A tale of two firms

The gap between struggling and high-performing AEC firms often comes down to seven operational levers leaders can control.

"It was the best of times, it was the worst of times."

So begins A Tale of Two Cities, Dickens' classic novel. This article will compare not 1800s Paris and London, but two modern design firms with very different margin profiles. (To be upfront: I have not read the actual novel in 30 years. That is the last literary allusion you'll encounter here.)

Most architecture and engineering firms compete on the quality of their work. But despite the brilliant work done across the industry, many firms struggle: Too little margin, challenging work-life balance, and an overall sense of chaos. Quality work matters, but quality work alone doesn't drive sustainable profitability. How a firm is managed – operational excellence as a differentiator – is an underappreciated lever.

Consider two fictional firms: Paris Design and London Design. Both have 50 employees, 40 of them billable. Same average bill rate of $150 per hour. Same annual revenue of $10.5 million. London posts a 25% profit margin. Paris earns 5%. The roughly $2 million gap between them doesn't come from better clients or harder work. It comes from seven operational levers that Paris hasn't mastered – yet.

Seven operational levers that drive AEC firm profitability

This isn't an outlandish scenario. Our own benchmarking analysis of hundreds of A/E firms shows this is roughly the gap between top and bottom quartile firms. Here are seven levers that explain it:

1. Pricing strategy and fee alignment (pre-proposal)

Most firms set fees based on instinct, prior precedent, or fear of losing the bid. High-performing firms treat pricing as a discipline – reviewing comparable project data, understanding client risk profiles, and structuring proposals to anchor value rather than simply justify cost. They:

• Use prior project data to calibrate fees and avoid chronic underpricing
• Price for risk, complexity, and client behavior – include premiums where warranted
• Structure proposals with tiered options to anchor on value
• Expand scope through thoughtful cross-sell and upsell where it genuinely serves the client

2. Scope definition and project scheduling (proposal and planning)

Scope creep is the silent tax on A/E profitability. It compounds quietly – a few extra meetings here, some unanticipated revisions there – until a project that was priced at healthy margins finishes underwater. The best firms manage this not through confrontation, but through clarity. They:

• Involve project managers in initial scoping, not just at handoff
• Define clear deliverables, milestones, and billing dates before kickoff
• Document scope explicitly – including what is not included
• Enforce change orders consistently; leadership has to model the behavior

3. Labor mix optimization (project staffing)

Senior staff are expensive, and clients value their judgment – but not for every task. When principals and senior engineers routinely perform work a mid-level associate could handle, firms hemorrhage margin invisibly. London Design has built a culture of deliberate delegation: role-appropriate work, transparent scheduling, and active coaching for senior staff who find it hard to let go. They:

• Standardize resource planning by role and project type
• Make scheduling and allocations visible across the full team
• Train senior staff to delegate effectively – it's a leadership competency, not an abdication
• Track labor mix on completed projects and use it to calibrate future staffing plans

4. Budget tracking and early intervention (project execution)

Write-offs are often treated as inevitable. London Design disagrees. Their PMs review burn-rate dashboards weekly, receive alerts at key thresholds, and are expected to intervene before a project goes past the point of recovery. The goal isn't to punish overruns – it's to surface them early enough to do something about them. They:

• Monitor budget versus actual with live time-tracking data
• Review project budget status weekly, not monthly
• Use forecast-at-completion analysis to predict final margin before it's too late to adjust
• Set intervention trigger points at 30%, 60%, and 90% of fee burn

5. Realization and utilization optimization (execution/billing)

Two metrics define the efficiency of a professional services firm: utilization (what percentage of staff time is billable) and realization (what percentage of billable time you actually invoice and collect). Most firms track one of these. The best track both, in real time, and manage to both deliberately. They:

• Set explicit utilization expectations by role – and publish them
• Shift to daily time card entry for precision and accountability
• Forecast workload 90 days out for all billable staff
• Orient team conversations around revenue per labor hour, not just hours worked

6. Billing timeliness and WIP management (closeout/billing)

Work in progress – hours logged but not yet invoiced – is one of the largest sources of silent revenue loss. The longer WIP sits, the more likely it is to be discounted, forgotten, or written off. London invoices consistently: monthly at minimum, at milestones whenever possible, with automatic sync between time-tracking and billing. The best firms:

• Communicate billing schedules to clients during project onboarding
• Invoice all projects at least monthly – or at defined milestones for fixed-fee work
• Track WIP live rather than reconciling at month-end
• Automate the sync of unbilled time and expenses into the invoicing workflow

7. Collections and bad debt management (post-billing)

The last mile of revenue is often the most neglected. Many firms invoice on time, then essentially hope for payment. The best firms treat collections as a process: automated reminders go out on schedule, principals follow up personally after 30 days, and late payment terms are built into contracts from the start. The best firms:

• Offer electronic payment options to every client where viable
• Set up automated invoice reminders on a defined cadence
• Engage principal-led collections on any invoice past 30 days
• Include late payment fee terms in all standard contracts

Profitability: Not just about the bottom line

Taken individually, each of these levers is meaningful. Taken together, they are transformative. None of this requires better clients, higher billing rates, or additional headcount. The revenue base is unchanged. Every margin point comes from doing more with what the firm already has.

There is a purely financial argument to be made here – more margin from the same revenue allows firm owners to take home more cash, distribute more substantial bonuses, and increase the value of the firm. But a different framing: Profitability is not the point of a great firm. However, it does make everything else possible.

Operational excellence – the discipline outlined across these seven levers – creates margin that gives you options. It means:

• Better compensation and career paths for your team. You can't retain top performers on thin margins. The firms your best people want to stay at are the ones that invest in them – and investment requires margin.
• Better client delivery. When you have room to breathe, you can do the job right. You can fix the mistake. You can bring in extra resources when a project hits a hard stretch. Healthy margins are a client service investment.
• Doing the work you actually want to do. Most firm leaders didn't start their firm to manage cash flow crises or chase paper. They started it to do great work. Operational excellence isn't about becoming a bean counter – it's about removing the financial friction that keeps you from the work you love.

What to do next

Doing too much at once is the best way to do none of them well. Trying to address all seven levers simultaneously will dilute your efforts and frustrate your team. Start by picking one or two and:

• Determine what metrics to measure and how
• Build an action plan intended to move that metric
• Track progress on a recurring basis
• Determine what's working, what's not, and iterate

While we of course recommend the right firm management software to enable all this, Excel and a weekly meeting is a reasonable starting point.

London Design understands all of this. Paris Design is beginning to. The gap between them is real – but it is also closeable, one operational lever at a time.

Matt Cooper is CEO of BQE Software, Inc. Connect with him on LinkedIn.