Tuesday, March 15, 2011

Recent PSMJ Survey Shows Concerns of Fleeing Clients Largely Unfounded

Raising Rates an Underused Strategy for Improved Profitability

Newton, MA — The factors putting downward pressure on earnings in today’s economy are many. Revenues are down with more firms chasing fewer projects and rising costs are putting a tighter and tighter squeeze on many A/E firms. Further, with hungry competition seemingly everywhere, it may appear counterintuitive that raising rates would be a viable strategy for increased profitability in the current economy. But, the results of a recent survey conducted by leading A/E industry research, training, and consulting firm PSMJ Resources, Inc. seem to indicate just that.

In January, PSMJ surveyed 57 A/E firm leaders and asked whether their firms raised fees in 2010 and, if so, how much work they lost as a result. Of the firms surveyed, only 29% raised their rates – an indication of significant apprehension towards the strategy. However, of those firms that did take the leap and raise their rates, an overwhelming 86% reported “no noticeable loss of work” as a result. What’s more, the remaining 14% that raised rates reported that the loss of work was no greater than 10%.

“Of course, the key to long-term growth isn’t as simple as raising rates without delivering the value to back that up” states PSMJ Consultant David Burstein, P.E. “But this survey underscores that, at current levels, demand is less elastic than many may think. Accordingly, firm leaders need to be thinking long and hard about whether holding the line on fees is going to get them to where they need to be.”

Taking a conservative stance and assuming that 10% of revenue is lost with a fee increase, the following table maps out the profitability improvement that comes from a 5% annual fee increase over a three-year period:

1. Direct Labor Multiplier of 3.0 and Overhead Rate of 165% are based on industry norms per PSMJ survey data.

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