Name: Live Webinar: Architectural and Engineering Industry Trends - Strategies for Growth and Long-Term Success
Uploaded: 2025-11-18T19:30:05.895Z
Duration: 1 h 30 min
Description: Live Webinar: Architectural and Engineering Industry Trends - Strategies for Growth and Long-Term Success

Transcript for "Live Webinar: Architectural and Engineering Industry Trends - Strategies for Growth and Long-Term Success": Good afternoon, and welcome to our live webinar, Architectural and Engineering Industry Trends, strategies for growth and long term success, hosted by PKF O'Connor Davies. Before we get started, I'd like to go over a few housekeeping items so you know how to participate in today's call. We're pleased to offer live closed live closed captioning throughout the webinar. To access the the captions, please use the stream text link located in the chat section of your attendee panel. You will have the opportunity to submit text questions to today's presenters by clicking on the q and a tab on the right hand panel. You may send in your questions at any time during the webcast. We have a lot of material to cover, and if time permits, we will make an effort to respond. If we cannot get to your questions, a response will be sent post event. This webinar is offering one CPE credit and specialized knowledge. Polling questions will be launched in the polls tab on your right hand panel, and you will need to respond to three of the polling questions to receive credit. Please note that polling questions will only appear as they launch. Please pay special attention as these polls will be launched periodically. CP certificates will be issued within eight to ten days via email. Please also note a copy of the PowerPoint slides and a recording of today's webinar will be made available to you via email four business days post event. As we near the end of the webinar, we do have a very short survey which will be prompted, and your response is greatly appreciated. At this time, I would like to introduce Nick Tambocklis, partner of architectural and engineering practice with Pete Campbell Connor Davies. Nick. Good afternoon. Good morning, everyone. Welcome today today's webinar on architecture and engineering industry trends. My name is Nick Tambachlis. I'm a partner in the PKF O'Connor Davies architecture and engineering practice. I've been working with firms like yours, providing consulting, advisory, audit review, and other financial statement services for over fifteen years. I'm also the firm's lead partner for overhead rate audit practice and a certified design accountant. Outside of my core accounting and consulting responsibilities, I've been cochairing the ACEC Massachusetts accounting and finance form for several years now, providing education to its members. With me today is my colleague, Michelle. Michelle? Thanks, Nick. My name is Michelle Downing, and I'm a director in our A and E practice. I have over eighteen years of experience working with A and E firms providing financial and tax advisory services. In addition, I have extensive experience in overhead rate audits, and I also lead the data analysis and production of our annual a and e studies. Alright. Great. So to start things off, what we like to do is give you a brief introduction of our firm and what we would like to accomplish today. Be careful, Connor Davis is one of the nation's largest full service accounting tax and advisory firms. Within our firm, we have a dedicated architecture and engineering industry practice with a team of over 70 accountants and advisers who devote their time to serving any firms like yours. We take pride in producing our annual architectural and engineering studies, which is done by analyzing our client data, surveying participants, and aggregating results to provide an average picture of the industry that can be used for benchmarking and strategizing. Our newest studies, which is our twenty first year, by the way, which is very exciting, represent both regional and national firms, all of which are employee owned with revenues ranging from 3 to 600,000,000 and head counts of 10 to over 2,000 people. Success can take a lot of different forms in your practices. So think about a talented and dedicated team, industry awards and recognition, a strong legacy, happy clients. But none of these can thrive without a financially healthy foundation. The A and E industry is evolving and growing more competitive every day. Leaders in the most successful firms monitor and analyze key performance indicators and metrics from this year's studies along with sharing observations about how 2025 is trending and any insights we have into 2026. We'll also start about we'll also talk about the best firms out there and how they use this data to strategize. One important note, we believe that this information that we're going to share is very important to share with your team outside of the accounting and finance group, like your PMs and other next generation firm leaders. When everyone understands what these KPIs mean and what they translate into, firms can better align with their people and reach impressive new levels. We see this all the time with our client base. And finally, what we'd like to do is also hear from you on today's session. As we move along, please let us know if you have any questions, and we'll try to answer them in real time. K. So this key performance indicators and metrics agenda that you see on the screen here is the list of topics that we're going to cover today. Our full studies include a lot more information, but the ones that are listed here are the more essential KPIs and metrics we see firm leaders monitor to gauge organizational health. If anyone's interested, I recently wrote an article that we published with the top 10 list with definitions, calculations, and uses of those KPIs. It's an easy read to share with your team. You can find it on our website under the a and e industry page, for resources. Alright. We actually do have a first question here from the group just asking about the composition of the firm sizes that are included in our studies. So when we put this data together, we categorize it into small, medium, and large firms. So small firms are typically in the zero to 50 person range, medium, 50 to 250, and then large, over 250. About 40% of the participants are small firms, 40% are medium firms, and the remaining 20% or so come from large firms. So hopefully that helps understand, and lets you relate to this information a little bit more as we go through this. Okay. Alright. So throughout this presentation, architecture statistics will be in green, and engineering will be orange. This first chart shows a ten year trend of net fee income growth. These percentages represent the growth rate from the previous year. So for example, if you're looking at this in 2024, architecture net fee income grew six and a half percent, and engineering net fee income grew about 10% from 2023. So this chart is presented annually, but the KPI itself can be measured quarterly, monthly, depending on your needs. As most of you know, the growth in the in the industry depends on a lot of different factors. So think about geographic region, economic conditions, and specific market trends. This chart shows a blended average across all those different demographics. Internally, you should be looking at this by market or by business line to identify opportunities. So think about which segments you might wanna grow into or even which areas you might wanna phase out in your business. So what's not a shock to anyone by looking at this is in 2020, there was a noticeable slowing in growth. Architecture net fee income on average actually shrunk during that year, but it's been rebounding pretty nicely over the past few years. In 2023 and, again, in 2024, there was a deceleration of growth, not a loss, just a slowdown compared to previous two years. But, overall, it's still a pretty good time to be in the industry. Engineers are realizing double digit growth for a third year in a row, and architects are still growing positively. I I mentioned that this is an average, but to give you some more clarity into the results of our study, in 2024, there are some individual architects that reached net fee income growth as high as 57%, which is extremely impressive, while others declined about 38 year over year. For engineers, the range wasn't as wide. The highest net fee income growth rate recorded was about 23% with the low essentially holding flat from the previous year. So there's less volatility there as compared to the architects. For 2025, most firms are anticipating an increase of about seven to 8% with architects being on the lower end of that range and engineers on the higher end. For 2026, looking into next year, most firms are projecting a similar growth rate as 2025. So this is gonna be moderating back to those more traditional pre COVID levels that that we've seen, earlier. So what does this KPI mean? If you're seeing rapid growth, it might suggest that there's an opportunity for expansion. So do more of what's working. Declining growth could highlight some issues like client retention, market saturation, or competitive challenges. So here, you wanna dig into the catalyst, what's really driving that. Then a final point on net fee income growth before we move on is that public investments in infrastructure. So you can think about the IIJA, demand for green building, whether that's high demand, low demand, depending on policies and executive decisions, adoption of technologies, project delays, inflation, staffing. All of these items are gonna affect your level of growth that you realize. We'll be talking a lot more about these influences later on in the presentation. Right. K. So moving on to net fee income per full time equivalent. So this is an important KPI that provides insight into productivity and efficiency. It evaluates how effectively you're utilizing your people to generate revenue. It's calculated by dividing net fee income by full time equivalents. Full time equivalents are typically calculated by dividing total hours by 2,080. So what's that 2,080? That's forty hours per week times fifty two weeks per year. Net fee income per full time equivalent increased in 2024 to $227,000 for architects. For engineers, on average, 2024 saw consistent levels compared to 2022 and 2023 hovering around that $200,000 mark. So this metric alone will not give you insight into any individual employee performance, but at a firm level, you're seeing higher values that's indicative of that employees are working efficiently on profitable projects. So you wanna hire more people and fuel the business development for that type of work. You're seeing lower values that could signal underutilization, inefficiencies, or lower margin profits. So you wanna identify the bottlenecks here and really dig into the the the cause. Comparing your firm's results to industry averages is an important first step in potentially making any kind of organizational changes here, whether that be adjusting staffing levels, investing in professional development, or identifying growth opportunities. This metric is also useful to consider when budgeting for both revenue and staffing levels because you can easily forecast revenue based on your current workforce or understand what kind of staffing levels you need to reach those revenue goals. For example, think back to what we mentioned about revenue growth tapering off over the next couple of years. If you believe your firm will experience the slowdown, if you're maintaining a certain level of net fee income per FTE, you'll maintain your profitability, which is obviously an important factor here. K. We'll move on to utilization next. Yep. And, Nick, there's a a couple questions. The first one is, about firm composition. So you mentioned employee owned as an ESOPs and no. It's I I'm I don't think there were any firms that were had ESOPs, but I can get back to. you. There's there's no 100 ESOP firms in in our study. There are firms that have a component an ESOP component within their organization. Yep. And then there was another question about who's included in the calculation of FTE, and does that include administrative task, staff and owners or just technical staff, and then it includes all employees, which would be technical, administrative, and owners. Okay. Alright. Thanks, Michelle. Alright. So these these charts here show utilization at the top and profit as a percentage of net fee income at the bottom. These are presented together for a reason. In design firms, although not always exactly correlated, utilization can be a significant driver of firm profitability. If we were to see major changes in utilization, in most cases, profit would roughly trend in the same direction. However, be careful on rewarding just high hours because high hours doesn't necessarily mean profitability. Utilization represents the percentage of time that's chargeable to projects and can be calculated using hours or dollars, both of which are presented here at the top of each chart. Calculating utilization using hours can eliminate the wage rate impact of highly paid individuals, essentially leveling the playing field. In a moment, on the next slide, we'll dive deeper into the spread between hours and dollars and what that means. One observation here is that the industry utilization has remained remarkably steady over the past decade with the largest variation being 1.6 points. Profit as a percentage of net fee income represents the percentage of profit a firm retains in the business before principal bonuses but after staff bonuses. This KPI tells you how much of your net revenue is converted to profit and can be used to plan for future initiatives and set realistic expectations. Across the board in 2024, firms saw very consistent levels in utilization from 2023. Despite this, profit as a percentage of net fee income fell in 2024, 14% for architects and 14.7% for engineers on average. Some high performing architects reached a profit percentage of close to 33%, while top earning engineers reached almost 29% during 2024. Profit margins are beginning to become under pressure from rising costs and economic uncertainty, which has led to delayed schedules, less demand in some markets, and higher financing costs. For 2025, we expect utilization to continue to remain consistent with 2324 levels. We'll walk through our profit percentage expectation shortly. For now, let's dive deeper into utilization. These charts show the utilization that we discussed on the previous slide. Utilization in hours is the top line, and utilization in dollars is shown on the bottom. One KPI that's not always tracked by firm management is the spread between these two utilization ratios. This spread could indicate whether a firm's organizational structure is appropriate or if some shifting needs to occur. What we typically look here look for here is a spread not more than three percentage points. Over three percentage points might indicate that a firm is top heavy with underutilized highly paid individuals. In 2024, the spread in architect utilization grew to 2.1 points, while engineers moved into their fifth year of spreads greater than three, reaching a high of 4.2 points. When we talk about labor utilization, it's important to understand that it's most influenced by highly paid leaders. Yep. So, Michelle, I just wanna jump in here for a minute because this is a really important analysis that should be done, in in every firm is is analyzing the spread between hours and dollars utilization. But what I do wanna note is that it it doesn't necessarily tell the whole story in itself. So for example, your firm might have a strategy that includes highly paid positions leading certain initiatives like AI, exploration and integration, highly paid positions that focus primarily on business development or m and a. So this spread in that that initiative to use these highly paid individuals for those type of initiatives could be intentional. So you shouldn't just just focus on the number. You should also be matching that up with your firm strategy as well. Yeah. That's a good point. And, also, the size of a firm has an impact where larger, more structured firms may have more individuals in c suite positions that don't do technical work, whereas smaller firms might have principles that roll up their sleeves more often. We recommend that this KPI be reviewed periodically to ensure that it aligns with your firm's strategic goals. And if it doesn't, it may be time to right size your organization. It looks like we have a question on utilization. Is that based on billable time as a percentage of total time sheet hours, or is it based on billable time as a percentage of available hours? And it's of total time sheet hours, and we'll walk through that now. So we just discussed total hours utilization for the firm. Now let's look at it by role. Utilization by role can lend insight into workforce productivity and efficiency and is used for firm resource planning. This slide presents direct and indirect utilization broken out between principals, professional staff, and support staff for 2024 and 2023. Indirect hours includes PTO, marketing, business development, professional development, IT, accounting, and other administrative time. For both engineers and architects, you'll notice that principal utilization decreased in 2024, dropping about one point for architects and dropping almost three points for engineers. Professional staff stayed consistent for architects and increased 1.5 points for engineers. Yeah. So I'm gonna jump in here for a minute, Michelle. So what you just explained is in line with the previous slide where we showed that the spread between hours and dollars was increasing for both architects and engineers. So that corresponds with the decreased utilization of principles that we see here who are the higher paid individuals in this case. So, yeah, again, going back to the to the theme of the number itself at an at an organizational level is important to look at and to track, but you gotta start digging into that. And and what does it really mean to your firm, and does it line up with your strategies? Yep. So in summary, firms should monitor monitor utilization to make sure employees are spending the right amount of time in the right areas, and this aligns with your strategic objectives. We've also heard from some of our clients that they're starting to set utilization goals and targets for levels in an effort to increase overall firm utilization. Targets by role can also help identify employees who may be overworked if their direct utilization is above the target or those that may have the capacity to to take on more work if they're below the target. These pie charts break out the percentage of technical and nontechnical employees, which can be helpful in understanding how many nontechnical employees you need to support your technical staff. Nontechnical is further broken out between administrative, finance and accounting, HR, IT, and marketing. So as an example, for a 250 person firm, if you're using an average finance and accounting percentage of about 4%, you would expect approximately 10 employees in your finance and accounting department, which would include CFO, controller, accounting managers, billing, and project accountants. In 2024, there were proportionally more technical employees in both architectural and engineering firms as compared to total employees versus 2023. For architects, in 2024, technical employees made up approximately 82% of FTEs. This was 80% in 2023. For engineers in 2024, technical employees made up 85% of FTEs. This was 83% in 2023. So this two point shift, that that's been a result of one of two things. New hires were primarily technical employees, or if reductions in workforce occurred, some nontechnical functions were impacted. Now I'll pass it back to Nick. Alright. Thank you. So, we mentioned that utilization is one of the more important KPIs for firm to track, But you can use another KPI. So this is the total labor billing multiple, also known as the revenue factor, to assess efficiency. So this KPI shows how effectively a firm is turning labor cost into revenue. It represents how much net fee income is generated from every dollar of labor. So for example, if you look at the chart in 2024, the average architect generated $2 of net fee income for every $1 of labor incurred. This is calculated by multiplying utilization by your billing multiple or dividing net fee income by your total labor. So algebraically, it will get you to the same result. The importance of this KPI is that it's not influenced by time entry, so direct versus indirect time entry on those time sheets, which some firms struggle with. And if you do struggle with it, it could result in skewed utilization results. So after plateauing for a few years between 2015 and 2018, architects have seen an impressive increase in their revenue factor to a ten year high of two in both 2023 and 2024. Engineers are trending back towards their highs of the decade, not far behind architects at 1.94 in 2024. So as firms diversify into other services or products, so think about software offerings, maybe modeling or forecasting, or less labor intensive services by using AI. This KPI is gonna be more important to monitor in connection with utilization to tell the whole story. So, for example, there could be years where utilization is down, but the revenue factor could be up, especially as the industry moves towards more value billing with less reliance on hours, which we're starting to see very slowly with AI advancements, but will become a lot more prevalent, over the next five years or so. So what does this KPI tell you at the end of the day? 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. So this one KPI will tell you, how well you utilize your staff and how well they're performing on projects. So looking forward to to the 2025, and then into 2026, we're expecting to see these annual increases that you've seen over the past, you know, three, four years start to taper off a bit, and and level off. So we're not anticipating any more significant jumps in the revenue factor, at least in the short run. Alright. Gonna move on to the billing multiple and the breakeven multiple. So the firm's billing multiple represents the amount of net fee income generated by every dollar of direct labor. So $3.26 for every $1 of direct labor for engineers in 2024. It's one of the most important and widely tracked KPIs for any firms, the billing multiple. It's used for pricing proposals, project management, budgeting, and benchmarking, just to name a few uses. The billing multiple on these charts is represented by the top dotted line. 2024 saw an uptick for both architects and engineers due to continued efficiencies in managing labor and the ability to pass through those wage increases through increased bill rates. Architects reached 3.33 in 2024, while engineers jumped to that 3.26. So an increasing billing multiple over time means that a firm is improving its efficiency and its profitability. A declining or below average multiple might indicate problems like scope creep, project management, or overall pricing. So you'll wanna investigate those if this is the case, if you're seeing your billing multiple decrease. So if you remember back a couple slides, we said that utilization really didn't increase for 2023. There was only a tenth of a point increase for architects. So what that means is that the direct labor that was incurred in 2024 on average was more productive. Basically, proportionately, more direct labor was able to be billed in 2024 than in 2023. So you also see this reflected in the revenue factor that we just talked about. The relationship between your billing multiple and utilization can't be overstated. It's extremely important. Together, they show that, you're leveraging your workforce in a way that contributes to your success. Alright. So moving on to the bottom of the chart, the solid line, that's the breakeven multiple. That's calculated by dividing total operating cost by direct labor. It represents operating costs incurred for every dollar of direct labor, and that's including your overhead and your salaries. So as the name implies, this is the multiple that has to be reached to breakeven to cover all of your costs. Because labor is your biggest cost, it's the biggest influence to your breakeven multiple. Firm should really understand this KPI. It's important so that a floor or a walkaway multiple can be used, in your go, no go process. I I mean, if if the twenty twenty four breakeven multiple is a 2.85 for architects on average. You would not wanna take on any new clients or projects that might be at a two multiple, for instance, because you will not be profitable. So cost to run an engineering firm have continued to rise during 2024. So that resulted in a jump in the breakeven multiple for the engineers. Architects, though, have held pretty steady. So if the billing multiple on this chart represents revenue and the breakeven multiple represents costs, the spread, the difference between the two represents profit. So this spread was point four eight for both architects and engineers in 2024 and represents the amount of profit realized for every dollar of direct labor incurred. So think of it this way. 48¢ for every $1 of direct labor contributes to your profit on average. Right? So looking forward to year end 2025 and projections for 2026, firms on average are expecting the billing multiple to hold pretty steady, no significant changes on the top line, and cost will follow the same trend in general. So in most cases, we're anticipating pretty stagnant profit from 2024 to 2025, and then potentially into 2026. But in some cases, there will be some slightly diminished profit depending on on the firm. Alright. Moving on to profit per direct hour. So these charts look at billings, costs, and profit from a slightly different perspective than the last slide, and it might help you strategize a little bit differently. So here we're analyzing these metrics per hour instead of per dollar. So we'll start with the light shaded bars on the left. These represent your bill rates per direct hour. Both architects and engineers reached approximately a $163 per hour in 2024, which was about a 3% increase over last year. So now the stacked bar to the right is made up of direct labor, so that's in blue for both architects and engineers, and then overhead costs, which include indirect labor, all presented per direct hour. One observation here is that direct labor, very consistently, has made up about 37% of your total cost for both architects and engineers over the past at least fifteen years of of doing this survey. Your firm probably has a similar consistent structure from year to year, but if it doesn't, if your direct labor varies, you know, significantly, that's something that you wanna take a look at. Overall, total costs increased about 5% year over year for architects and about 3% for engineers. Michelle is gonna have a little bit more detail on that data in a moment, but just to round this metric up. So if you take a step back and you think about these two bars as revenue and costs, the difference between the two represents profit per direct hour, which is shown at the top of the chart, with architects at $22.75 per direct hour and engineers at $23.92. So knowing your history here allows you to easily forecast profit by quarter, by month, by week, or even if necessary, by day. So it's a really useful tool. Alright. I'm gonna pass this on to Michelle. Thanks, Nick. There there was another question about indirect hours, and this kind of goes into this slide with indirect labor. And so PTO and holiday hours and labor, that's included in indirect when we're looking at these, study results. So this slide here shows what makes up the overhead rate in 2023 and 2024 by major categories. Your overhead rate represents the cost of non project related expenses as a percentage of direct labor. It's no surprise that the biggest component of a firm's overhead rate is indirect labor followed by fringe benefits. Indirect labor stayed consistent with 2023 for both architects and engineers, which was a result of direct utilization remaining steady with prior year. For 2025, the indirect labor is expected to be consistent, but ensuring that you're optimizing staff resources between billable and non billable work will also impact this. Fringe benefits, which primarily consists of health insurance, retirement plan benefits, and payroll taxes, also stay consistent with 2023. Similar to labor, we expect fringe benefits to remain consistent or slightly increase in 2025, but there are some factors that will impact this, including headcount and rising health care costs. Staff bonuses decreased for architects while they increased slightly for engineers. We'll go into more detail on staff bonuses in a few slides. Occupancy, which includes rent, decreased in 2024 for architects and remains steady for engineers. What we've seen here is firms not necessarily terminating leases early, but downsizing, subletting existing space, or even renegotiating their lease extensions to include free rent, significant tenant incentives, or reset the base rent. For 2025, we expect this to remain steady or slightly decrease. The computer and IT category shows an interesting change. For architects, this actually decreased from 2023 down about one point. Some architect firms downsized, which led to less less licenses needed. For engineers, this category continued to increase. When we looked further into computer and IT cost per full time equivalent, for architects, this increased from $7,400 to $7,600 per FTE. For engineers, computer and IT cost per full time equivalent increased from 7,300 to $7,600 per FTE. Professional fees increased slightly from 2023 for both, while insurance held consistent with prior year for engineers and decreased slightly for architects. Other costs, which include office, travel, depreciation, recruiting, and marketing, increase for both architects and engineers, the biggest driver being travel and miscellaneous costs. For 2025, we expect these other costs to level off as firms continue to assess their cost structure. Ultimately, the way a firm manages its overhead costs will have a direct impact on profitability. It's essential to regularly track these costs against revenue projections to assess profitability, stay competitive, and support long term financial health. It's important to distinguish costs that drive profitability and those that hinder it. Investments in areas like business development and project management training can improve profitability over time and shouldn't be the first cost to cut. On the other hand, eliminating cost for access office space or duplicate admin roles can lead to increased profit margins. Looking at the overhead rate in total and considering the uncertainty in certain markets in the a and e industry, firms are beginning to take a closer look at the cost necessary to run their business and looking for opportunities to keep their overhead rate at least consistent with 2024. Michelle, I'm I'm just gonna jump in here and add a a little commentary because, we we do a lot of benchmarking for our clients, and and they'll look at the industry average, and some of them might have a a higher overhead rate. And the question is, what am I doing wrong? Why am I spending so much compared to to my peers? But just going back to reiterate the point that Michelle made a few moments ago is that, overhead is not necessarily a bad thing. High amounts of overhead is not a bad thing as long as the composition of that overhead is contributing to the success of your firm. So breaking your overhead rate or your total cost down by category and analyzing, doing an exercise on, what categories are contributing to the profitability and the success of our firm and which are not is the most important aspect versus just looking at your overhead rate or cost structure in total. That's a good point. Thanks, Nick. Alright. This chart presents the average direct, indirect, and combined hourly rates. The average hourly rate is calculated as labor divided by hours and does not include bonuses. They represent the amount your firm pays for direct labor, indirect labor, and total labor for every hour worked. In 2024, labor costs continue to rise but at a slower pace than the last couple of years. On the next slide, I'll go into some more detail on labor. For architects, the combined labor rate, which is the dotted middle line, rose from $49.64 to $50.70, a 2.1% increase. For engineers, the combined labor rate, which again is the middle line, dotted line, rose from $52.99 to $54.60, a 3% increase. In regard to 2025 and looking ahead to 2026, we expect the combined labor rate to increase around two to 4% per year. This slide here shows the ten year trend for raises as a percentage of salary. As you can see, prior to 2022, the pay raise percentage held relatively consistent between three and a half to 5% for architects and three and a half to four and a half percent for engineers. Then in 2022, we saw a jump in the average as firms ramped up recruiting and retention efforts. During 2023 and 2024, pay raises began to decrease and return to more normalized levels. For architects in 2024, the pay raise percentage ranged from no raises to a high of 8% with the average coming in at 4%. For engineers in 2024, the pay raise percentage ranged from a low of three and a half percent to a high of 8% with an average coming in at five and a half percent. For 2025, we expect the architect's percentage to hold steady and for the engineers to continue to decrease slightly to around 5%. But the percentage will be dependent on some factors such as talent shortages, which could result in a higher percentage to retain key talent, geographic locations, and the markets firms work in. For example, if a firm focuses heavily in the data center sector, they may have a higher raise than those firms that may work in residential. To minimize raises or rodent profit margins, firms should consider these annual raises when setting next year's multipliers and fixed fee budget templates. This slide presents bonuses as a percentage of salaries over the last decade. For 2024, the bonus percentage range for architects was a low of no bonuses to a high of 15%, with the average coming in at six and a half percent. For engineers, the bonus percentage was a low of no bonuses to a high of 12% with the average coming in at 7.3%. You can see that the bonus percentage has been trending back down to more normal levels over the past two years similar to raises. In regard to 2025, we are still seeing healthy bonuses and expect this percentage to be consistent with last year. However, this percentage will be dependent on overall firm profitability and individual performance. When thinking about comp compensation strategy, some firms are beginning to put more emphasis on incentive compensation versus salary increases, rewarding those individuals that contribute more to the overall success of the firm. The staff turnover ratio represents the percentage of employees who have left voluntarily and involuntarily compared to total employees. This does not represent employees who were replaced. Within our study participants during COVID, there was a noticeable difference between architects and engineers with respect to turnover. Architects who were more likely to benefit from the paycheck protection program made a business decision to retain staff for as long as possible, resulting in a low 8% turnover ratio in 2020. However, what you'll see in the following year is that correction for that business decision with the architects experiencing a higher than average turnover of close to 14%. Pre COVID, the average industry turnover rate was approximately 12%. 2024 staff turnover ratio for architects is slightly lower lower than the pre COVID average, while the engineer staff turnover ratio was a little bit higher. For 2025, we expect architects turnover to to increase and engineers will stay consistent. Remember though, this is just an average and will really be dependent on a firm's market focus. Yep. Michelle, before we let's just take a quick break right here before we move on to answer a couple questions. So the first is, in addition to engineering design, this firm's revenues are derived from construction inspection. So the question is, do the firms in our study have a significant construction inspection or or field staff? Many of the firms in our study have a focus on construction inspection, construction administration. So that is a significant piece of of most of the participants' revenue. Second question, Michelle, I'll I'll give this one to you. There's another question asking if we know what the average tenure of staff is, which I think we we're not presenting it here, but I think we do ask that question to the participants. I don't know if you have that information handy. Yes. I do. So for both architects and engineers, on average, the, employee tenure is about seven to eight years. K. Alright. And then, can you please repeat the turnover definition? Do you wanna just go through that one more time? Yep. Yep. So that is the percentage of employees who have left voluntarily and involuntarily compared to total employees, but it does not include employees who are replaced. K. Alright. And then, the source of our data and how large our sample size. So the the source of our data is going to be a combination of our clients and our and just other non client study participants, primarily headquartered in the Northeastern part of the country, but many of the participants have national offices across the country. So, hopefully, that gives you a little bit more clarity into that. Alright. So let's move on to make sure we can get through the rest of the metrics here, and then we will try to take some more questions at the end. Alright. So moving on to days fees and accounts receivable. So that's also known as DSO. This represents the average collection period of a firm's receivables. Basically, how long it takes to convert sales into cash. This chart shows DSO trending downward over the past ten years. Obviously, that results in quicker cash injections into firms that allows them to fuel operations and to build on new initiatives. It's important to note that this is an average, and DSO is impacted by your mix of public versus private, prime versus sub arrangements, and so on. So how you bill and get paid, whether that's paper or electronic, will also have an impact to your DSO. A lot of firms either switched to or increased the frequency of electronic billing in collections during COVID and stayed there, assuming the same for many of you. After several years of decline in DSO across the industry, 2023 saw an uptick in days for both architects and engineers. 2024 saw architects making about three days worth of improvements, but engineering staying relatively consistent. There are a lot of factors to consider here when you're looking at this. The the increase in DSO from twenty twenty two's lows could potentially be an indicator of a pending slowdown, which we've touched upon a little bit, and and I'm sure all of you are are starting to think about. That despite even though a lot of the our firm leaders are still optimistic cautiously, about the industry's future. So when there's times of increasing DSO, it's important for leadership to try to understand why it's happening and to closely manage the other side of the equation. So your your payables side of the equation to make sure that you maintain sufficient cash flows, working capital to run your businesses. Analyzing DSO also gives you insight into the financial health of your clients, which is obviously very important, allowing you to make decisions on extending or not extending credit to them. Early warning signs here are are crucial to identify. Ongoing challenges like the lingering effects of the government shutdown, tariffs, other uncertainty could result in DSO increasing even more in 2025 and 2026 depending on the markets in the sectors that you serve. There's a couple questions. The first one is, does DSO represent build or unbilled, AR, and it includes build AR, in our study. And then the formula for DSO, I guess that's a good question because there are many different ways to calculate DSO, and the key is just to calculate it consistently so that you can identify trends over time, for your firm. Alright. Moving on to working capital. So working capital as a percentage of net fee income is a measure of firm financial health. It represents the liquidity needed to cover short term operational needs like payroll and accounts payable relative to your earnings from projects. In 2020, there was a significant increase in working capital. You can see it here, with both architects and engineers reaching about 28% of net fee income. This was a combination of PPP for those firms that did receive it and then other firms just placing excess cash in reserves just in case. A lot of uncertainty in 2020, obviously. Post COVID from 2021 to 2024, as firms began to realize that they might not need, to maintain such a high level of working capital, they began to tap into those reserves to pay higher wages, deal with inflation, and to invest in initiatives that were placed on hold during the pandemic. So m and a initiatives, investments in new business lines, and so on. So, typically, firms with working capital of 20 to 25% of net fee income have that financial flexibility to manage downturns without incurring additional debt. But the level you need is really firm specific. 15% might be just fine for you. Other firms might need 35%. Again, very firm specific. It really comes down to how quickly you can turn around, your assets into cash and how much of that cash you need to fund operations, or initiatives. So the ultimate goal here in managing your working capital is to make sure that you don't have too much or too little. Bigger is not necessarily better here when it comes to working capital because you could miss out on some missed opportunities for investment if you're holding on to too much. In 2025 and 2026, working capital was expected to level off, as the industry returns to those normal pre COVID levels. But economic uncertainties, client payment delays. So think back to what we talked about with DSO, higher cost of doing business. Think back to what Michelle was saying on on the overhead slide. And any planned initiatives could all increase those working capital requirements. Just a final note on working capital before we move on is that it's not just the number that you should be looking at. The quality of working capital is also very important. If you calculate a working capital percentage of 25%, for instance, but that includes AR that you might not collect or WIP that you might never build, that working capital may not convert into cash, and that could give you a false sense of security. So, just something to think about when you're analyzing that. K? So we're gonna move on to some AI and technology trends now. So as all of you know, AI is significantly rapidly transforming the A and E industry. So we surveyed our study participants on their current and expected uses of AI for a second year in a row now, so these are the results. For 2024, three quarters of engineers are currently using AI tools internally. So this is up from just about half last year, about 50% last year. Notably, use of AI by architects last year was only about 40%. You can see here that that more than doubled and reached 83%. So the acceleration during 2024 outpaced engineers. Architects, you know, in some cases, were more skeptical at first, than engineers were starting to realize the opportunities there. So for those firms that are using AI, they're still using it mostly for administrative tasks. So think about drafting proposals, marketing, reviewing of contracts, presentations, and and so on. Almost all engineers surveyed stated that they'll be using AI in the next five years in some capacity. About three quarters of architects responded similarly up from two thirds last year. Some form, some form of exploration in AI is is not just as an internal tool, but also as a service. So if you think about AI based analysis tools providing insights into environmental footprint of designs, specialized services like site condition monitoring, flood predictions, and more. So that was interesting to us, so we started surveying our clients on that topic. Despite the fast pace of implementing AI, only about half of respondents believe that they will be offering an AI product or service. Respondents believe that they will be offering an AI product or service during the next five years. I believe that's going to change pretty quickly once the industry starts to realize the opportunities that are available there. AI focus groups, committees, firm champions, these are all essential, for firms that are serious about implementing change. About three quarters of engineers and close to half of all architects surveyed have created these positions already. One important takeaway here relates to what that workforce of tomorrow is going to look like. Once these tools become more prevalent in the industry, we're gonna need to start thinking about investing in training. For existing employees or hiring more nontraditional architects or engineers like data scientists to fully benefit from from these technologies. What we also did this year was asked our study participants to rate on a scale of one to 10 with one being the lowest and 10 being the highest their focus on implementing AI within their firms. So, overall, engineers were much more focused on implementing this change. You can see that the orange bars are mostly in the five to nine range, where architects are mostly in the one to five range. No one's fully committed at a 10 yet, but I suspect that that's going to happen pretty quickly. Right. Just some final thoughts and looking forward as we wrap up today's presentation. The A and E industry continues to prosper as we close out 2025 and look ahead into 2026. Overall, firm leaders remain cautiously optimistic. I've used that term a bit today, but that's true, that the industry's strong performance will continue. Brighter perspective in the long term, a little bit more pessimistic in the short term, but, overall, optimistic for the industry. So with respect to net fee income growth, this is expected to soften and slow slowly starting to head back down to pre pandemic levels of growth. That being said, most firms are projecting net fee income growth between seven to 8% for 2025. For 2026, a lot of the firm leaders that we talk to believe that 2025 growth levels will hold consistent. So we're not anticipating a dip, but we're not anticipating, significant increase in growth either. Michelle? Yep. Employee recruitment and retent retention continues to remain a priority for a and e firms. Firms are still seeing a shortage of skilled labor, which is putting continued pressure on wages. In addition, the aging workforce is also contributing to this shortage. And other aspect of the labor shortage is that this is impacting firm productivity and growth. One way firms are trying to offset this is with the use of AI. As Nick noted a few slides ago, many firms are using AI internally to help maintain productivity, but firms should also ensure that they're using AI to its fullest potential. We've spent some time discussing pay raises and bonuses. And in summary, firms are planning four to 5% wage rate increases and seven to 8% bonuses for 2025. Backlog remains strong in the industry at ten months on average. However, this can vary significantly depending on markets that firms work in. Data centers, power, water, sewer, waste industries are the strongest sectors right now. Additionally, about half of the IIJA funding has not yet been dispersed, which is contributing to the robust backlog of those firms working in the sectors that this act benefits. The execution of backlog has been slow, though, with many projects being delayed from rising construction costs and higher interest rates. Yep. And so just a a quick note on industry consolidation. So it's still hot. Around 450 US deals are expected to close in 2025. So why so many? Think about drivers of, you know, demand for infrastructure updates throughout the country and firms with aging owners. There's there's also still a lot of interest from private equity, family groups, and strategic buyers because of the attractiveness of the industry. Economic and political uncertainty is here. It's here to stay, I think, for a little bit. Lingering effects of the government shutdown, uncertainty of how executive orders might affect operations, tariffs, inflation, project delays, recession fears. These are all things that lead to nervousness for some firms. I probably most of you most of you keep track of the AIA billings index and the E and R confidence index. Both of those have been below the 50 mark for quite some time now, so that is also signaling, some softness. Michelle, you wanna give one final comment on on the tax law? Yep. So the industry had a large win over the summer when the big beautiful bill was signed into law on July 4. The under the new law, companies can now once again deduct research and experimentation costs beginning after 12:31 twenty twenty four. With the year wrapping up and 2025 marking the first year that these costs can now be deducted again, Firm should continue firms should be working through tax planning now to evaluate the most advantageous strategies for their business related to this change. So we've gone through a lot and presented a wide range of KPIs, metrics, and insights into the current transfer 2025 along with some expectations for 2026. As Nick noted earlier, it is an exciting time to be an architect and engineer even though there is some uncertainty. The industry is rapidly transforming, and, using these KPIs can help you regularly monitor your financial, reporting. Today's presentation was just a glimpse into our studies. These QR codes will bring you to our website for the full versions of the studies, which also includes more information and other useful metrics. Well, we're also looking forward to our annual a and e summit next June. During this past June at our twenty twenty five summit, we welcomed economist doctor Anibam Basu as our keynote speaker and had a panel discussion with representatives from ECEC AIA and a practicing engineering firm. We also, presented a preview of our study data that we presented today. Alright. We hope that you enjoyed this, got something to take away, and and with your team. And, for any questions that were not answered, because there were a lot, Michelle and I will go through the list, and we'll make sure that we circle back and and provide answers to those. Alright. Alana, any closing remarks? Thanks, Michelle and Nick. And thank you everyone for attending. If you haven't completed it already, we have launched our survey located in the survey tab of your panel. A copy of the PowerPoint slides and a recording of today's webinar will be made available to attendees via email four business days post event. Thank you again. Have a great rest of your day.