How does your firm’s financial performance stack up against the rest of the AEC industry?
Zweig Group’s 2023 Financial Performance Report of AEC Firms is a comprehensive, data-based industry resource. The report contains trend data on key financial statistics, descriptions of finance departments, and a general overview of the financial practices of AEC firms. Additional topics on everything from financial software use in AEC firms to cash flow reporting are also included. This report can be used to benchmark key financial metrics for any AEC firm, evaluate firm performance, and make strategic decisions. The 2023 report was compiled with financial data gathered from participants for the 2022 fiscal year.
In April of 2022, domestic airlines dropped mask mandates for passengers, just as many design firms were trying to bring their staff back to the office. Though many workplace models and firms in the AEC industry remain more flexible than they were before, we found turnover crept back up after a decade low of 8.6 percent in 2020 to around 12.5 percent in 2022. Employees remained confident in the job market as backlog and pipelines stayed full. Zweig Group’s data show more than eight months of backlog at the end of 2022, higher than any year pre-COVID. However, this measure has retreated each year over the last three years with a high of 9.3 months in 2020.
In 2022, firms had the highest growth rate on record since 2006, topping out at nearly 13 percent for the year. On average firms grew gross revenues by 23 percent since 2020. Firms are expecting their forward looking three-year growth rate to cool down a bit – to just over 16 percent.
Net service revenue per employee continues to climb year over year, however it lagged core consumer price index inflation data over the last three years. The Bureau of Labor Statistics shows annual core CPI increases of roughly 13 percent from January of 2020 to January of 2023. Zweig Group’s data show NSR/FTE increasing from $150,157 to $165,710, or 10.5 percent over that time frame. Historically, NSR/FTE growth in the AEC industry has outpaced average inflation indexes in the U.S. by a few points. Utilization pushed above 60 percent after dipping to 59 percent last year. We believe improvements in technology, processes and standards – along with the impending machine learning revolution – will continue to allow firms to generate more revenue with fewer staff. If your firm’s revenue per employee is not increasing each year, you need to take a good look at your operations!
Bonus costs as a percentage of profit and bonus per FTE went down this last year, with bonus per FTE coming in just shy of $7,000 and bonus as a percentage of profit coming in below 25 percent. It appears more firms continue to hold some excess cash on the balance sheet. Zweig Group saw management bonuses dip over the last few years, as owners have relied on distributions and invested in growth. Salary increases in 2022 absorbed a portion of the funds previously earmarked for incentive programs. More firms are modifying their overall compensation programs as a result of inflation and the strong demand for talent. Pre-tax, after bonus profit increased again this year to nearly 10 percent. Historical values for this metric hovered around five percent.
Return on equity came back to earth after a decade high of more than 27 percent in 2021. This last year we saw return on equity of 21.4 percent, which is more in line with historical values. Balance sheets are still healthy with a median quick ratio of 3.4, higher than any value over the last decade. Working capital as a percentage of NSR was around 33 percent with larger firms running leaner than their smaller peers.
The 2023 Financial Performance Report of AEC Firms and dynamic Excel based Financial Performance Benchmarking Tool provide insight into the 2022 fiscal year and allow firm leaders to gain a unique perspective on where they stand relative to the industry. For more insights or questions regarding the report or benchmarking tool, please contact Zweig Group’s research department at research@zweiggroup.com.
Will Swearingen is a principal and director of ownership transition advisory services at Zweig Group. He can be reached at wswearingen@zweiggroup.com.
