Designing Success: 10 Essential Key Performance Indicators for Architects and Engineers

10 Essential KPIs

KPI

Definition

Calculation

Use

Net Revenue Growth Rate

Percentage increase or decrease in net revenue during a specified period. Net revenue represents fees that are generated on the firm’s direct labor (gross revenue minus all direct and reimbursable expenses, excluding labor).

(Current period net revenue – Prior period net revenue) / Prior period net revenue

Easy, but useful, KPI to calculate. Measured annually, it reveals if the company generated more, or less, net revenue in the current year than the previous year. Can also be measured quarterly or monthly, depending on your needs. Rapid growth might suggest an opportunity for expansion. Declining growth could highlight issues like client retention, market saturation or competitive challenges.

Net Revenue per Full-Time Equivalent

The amount of net revenue generated by each full-time equivalent (FTE). One FTE typically represents the workload of a single full-time employee working 40 hours per week, 52 weeks per year, which is equal to 2,080 hours. Hours worked by part-time employees are combined and converted to FTEs. For example, two employees working 20 hours per week for 52 weeks is equal to one FTE.

Net revenue / FTE (total hours / 2,080)

Important because it provides a measure of productivity and efficiency. It evaluates how effectively you are utilizing your workforce to generate revenue. Higher values indicate that employees are working efficiently on profitable projects. Lower values may signal underutilization, inefficiencies or lower-margin projects. Also a useful metric to consider when budgeting for both revenue and staffing levels because you can easily forecast revenue based on your current workforce or understand what staffing level you need to reach your revenue goals. Although typically measured annually, like the net revenue growth rate, it can be adjusted to reflect a shorter cycle – just be sure to adjust the FTE hours to match the same period of net revenue. 

Utilization Rate

The percentage of time spent that is chargeable to projects. Utilization can be measured using labor dollars or labor hours.

Direct labor dollars / Total labor dollars

or

Direct labor hours / Total labor hours 

Utilization is a significant driver of profitability. An increase in utilization usually translates to an increase in profitability – as long as your billing multiple remains healthy. It lends insight into workforce productivity and efficiency and is also used for firm resource planning. The spread between calculations using dollars and hours gives you a glimpse into your organizational structure; for example, if your firm’s utilization based on hours is significantly higher than utilization based on dollars (usually more than 3 points), this could be an indicator of “top-heaviness” where your higher-paid positions are considerably less utilized than others in the firm. This could be intentional based on specific initiatives, so the key is to make sure it aligns with your firm’s strategy. Utilization should be calculated at firm, division, role and individual levels as each will tell a different story. 

Billing Multiple

The amount of net revenue generated from every dollar of direct labor (e.g., a billing multiple of 3.25 means that for every $1 of direct labor incurred, your firm earns $3.25 of net revenue). 

Net revenue / Direct labor

One of the most important and widely tracked KPIs for A&E firms. It’s used for pricing proposals, project management, budgeting and benchmarking, just to name a few. It tells you how well you are converting your direct labor into revenue. A rising billing multiple typically means that a firm is improving its efficiency and profitability. A declining or below average multiple may indicate problems with scope creep, project management or overall project pricing.

The relationship between your billing multiple and utilization cannot be overstated. Your utilization tells you if you’re using your staff effectively. Your billing multiple tells you if your projects are priced and managed properly. Together, they show whether you’re leveraging your workforce in a way that fosters success. 

Revenue Factor

Also known as the total labor billing multiple, the revenue factor shows how much net revenue is generated from every dollar of total labor.

Utilization (in dollars) x Billing multiple

or

Net revenue / Total labor 

Important to monitor because it’s not influenced by time entry (direct versus indirect hours), which if not tracked accurately, could result in skewed utilization. A healthy revenue factor supports decisions to hire more people and to invest in growth. A declining revenue factor can indicate margin erosion or other financial strain. This single KPI captures how well your firm utilizes its staff and how well it performs on projects. 

Breakeven Multiple

The billing multiple that needs to be achieved to cover your costs – to break even as the name implies. In other words, this is the amount that needs to be billed for every dollar of direct labor incurred to pay your salaries and overhead.

Total operating costs (including direct labor) /
Direct labor

Calculating an accurate breakeven multiple is crucial to pricing projects and monitoring performance. In simple terms, if you know how much on average it will cost you to perform on a project and you know how much profit you want to earn, you can build up your fee to reach those goals. If your billing multiple is higher than your breakeven multiple, you are profitable. Of course, the opposite is true if costs exceed the revenue being generated. For long-term projects, regular check-ins to ensure that costs are being covered over the period of performance are critical for effective project management. 

Overhead Rate

Costs that aren’t directly tied to projects (indirect expenses) as a percentage of direct labor. The overhead rate expresses how many dollars of overhead the firm carries for every $1 of direct labor incurred.

Indirect expenses / Direct labor

Analyzing this helps firm leaders evaluate their indirect cost structure. The individual categories of expenses which make up the overhead rate are helpful to review versus budgeted amounts, prior year amounts and industry averages. These comparisons will allow you to quickly identify areas that may be opportunities for cost cutting, investment or which need further analysis. Indirect labor will typically make up the largest category of overhead. Because of this, decisions made that impact your utilization rate will have a significant impact on your overhead rate.

Profit as a Percentage of Net Revenue

Profit earned by a firm as a percentage of its net revenue. Owner bonuses are typically excluded from the calculation of profit for this KPI as they are discretionary and can vary widely. Staff bonuses may or may not be excluded – just be consistent. 

Profit (before owner bonuses and other discretionary items) / Net revenue 

Tells you how much of your net revenue is converted to profit. Can be used to plan for future initiatives and set realistic expectations. If your percentage is lower than you think it should be, dig into your project management process, project types, overhead expenses and utilize the other KPIs discussed to find out why.

Days Fees in Accounts Receivable (DSO)

Days fees in accounts receivable, or days sales outstanding (DSO), represents the average collection period of a firm’s receivables – basically, how many days it takes to convert billings into cash.  

Average accounts receivable / Daily gross revenue

This measures the efficiency of your accounts receivable process. A lower DSO means faster payment collection and better cash flow. A higher DSO indicates delays in payment, which can strain working capital and liquidity. Analyzing DSO also gives you insight into the financial health of your clients, allowing you to make decisions on extending credit. Early warning signs are crucial to identify here.

Working Capital as a Percentage of Net Revenue

How much of your firm’s net revenue is tied up in current assets and liabilities and whether you have enough liquidity to operate smoothly. Significant current assets and liabilities typically include your accounts receivable, contract assets (WIP), prepaid expenses, accounts payable, contract liabilities (advanced billings) and accrued expenses. Liquidity is the ability to easily convert assets into cash to meet upcoming financial obligations, such as paying bills and salaries.

(Current assets – current liabilities) / Net revenue

A measure of your firm’s financial stability. A low percentage may indicate that you efficiently convert revenue into liquidity with minimal working capital tied up. A high percentage might suggest that too much capital is tied up in receivables or other current assets, limiting operational flexibility. The goal in managing working capital is to ensure that you don’t have too much or too little at any given time – bigger is not necessarily better here. Also, it’s not just the level of working capital you should be assessing – the quality of working capital is also important (i.e., accounts receivable that you may not collect or WIP that you may not bill could give you a false sense of security if included in the calculation). Most importantly, firm leaders should constantly assess what the adequate level of working capital should be by considering factors like investments that need to be made, growing or declining net revenue or other significant uses of cash.