A S H R A E J O U R N A L a s h r a e . o r g F E B R U A R Y 2 0 1 54 4

TECHNICAL FEATURE

Kate Allen, P.E., is director of A/E/C Industry Surveys for PSMJ Resources, Inc., Newton, Mass.

BY KATE ALLEN, P.E.

Has the economy improved for the A/E industry as predicted last year, and if so, will it be enough to allow firms to attract and retain key employees? Another year has passed, and its time to once again use benchmarking data as a window into the over-all financial condition of the A/E industry and its impact on compensation.

First, lets go back to our findings from last year to get

started. In the February 2014 issue of ASHRAE Journal, the

article Pay for Engineers in the A/E IndustryStill on the

Road to Recovery? presented a discussion on cash com-

pensation as it related to the overall financial health of the

A/E industry, following the economic downturn of 2009.

The intent of the article was to help both the engineer

and the employer better understand the current financial

position of the industry and how that was impacting com-

pensation options, using A/E industry-specific bench-

marking data. The benchmarking data revealed that net

revenues were rising slightly faster than expenses, and

while overall profitability as a percentage of net revenues

had improved (to a median of 11.4%), it still remained

significantly below the 2007 high of 15.2% (median). The

connection between base compensation and billing rates,

as evidenced by target and achieved direct labor multipli-

ers, of 3.10 and 3.02 respectively, was discussed as well,

with emphasis on the impact of pricing (fees) and project

management on overall profitability. The industry was

improving but had not fully recovered from the reces-

sion in terms of profits and compensation rates. Overall,

it appeared the A/E industry was poised for growth as the

economy continued to improve.

With another year behind us, and new data at hand,

lets look at this years numbers to see where we stand

and how much improvement the industry actually saw

in the past year. The tables and figures that follow report

the median for each metric, which is the midpoint of a

set of data (not the average). There are many success-

ful firms that outperform the industry medians, but

the tables and figures that follow may be useful to begin

comparing your firms performance.

Overall Financial Performance Impacts Compensation OptionsAn Update on the Big Picture

The results are encouraging! Net revenues and profits

are continuing to rise faster than expenses and labor

Engineers Pay and Financial Performance

This article was published in ASHRAE Journal, February 2015. Copyright 2015 ASHRAE. Posted at www.ashrae.org. This article may not be copied and/or distributed electronically or in paper form without permission of ASHRAE. For more information about ASHRAE Journal, visit www.ashrae.org.

F E B R U A R Y 2 0 1 5 a s h r a e . o r g A S H R A E J O U R N A L 4 5

TECHNICAL FEATURE

the achieved direct labor multiplier the result is a net

revenue deficit (less profit than expected), which was

a 1.6% median in 2014 results. If the target is greater

than the achieved direct labor multiplier, the result is

a net revenue surplus (higher profits than expected).

The improved results in Figure 2 generally indicate that

firms are achieving better fees for projects and/or those

projects are being more efficiently managed, reducing

the net revenue deficit.

Unfortunately, the A/E industry is still struggling to

earn a reasonable profit, but its headed in the right

direction (Figure 2) and has seen a gain of 36% since the

low point in 2010.

Compensation TrendsAnnually, for the past 32 years, PSMJ Resources, Inc.,

has conducted a management compensation survey that

solicits data from both engineering and architectural

firms for 17 management positions, from chairman of

the board to junior project manager. Historical Total

Compensation is presented in Table 3 for the past six

years. Its important to note that compensation rates

generally increase with firm size, so use the information

in the table with caution. The table is presented to dem-

onstrate trends only, and for more detailed information,

a full compensation study would be needed.

TABLE 1 Comparison of key financial indicators 2013 2014.

(MEDIANS) 2014 2013 % CHANGE

Net Revenues per Total Staff $127,607 $125,589 2%

Net Revenues per Direct Labor Hour $103.95 $101.66 2%

Direct Labor Costs per Direct Labor Hour $33.84 $31.90 6%

Total Costs per Direct Labor Hour $87.91 $86.50 2%

Equity per Total Staff $31,659 $21,666 46%

Operating Profit (Net Revenues) 12.97% 11.42% 1.6%

Overhead Rate (before Incentive/Bonus) 160.59% 159.56% 1.03%

Chargeability (Payroll Dollars) 59.56% 59.69% 0.1%

Backlog Change 9.00% 7.00% 2.0%

Gross Revenues Change 7.00% 8.00% 1.0%

Staff Size Change 3.57% 2.70% .87%

Net Direct Labor Multiplier Achieved 3.07 3.02 .05%

Average Work-in-Process Days 18.00 25.51 7.5%

Average Collection Days 66.55 70.12 3.6%

Source: PSMJs 2014 Financial Performance Benchmark Survey Report

costs. Overhead, as a percentage of

direct labor costs, is holding steady

near 160% (Table 1). Direct labor costs

have increased 6%, exceeding the

growth of the consumer price index;

profits (earnings before bonuses,

discretionary distributions, and

taxes) have increased 14%. Balance

sheets are improving as evidenced

by the substantial amount of equity

that firms are carrying per total

staff, which increased from $21,666

to $31,659, between 2013 and 2014.

A detailed historical comparison

of several of these key financial

indicators is provided in Figure 1 and

Table 2.

The great news is that the gap is

closing between the target and the

achieved direct labor multiplier

(Figure 2). If the target is less than

TABLE 2 Comparison of key financial indicators, 2010 2014.

(MEDIANS) 2014 2013 2012 2011 2010

Net Revenues per Direct Labor Hour $103.95 $101.66 $100.32 $94.69 $86.63

Direct Labor Costs per Direct Labor Hour $33.84 $31.90 $31.31 $30.99 $30.99

Total Costs per Direct Labor Hour (Overhead + Direct

Labor) $87.91 $86.50 $88.73 $86.06 $87.78

Operating Profit (Net Revenues) 12.97% 11.42% 9.31% 9.86% 9.49%

Source: PSMJs 2014 Financial Performance Benchmark Survey Report

FIGURE 1 Historical direct labor benchmark trends. Source: PSMJs 2014 Financial Performance Benchmark Survey Report.

$120

$100

$80

$60

$40

$20

$0

2002

2003

2008

2009

2010

2011

2007

2006

2012

2013

2014

2005

2004

Profit

Overhead

Direct Labor

Net Revenue Direct Labor Costs Break EvenPer DLH Per DLH Costs

A S H R A E J O U R N A L a s h r a e . o r g F E B R U A R Y 2 0 1 54 6

Total compensation reached a five-year high in the 2009

10 time period but fell to a five-year low in the 201112 time

period for most positions/roles. While total direct compen-

sation for the majority of the senior level roles (Chairman of

the Board, CEO, COO, etc.) has yet to recover to 2009 num-

bers, more production-focused positions/roles have gener-

ally increased and have exceeded 2009 (Department Head,

Senior Project Manager, and Project Manager).

TABLE 3 Historical total direct compensation results.

2014 2013 2012 2011 2010 2009

Chairman of the Board $201,392 $215,000 $212,066 $233,589 $250,000 $240,144

Chief Executive Officer 236,700 265,342 233,000 233,216 247,500 250,000

COO/Executive VP 206,560 203,913 221,933 224,133 246,500 231,061

Senior VP/Senior Principal 185,645 198,674 200,000 178,092 210,137 200,500

Other Principals/Partners 144,000 145,000 143,415 150,000 146,641 149,327

CFO/Director of Finance 159,968 175,000 184,538 175,905 170,226 171,290

Controller 100,000 100,807 101,109 96,000 97,000 100,500

Business Manager 64,745 78,972 78,630 82,994 95,000 77,845

Director of Administration 83,500 140,246 128,750 80,528 123,668 85,280

Director of Operations 137,750 146,000 137,510 149,740 154,686 150,000

Director of BD 119,000 135,229 120,800 108,768 119,724 178,500

Director of Human Resources 97,314 102,231 100,000 91,655 92,867 99,309

Director of Computer Operations 104,257 104,589 97,000 96,000 100,000 105,500

Branch Office Manager 123,513 125,521 125,377 118,000 128,608 130,742

Department Head 123,355 120,000 120,560 112,677 114,000 115,752

Senior Project Manager 103,537 102,000 98,315 98,000 95,554 97,500

Project Manager 82,035 78,285 77,000 76,000 75,000 73,883

Source: PSMJs 2014 Management Compensation Benchmark Survey Report

FIGURE 3 Operating profits as a percentage of net revenues. Source: PSMJs 2014 Financial Performance Benchmark Survey Report.

181614121086420

2002

2008

2010

2006

2012

2014

2004

EBBT

(Per

cent

of N

et R

even

ue)

1990

1992

1994

1996

1998

2000

FIGURE 2 Target versus achieved direct labor multiplier. Source: PSMJs 2014 Financial Performance Benchmark Survey Report.

3.20

3.10

3.00

2.90

2.80

2.70

2.60

2.50

Net Revenue Deficit

Actual Net Fee Multiplier Target Net Fee Multiplier

2002

2008

2010

2006

2012

2014

2004

1990

1992

1994

1996

1998

2000

1980

1984

1986

1988

Billing Rate TrendsCompensation is directly related to hourly billing

rates, which are intended to recover all design firm costs

(including direct labor and overhead) and provide for

profit. For example, if a highly billable Senior Project

Manager is paid $50 per hour (excludes labor burden or

fringes), and the firms overhead rate is 160% on direct

labor, then the break-even billing rate would be $50 x (1 +

1.6) = $130 per hour; and a billing rate of $150 provides for

about 13% profit. Reimbursable expenses are recovered

from the client directly and not included in these billing

TECHNICAL FEATURE

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A S H R A E J O U R N A L a s h r a e . o r g F E B R U A R Y 2 0 1 54 8

TABLE 4 Historical billing rates by position/role for billable staff.

2014 2013 2012 2011 2010 2009

Chairman of the Board 205 197 195 200 191 190

Chief Executive Officer 198 200 195 191 190 200

COO/Executive VP 180 185 185 185 185 200

Senior VP/Senior Principal 190 195 190 186 182 200

Other Principals/Partners 180 186 172 172 175 170

Director of Computer Operations 130 117 125 115 138 120

Branch Office Manager 165 164 154 150 139 145

Department Head 165 157 155 150 147 140

Senior Project Manager 150 144 140 135 135 135

Project Manager 126 122 120 112 117 114

Source: PSMJs 2014 Management Compensation Benchmark Survey Report

rates. If compensation rates exceed what can be recovered

in billing rates, then profits may be negatively impacted.

Billing rates have been generally tracking with total

compensation. Many of the senior level roles (COO and

Senior VP) have yet to fully recover to pre-recession

rates, while more production-oriented positions (Senior

Project Manager, Project Manager) are above 2009 num-

bers (Table 4).

ConclusionThe numbers tell the story. The A/E industry is nearly

fully recovered to pre-recession compensation and bill-

ing rates. The achieved direct labor multiplier is on the

rise, net revenues are increasing, and expenses are hold-

ing steady. Employees are demanding salary increases,

post-recession, and by understanding the overall finan-

cial position of the A/E industry (at the median level of

performance) you can use that knowledge as you consider

your firms compensation strategycash compensation is

only one spoke in the wheel when it comes to employee

engagement and attracting and retaining staff.

Note: If you are interested in participating in PSMJs 2014 sur-

veys you can find out more about the benefits of participation at:

www.psmj.com/surveys-research/participation.cfm.

TECHNICAL FEATURE

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