.80 to 0.90
10
Other Useful Metrics

12. Selected Key Performance Indicators (KPI’s)
Median Values Clarity/Deltek
All Firms 2016
2014 2015 2016 Top 25% All Others
Utilization Rate 60.0% 61.0% 60.1% 62.7% 59.6%
Net Effective Labor Multiplier 2.97 2.96 3.02 3.50 2.88
Total Payroll Multiplier
(Revenue Factor)
1.77 1.79 1.79 2.16 1.70
Overhead Rate (ex-bonuses) 160.0% 155.2% 154.0% 145.00% 160.00%
Net Revenue Per Employee $129,689 $139,042 $140,189 $152,062 $133,995
Operating Profit on Net
Revenue
(Pre bonuses taxes)
11.80% 12.80% 13.0% 28.40% 8.10%
(a) Deltek/Clarity 38th Annual Report
Over 550 US and Canadian A&E firms
11
A&E Key Performance Indicators – Current Trends

13. Median Values Clarity/Deltek
10 Year All Firms 2016
Best 2014 2015 2016 Top 25% All Others
Utilization Rate 61.0% 60.0% 61.0% 60.1% 62.7% 59.6%
Net Effective Labor
Multiplier
3.07 2.97 2.96 3.02 3.50 2.88
Total Payroll Multiplier
(Revenue Factor)
1.79 1.77 1.79 1.79 2.16 1.70
Overhead Rate (ex-
bonuses)
151.00% 160.0% 155.2% 154.0% 145.00% 160.00%
Net Revenue Per Employee $140,189 * $129,689 $139,042 $140,189 $152,062 $133,995
Operating Profit on Net
Revenue
(Pre bonuses taxes)
13.0% 11.80% 12.80% 13.0% 28.40% 8.10%
* 2008 is $140,129 after CPI adjustment
(a) Deltek/Clarity 38th Annual Report
Over 550 US and Canadian A&E firms
12
A&E Key Performance Indicators – Current Trends
Selected Key Performance Indicators (KPI’s)

14. Median Values Clarity/Deltek Zweig
10 Year All Firms 2016 Group
Best 2014 2015 2016 Top 25% All Others 2016
Utilization Rate 61.0% 60.0% 61.0% 60.1% 62.7% 59.6% 60.7%
Net Effective Labor
Multiplier
3.07 2.97 2.96 3.02 3.50 2.88 3.08
Total Payroll Multiplier
(Revenue Factor)
1.79 1.77 1.79 1.79 2.16 1.70 1.83
Overhead Rate (ex-
bonuses)
151.00% 160.0% 155.2% 154.0% 145.00% 160.00% 154.0%
Net Revenue Per Employee $140,189 * $129,689 $139,042 $140,189 $152,062 $133,995 $141,291
Operating Profit on Net
Revenue
(Pre bonuses taxes)
13.0% 11.80% 12.80% 13.0% 28.40% 8.10% 14.6%
* 2008 is $140,129 after CPI adjustment
(a) Deltek/Clarity 38th Annual Report
over 550 US and Canadian A&E firms
(b) Zweig Group 2017 Financial Performance Survey
of AEP and Environmental Consulting Firms
13
A&E Key Performance Indicators – Current Trends
Selected Key Performance Indicators (KPI’s)

15. Median Values Clarity/Deltek Zweig Citrin
10 Year All Firms 2016 White Cooperman Benchmark
Best 2014 2015 2016 Top 25% All
Others
2016 2016
Utilization Rate to
Total Labor
61.0% 60.0% 61.0% 60.1% 62.7% 59.6% 60.7% 62.55% 60 - 65%
Net Effective Labor
Multiplier
3.07 2.97 2.96 3.02 3.50 2.88 3.08 3.02 3.0 or better
Total Payroll
Multiplier (Revenue
Factor)
1.79 1.77 1.79 1.79 2.16 1.70 1.83 2.02 1.8 or better
Overhead Rate (ex-
bonuses)
151.00% 160.0% 155.2% 154.0% 145.00% 160.00% 154.0% 151.91% 150 - 165%
Net Revenue Per
Employee
$140,189 * $129,689 $139,042 $140,189 $152,062 $133,995 $141,291 $195,903 $150,000
Operating Profit on
Net Revenue
(Pre bonuses taxes)
13.0% 11.80% 12.80% 13.0% 28.40% 8.10% 14.6% 22.08% 13.0%
* 2008 is $140,129 after CPI adjustment
(a) Deltek/Clarity 38th Annual Report
Over 550 US and Canadian A&E firms
(b) Zweig Group 2017 Financial Performance
Survey
of AEP and Environmental Consulting Firms
(c) Citrin Cooperman informal survey of 9 A&E firms in the
NY Metro area.
All have less than 200 employees.
Selected Key Performance Indicators (KPI’s)
14
A&E Key Performance Indicators – Current Trends

16. Monitoring and managing your firm by using KPIs will give you a better insight into
your business. Used properly they will help you to:
• Better manage projects
• Charge higher fees – or identify a need to increase fees
• Be more profitable
• Reward and retain your best people
• Plan ahead no matter what the economic conditions are
Keys:
• Make sure you have or develop a good reporting process.
• Focus on a few select KPI’s that give a balanced view of what’s happening.
• Understand them and react accordingly.
15
KPI Summary

17. • The deduction is 9% of qualified production activity income
• Significant tax benefit
• Costs to calculate are generally insignificant, relative to the tax savings
• A & E firms qualified based on receipts from services performed in the US for
US real property construction projects
• Repealed under Tax Reform for tax years beginning after December 31, 2017.
16
Section 199 – The Domestic Production Activities
Deduction

18. • Qualified Trade or Business owners (other than C Corporations) receive a
deduction of 20% of Qualified Business Income subject to several restrictions.
• This includes S corporations, partnerships (as well as LLP’s and LLC’s) and sole
proprietorships.
• Qualified Trade or Business includes the service of architects and engineers.
17
Flow Through Business Tax Deduction

19. • Step 1 – Deduction equal to 20% income allocated to owner.
• Step 2 – Above deduction limited to Higher of
• 50% of wages paid by business or
• 25% of wages paid plus 2.5% of depreciable basis of assets used in trade or
business.
Step 3 – If Business owner’s taxable income is under $315,000 the Step 2
limitation does not apply. This benefit phases out at $415,000.
Step 4 – Amount determined above further limited to 20% of business owner’s
taxable income.
18
Flow Through Business Deduction- Eligible
Business Rules

20. • If a firm is incurring expenses associated with the development of unique functional
and energy-efficient designs, there is a strong possibility that they could benefit from
an R&D Tax credit. This test applies to the firm and not the industry.
• Can provide a dollar-for-dollar reduction for federal tax liability.
• Beginning in 2016, “small businesses” can offset AMT with research credits.
• Credit not allowed for NYS or CT.
• For A&E firms, this means cash is retained in their business by claiming current year
credits or amending prior year’s returns for a cash refund.
• The analysis and computation of the credit is complex, but in general the credit is
about 4-7 percent of the total qualifying research expenditures.
19
Research and Development Tax Credit

21. • Potential tax benefit can be substantial.
• The R&D tax credit benefit was made permanent by legislation at the end of 2015.
• Start-up small businesses can elect to apply a portion of the research credit against
payroll tax.
20
Status of R&D credit

22. • Incentive for building owners to focus on energy efficiency. However, the deduction
does not apply to property placed in service after December 31, 2017.
• Applies to construction of new high-efficiency commercial buildings and upgrades to
existing buildings in the US.
• Relates to costs to install building envelope, interior lighting, HVAC and/or hot water
systems, that reduce total building power and energy costs by 50% or more per year
vs. certain minimum standards.
• Deduction can be up to $1.80 per square foot of the cost of qualifying systems in the
year they are placed in service. There are ways to partially qualify in the three
component systems.
21
The Energy Efficient Commercial Building
Tax Deduction – Section 179D

23. • 179D also encourages federal, state and local governments to build energy-
efficient buildings.
• Since governments don’t receive a tax deduction, the statute allows the
government entity to transfer the tax deduction to the architect or engineer that
designed the building.
• Typically, that is the architect/engineer primarily responsible for designing the
property. However, the benefit could be allocated to more than one designer.
22
Section 179D Benefits for Architects & Engineers

24. If you are performing services on projects outside your firm’s home state, there are
two critical issues that must be considered:
1. Make sure the architects and engineers are properly licensed individually and the
firm is registered in that state.
Failure:
• Can be grounds for sanctioning from the State’s licensing Board
• Opens you up to lawsuits from the Client
• Could lose your ability to sue (e.g. collections); you can only defend against a
lawsuit
2. Make sure you are reviewing states tax filing requirements and how income should
be apportioned.
• States have different requirements and use different methods to apportion
income.
Don’t get surprised! Make sure your firm is complying properly.
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OUT OF STATE PROJECTS ALERT!

25. Project Documentation

26. • Importance of Documentation
• Best Practices
• Document Retention Policy- Considerations
• The Communication Risk Driver
Overview

27. • Communication
• This is a key non-technical risk driver from XL which keeps to be
consistently increasing
• Manage expectations
• New Client
• Current Clients
Keys to Doing Business

28. • Trials involving construction disputes happen years later
• Difficult to properly recall the key events surrounding the alleged claims.
• Courts often look to documentation based on the fact that court cases occur
years later and memories can be faded or slandered during that time. In some
instances it may seem that he who has the most documentation wins.
• Design professionals often have the best/most documentation
Why is documentation important?

29. Business Records Exception to Hearsay
• Document made in the regular course of business
• Was the regular course of business to make such a record
• The document was contemporaneous
Getting Documents Admitted as Evidence

30. • General rules to observe
• Use proper language and Do Not Joke/ Insult
• Do not admit liability or fault
• Play devil’s advocate on each thing that you write
• Periodically review subordinates’ documents
• Train New and Current Employees on your firm’s documentation policies
Documentation Guidelines

31. • Potential problems with project documentation
• Preparing the “wrong” type of documentation
• Lack of Consistency
• Over-documenting
• Sending too frequent “CYA” type letters
Potential problems

32. • Have a written office policy
• Maintain records
• Office system to preserve old e-mails
• Cannot randomly get rid of e-mails
• Social Media policy should be included and signed off by employees
Electronic Documentation

33. General Issues:
• What do you say on your seal (approve/review)?
• Who has responsibilities for submittals and shop drawings and what are they?
• Who is responsible for dimensions and other details of work to be accomplished?
Shop Drawings & Submittals

34. • How Long to Keep Records and in what format
• Contractual Requirements by Client
• Type of Project- Public vs. Private
• Applicable Laws and Statute of limitations
• CONSISTENCY
Record Retention Best Practices

35. • Scope Change
• Schedule Changes/ Project Delays
• Budget Overruns
• Problems (encountered or anticipated)
• Key Conversations
Critical Items to be Documented

36. Which Risk Driver
occurs most
frequently?
• Client selection
• Construction Phase Services
• Project Team Capabilities
• Communication (Highest claim count)
• Negotiations and Contracts
• Quality Management
Risk Drivers

37. Which Risk Driver
occurs most
frequently?
• Start projects correctly
• Plan then do
• Don’t hope it will get better
• Manage communication
• Engage insurance early
Risk Drivers Communications

38. Communication specifics

39. Direct costs to your firm
Revenue required to offset losses
= 10 x amount of loss
Principals’ time in dealing with the
problem
Other problems resulting from
lack of attention by principals
Loss of reputation
Hidden costs of risk

40. THANK YOU!
QUESTIONS?