Benchmark Report 2023: Mixed Prospects
In a rapidly changing and complex world, architecture has increasingly become a difficult business. We are facing pressure from clients to do more and charge less. We are faced with increased construction costs and unpredictability in schedules. What’s more, an emerging labour force values a more balanced lifestyle and requires a higher compensation package to offset the economic strains placed on them. Balancing these combined demands and needs with the ambition and imperative to create healthy, vibrant, and beautiful spaces is challenging.
Furthermore, the new realities created by the Covid-19 pandemic over the last few years have created additional stressors. We find ourselves in unstable economic times faced with higher interest rates, inflation, and tight labour markets. What does this mean for architecture firms as we look ahead?
What does the data tell us?
In October 2022, the AIA published its annual Firm Survey Report, which provides insights on trends in firm billings and construction sectors that are impacting firms. In March of this year, the RAIC conducted the Canadian Architectural Practices Benchmark study highlighting current standards for compensation, billings, EDI, and other key indicators among Canadian architectural practices. As expected, there are commonalities.
Historically, the issues impacting our US counterparts similarly impact Canadian firms to a greater or lesser degree; however, the trends remain consistent. At this moment, both the Canadian and US economies are slowing.
Both the RAIC and AIA report that billings per employee remain strong with an average of C$149K per RAIC, and US$127K per AIA, while profit margins increased in the US from <10% to +16% in the last 10 years. I don’t think this data surprises anyone; we have all benefited from a strong economy and low interest rates.
Looking forward, both reports anticipated that future billings are expected to remain roughly the same. The August 2023 Architectural Billing Index, a leading economic indicator in non-residential construction, reported billings in the US were relatively flat for an eleventh consecutive month, while in Canada, firms agreed that this was the expectation going into 2023. This is consistent with the shift in economic policy to curb inflation, resulting in slower economic growth.
With billings and growth slowing, we need to review the sources of revenue for architectural firms. Looking at revenue by market sector for 2019 and 2021, it’s notable that residential revenue has continued to increase over this period.
We know there is a pent-up demand and a dire need for housing and that has created consistent revenues for architecture firms over the past several years. This market sector is influenced heavily by economic conditions, making it a challenge to deliver new housing amid higher interest rates and increasing construction costs. Both Canada and the US are facing these headwinds. Owners and developers are moving forward, sometimes cautiously, sometimes with revised scope, and sometimes on a slower schedule.
In Canada, the demand for housing remains strong, fuelled by population growth, and we can expect that architecture firms will continue to see this market sector as a material source of revenue into the foreseeable future. The recent announcements of increasing the GST rebate from 36% to 100% for residential rental, as well as the $20B increase in the mortgage bond cap, will help developers balance their proformas and encourage future development. This is a positive sign for firms in the multi-unit residential market.
As these new opportunities emerge, we need to focus on short-term measures and long-term growth strategies to navigate these turbulent times and set ourselves up for future growth. What does that road map look like?
Cash Management: As the economy shudders over interest rate increases, the response from owners and developers is to stretch cash. Firms need to manage their receivables efficiently and effectively to maintain continuity of financial resources. Managing cash flow is not only a good habit, it will be key to successfully navigating these challenging times. Getting invoices in the hands of clients quickly and collecting these accounts in a timely manner will support firms during this period.
Scope Control: A clearly defined scope that aligns with the fee proposed is important for managing projects and protecting against scope creep. It further has the benefit of aligning client expectations with the architects’ deliverables. If we are clear on services delivered and that aligns with the client expectations, this creates the foundation for a successful relationship. Investing in meaningful client management and developing a post-occupancy process is critical.
Relationship Management: According to the AIA benchmark study, over half of all US-driven revenue is through repeat clients, either in a competitive or non-competitive bid process. This underlies the importance of building and maintaining relationships for long-term success.
Diversification or Specialization: Larger firms typically can navigate interruptions in a particular market by leveraging the diversification of their portfolio and shifting focus to other growing sectors. Smaller firms tend to focus on a specific sector, so the ability to differentiate through specialization can help a smaller firm be more competitive. This is the time to really look at your firm and clearly define and communicate the key differentiators.
While we continue to see enquiries for new projects, it’s clear we need to adopt a nimbleness that allows us to respond and pivot to economic conditions, implement strategies that minimize impact on teams and quality of work, and create opportunities that allow us to build and sustain our competitive edge.
Phyllis Crawford (CPA, CGA) is Managing Partner at KPMB Architects.
This article is part of Canadian Architect’s series on the Canadian Architectural Practices Benchmark Report (2023 Edition). The full report is available for purchase from the RAIC.
Read additional articles in Canadian Architect’s series on the Canadian Architectural Practices Benchmark Report (2023 Edition):