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Employee Compensation Plans

How you compensate your employees can make the difference of whether or not or how well you can whether a down turn in the economy. We all saw it hit us in 2008 when the economy took a turn for the worst here in the United States. We saw countless times that companies:

  1. Waited a long time to lay anyone off even though they couldn’t afford too
  2. They were paying wages that just didn’t fit with the new economy.

So how can you get around this?

One of the things you can look at is how your employees are compensated. If you pay lower base salaries that you make up through a profit sharing plan, then if there is a down turn in the economy and the profits aren’t there, you get automatic cuts to your labor costs.

But if the economy is doing well, you will be sharing the wealth and sharing the profits of the company with the employees. By doing this you can reduce that minimum number of dollars that you need to bill each month just to breakeven. If you can reduce that then when they economy does go south you’ve got some cushion in there to maybe be able to whether the storm a little bit better.

The other place to look carefully is at your principle or owner compensation. This too is a place where there can be less salary and greater profit sharing, taking the money out as a dividend or distribution rather than a salary so that on a month-to-month basis when times are tight, your actual cost is not as high. When you do have the money, then you distribute it out. This is a great way to:

Most employees during this last down turn that we all went through, would’ve been happy to just have a job at the end of the day, even if it did pay a little less. And if they had low salaries with a high bonus or profit sharing, then the firm could have controlled costs without having to ask employees to take pay cuts.

In the interest of building your company to withstand a long-term effects of poor economies and to be around of decades, consider looking at your compensation plans to see if you can reduce the base but increase bonus and profit sharing.

The other thing that the bonus plan or profit sharing does is it outs the overall success of the company in the interests of the employees. If their projects are more profitable they get to share in that profit. So now it gives them the opportunity of an entrepreneurial spirit in working for you. It’s in their best interest to help the company succeed rather than just collect a paycheck.

 

Providing Health Benefits to Your Employees

For small businesses, like most architects and engineers, this is a huge expanse. Over the past few years we have seen these costs skyrocket.

But did you know that nearly 20% of Americans have secondary health coverage. What this means is they are covered by two health insurance plans because there are two working parents in the household. When this is the case, the have one plan be their primary coverage and the other is their secondary insurance. And while that is all fine and well, what is it costing you to provide secondary coverage to your employees?

One way to help limit the number of employees who are doing this is to have them participate in the cost of their health coverage. By the way, if an employee is using your insurance as a secondary coverage plan the benefits paid by the insurance company are much less but the premiums you pay remain usually the same- big price with limited benefits.

We did a change at our office where are employees were required to pay for 20% of their health insurances and we covered the other 80% rather than covering 100%. What we found was about 1 in10 of our employees opted out of our plan and elected to be covered by their spouse insurance. Usually this was because their spouse’s employer (hopefully it is a big company providing great coverage) was giving them good insurance and paying for all it.

Now we did not do this in an attempt to hurt our employees in any way, in fact we gave them each a rise to cover what their 20% share was going to be. We weren’t trying to take money out of their pocket, however, when a number of our employees opted out of our insurance plan, the company got the benefit of saving the remainder of those premiums that we had been paying.

For small architecture and engineering firms this can amount huge dollars.

So take a look at the health benefits you are providing to your staff and see if they are in line with what your company can truly afford to do.

Average net profit for 2015

Scrolling through PSMJ’s website I found an article about A/E Profit Margins and how these margins have been on the rise for the three consecutive years. 2014 saw average profits of 14.3%, the highest they have been in six years. 

While this is good news, I don’t get too excited about a 14.3% net profit and prefer to see profits in the upper teens or low to mid 20’s. Remember that this is the average of firms and the average is simply “the best of the worst and the worst of the best”.

Founder and CEO of PSMJ Resources Frank A. Stasiowski, FAIA, also believes that the 14.3% shouldn’t “…be an acceptable profit margin at all for an A/E firm,” “There are plenty of A/E firms that can and do deliver profit margins far higher than this.” 

So does your firm measure up?  How are you performing compared to the rest of the world? Do you want to reach higher profit margins? Of course you do. 

Now I can’t promise that you will make higher profits, but I can tell let you in on a little secret that will help your business run more efficiently ~ our software.

Our business and project management software offers you everything you need to run a successful AE firm more effectively and efficiently.  With the help of our solution your firm can stay organized and on task with every project that comes through your office. 

Reviewing Insurance Coverage

When was the last time you reviewed your insurance coverage’s?

We all know it is a pain in the butt to meet with different providers when looking at either health insurance or liability insurance. However, failure to do so on an annual basis can cost you either hundreds or thousands of dollars in higher premiums.

It is worth it to take the time on an annual basis to shop around. Now if you have a great relationship with your insurance provider, I don’t know if I would be jumping ship to new provider for 1-2% saves. But if you shop around, there is a very high probability that you are going to find better rates somewhere else.

You may want to look around for a provider that specializes in provided coverage for architects and engineers.

Just make sure, that you are dealing with a reputable company and you are getting a quality plan to back you up.

Cut Five Percent

Whether you are sitting around the conference table of the office or the kitchen table at home, if you look at your budget of the last year, almost always you can find 5% that you can cut on your spending.

The challenge is… do you ever do this exercise?

When was the last time you reviewed your companies’ expenses? Did you look closely at whom you spend money with and ask if there was room to cut? Here is what you need to do.

Categorize your expenses by whom you spent the money with. Then sort the list by the amount spent so that the largest at the top and the smallest is at the bottom. You want to work with the vendors whom you spent the most money with, as there will be more room for trimming.

Here is another reason to focus on the larger accounts. If you cut 50% from an account that you do $500 per year with you will have saved $250 but if you could 5%, one tenth as much, from a client you do $20,000 per you with you will have saved $1,000 which is four times the amount but a much smaller cute percentage wise.

So what you want to do is look at where you spent you money and see if there are any areas you can cut and/or negotiate with your venders and suppliers.

There may be an opportunity for you to consolidate what you’re purchasing. If you are getting your plotters supplies from one company but you are doing all of your printing with another company, you may be better served and get better pricing if you did all this business with a single vendor.

Here is a reminder. DON’T BE A CHEAPSKATE.

You want to negotiate but you want to treat your venders with respect and fairness. Just as you expected to be treated from the people that are paying you. There is nothing wrong with asking for a discount, but be kind about it.

True Story… when I started my engineering practice, we just started getting our printing done at one of our local reprographics companies. Being an engineering firm we didn’t have nearly as much volume of printing as an architect office did. However, we had a project that came up where we were going to be doing a lot of printing so we went in and were talking to the manger about it. They pulled out this magical book that had these huge discounts. This pricing book is for their professional clientele not the people that come in off the street. We were paying the off the street price rather than the discounted price that had about a 40% savings.

We could have asked for better pricing two years early, had we done that we would have saved a lot of money.

So, there may be discounts out there that you just haven’t asked for.

So just ask!

“Do you have any discounts for the people in the industry?”

Again, just remember, nobody like cheapskate but you have the right to shop around because it is your money we are talking about.

In another upcoming post, we will talk about other areas that you probably have not looked at in a while that you could grant you a great deal of savings.

 

Billing Reimbursable Items

When billing reimbursable expenses there is a chance that a client, from time to time, might dispute one of your reimbursable expenses and hold up paying the invoice until the dispute is resolved.

A client of ours once had an invoice where the design fees represented about $60,000 on the invoice and the reimbursable expanses represent about a few hundred dollars. But because one of the reimbursable expenses was disputed, the entire invoice was not paid for several months until the dispute was resolved.

Had this firm submitted two separate invoices one for the design and one for the reimbursable expenses, then the design fees could have been paid more promptly and only the invoices with the reimbursable expenses would have been delayed.

This depends on you client and what the rules and operating procedures are. But some clients won’t pay any part of an invoice if a portion of it is in dispute.

So, if that’s the case, you may want to separate your billings into two invoices:

  1. Fees that most likely will not be disputed
  2. Reimbursable or other items that could become disputed

Hopefully, you will not have to deal with disputed invoices and will have happy cash flows.

 

Dating Your Invoices

No, I am not talking about taking them to the movies and buying them a tub of popcorn, I am talking about the date you put on your invoice. Here is a little un-known trick that won’t work for every client but it will work in some instances for you.

If it is April 3rd and you are doing your invoicing for work you completed in March date the invoices March 31st rather than April 3rd.

But why? Because then for the person receiving the invoice they will read it as a March Bill and most companies will pay their March billings in April., but if it is dated April, even early April, it becomes a May payable. So instead of receiving your money in April you do not get paid until May.

So you may be able to accelerate the payment by a month simply by dating it the last day of the prior month rather then the first few days of the current month. This is probably going to happen more when you are billing larger organizations or agencies because they have accounting departments who often function on the monthly cycle. If you are billing a small company or a homeowner this probably will not have the same affect, but it never hurts to try.

So if you are issuing invoices for your engineering or architectural service within the first couple days of the month try dating the last day of the prior month.

Invoicing Follow Up

It is an important step to get your invoicing out the door, but it is equality important to keep up on status of the invoice.

How long has the invoice been out?

Has the client actually received it?

Do they have any questions about it?

When do they think they are going to pay it?

Now the follow up can be woven into the conversations that the project manager is already having with the client.

First, the project manager needs to be in the loop. They need to know the payment status of every invoice; they need to be able on a simple dashboard or simple report to look at their projects and see what the outstanding balances are and to know where that project sits. Then when they are having a conversation with the client and they happen to have an outstanding balance or the balance is starting to get out there past say 30 days (if you do billings in Net30) you can begin to ask questions and drop hints to the client such as: “I am just following up on the last invoice we spent out, did you see any challenges with it, or do you think there will be any problem with getting that paid?” If the client says there will not be any problem, then once again they have made the subconscious contract and commitment to you to pay their bill. Secondly, by just having these conversations or asking these questions you become squeaky wheel -hopefully a non-annoying one, but it is a fine line!

Think about it, they have five companies they owe money to and you are they only one asking about it, whom are they going to pay first? Most often they are going to pay the person asking about the money first. They want to get you taken care of so they can stop answering your questions and avoid the embarrassment of telling you no or that you can’t get paid right now. If the other folks are not going to ask for their money, that’s fine. What you want to do is get your money in as fast as you can.

So just follow up with the client by asking simple questions:

“Did you get our bill?”

“Do you have any questions about our billings?”

“Are you going to approve it for payment?”

You can also put it on yourself:

“I know I didn’t clarify a reimbursable and I just wanted to make sure you didn’t have any questions about it?”

“Did you need to see backup for the time that we spent?”

It is critical though that you put this information in the hands of your project managers so they can have these conversations. In most cases there doesn’t need to be a direct phone call to deal with invoice payment unless you have a slow payer or other issues (that I will cover in another post) however, it is very simple to just bring this up conversationally when you are already discussing other items on your projects.