Marginal Gains….
I am now a couple of weeks into my Phase 3 attachment and while digging into some information on a project I am involved in I picked up something which I thought was quite interesting and worth putting out there for comparison against other design consultants.
Reading the Risk Assessment which was completed during the tender stage I came across an entry which highlighted a predicted profit margin of 60% as a risk and a comment which indicate this was an “aggressive” tender in the hope of securing the bid and a foot in the door for future works on this major project.
I was (maybe naively) quite surprised at this. Not having any experience of working in a design consultancy I didn’t really know what to expect, but this seemed a pretty significant margin. I had a chat with my design manager to get a better understanding of the situation and found out that actually 65 -70% is the normal range on projects and 58% is the minimum allowable margin.
I was curious to know how this bears up against other people’s experience, particularly on jobs in the UK and US vs Aus?
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Hi Auggy,
I think the concept of 60% profit is misleading. My experience of pricing work in consultancy suggests that if you are doing bottom up tender pricing you start with the anticipated resource commitment in the form of hours of input by different pay bands. This is a simple multiplication and sum to total exercise to give basic cost. The charge rate for each person is not their salary but their employment cost (of course). On to the basic figure we then need to add an amount for office overheads, contingency risk, contribution to core and profit. This is done as a basic multiplier and is the 1.6-1.8 multiplier that I think has been noted in your risk register as ‘profit’. Questions around the make up of basic employment costs, local and central cost components etc. are a frequent visitor at CPR so some discussion as to what goes into each is a good thing!
The stats I uncovered about my new place don’t offer a direct comparison with your 60% profit but I was surprised nonetheless…
They charge >300% the payroll rate for all staff. The daily rate for a director is in the region of £1,500! Building wiki said the norm was about 250%.
I wasn’t able to dig into the profit margains of the business but found many clients are happy to pay a premium for a ‘proven entity’. For this reason we seem to have several high profile government financed schemes with minimal risk appetite for getting the design wrong!
It appears they do not have to chase for future work contracts quite so much and clearly hold themselves in high regard…
So what goes into charge out rate to make it 250% of salary?
Sorry, that was poor wording on my part to include the word profit. The 60% margin on the actual delivery cost is indeed to cover the significant overhead costs that the consultant has and in discussion with my manager a significant portion of this is wages for the staff who aren’t directly costed in the tender. I also imagine a percentage is included to cover the fluctuation of consultancy work? Never the less I wonder what the perception is on the client’s side and what level of transparency is included in the fee breakdown they receive.
Auxiliary Staff costs, the cost of premises, IT and everything down to toilet paper and cleaning staff are local overheads. In this there might also be training, collective non productive time/events such as a Christmas party to pay for. That leaves contribution to core to explain… how much the client knows anout the detail of the costs depends upon a number of things, the most critical being….? The form of contract. Lump sum bids are the consultants business and the client gets what they pay for if they agree the price. Have a think about the forms of engagement and what each might mean in terms of how you might want to make up your price and what you might want to declare… this is when a 300% multiplier on resource costs can be useful…
Hi all, I found this a slightly odd one on during phase 3. For small packages where it is easy to understand the amount of work involved a rate per hour is perfect. Profit is then simply dependant on the time the work has taken minus overheads. The rate is generally 3 times the cost of the employee. For big projects understanding the time involved is difficult and therefore this method is not easy. After being fairly nosey I discover when pricing big jobs they simply take a % of the project estimated costs, typically 1-3% dependant on project complexity. Seems a rudamental to me, and raises chicken and egg type questions. If the fee is then insufficient, resources are removed and the designers become more difficult exercising the contract, asking for additional fees for work required quicker than what is agreed in the contract. Value engineering ideas the clients sub contractors have also become a good additional source of profit, all need checking by the permanent works designer. If the profit margin is being eroded the designer can inflate quotes, the client cannot go elsewhere due to liability, unless they appoint a new designer ££££.
It appears to be somewhat of a black art, maybe why the director is on £500 a day (using rule of 3).