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Architect's practice revenue up – along with costs

Words:
Aziz Mirza

The RIBA Business Benchmarking report shows a resilient profession but highlights rises in pay and expenditure

The profit squeeze on practices looks set to last into 2024.
The profit squeeze on practices looks set to last into 2024. Credit: coldsnowstorm | iStock

Architectural businesses are growing again. For the first time in four years, RIBA chartered practices report higher revenue. And that growth is spectacular; total revenue generated by all RIBA chartered practices is 17% higher than last year’s figure, shows the RIBA Benchmarking Report 2023 – Revenue and Profit, which has just been published. This turbo-boost marks a convincing return to the long-term trajectory of growing revenue.

Until 2019, practice revenue had been growing consistently year on year. Since then, the pandemic and its aftershocks saw practice revenue stagnate or fall. Rising building cost inflation, general consumer inflation and higher salary costs have had an impact. Latest figures show just how dramatically the profession has recovered from the pandemic – but also that inflation is proving to be a real negative. This means there had been no growth for four years. Finally, things have changed.

The positive picture is enhanced by the finding that average practice revenue has grown right across the profession, in every practice size group analysed in this survey. Small and medium sized practices have performed particularly well in the last 12 months, recording all-time average revenue highs, beating anything pre-pandemic. The average practice revenue in a one-person firm is 6% higher than it was in 2019; for a 10-20 person practice it is 17% higher; while practices with 3-5 people report average revenues that are 14% higher than in 2019. Average practice revenue is also higher compared with 2019 for the larger practices, although is lower than it was in 2021 for 50-100 and 100+ practices.

Much of this year’s growth comes from those 100+ practices. The large practices always account for a huge share of the profession’s revenue and so are worthy of attention. As a group, the 100+ practices’ share of a growing market has risen from 41% last year to 45% this.

And although large practices are growing strongly, they are still posting an average revenue that is lower than before the pandemic. Because so many large practices are in London, the capital’s share has increased to 70% this year. London is dominating the profession even more than usual.

Large practices have generated much of this year’s growth from projects based outside the UK. If that was a conscious strategy, it looks like it has succeeded. 100+ practices are responsible for 86% of international revenue and there has been an impressive 43% growth in international work. Much of this year’s rise in revenue has come from jobs in the European Union and North America. Unexpectedly, EU work this year has contributed more to practice revenue than projects from Asia or the Middle East. Perhaps international work is normalising after the shock of Brexit.

But expenditure is rising too

While this year’s figures show that practices of all sizes have successfully increased their revenue, the data also reveals that expenditure has increased at an even faster rate. This has inevitably squeezed profit margins. Where fees are linked to construction costs, building cost inflation has pushed up fees. More specifically, practices’ average hourly rates have not kept up with inflation.

Throughout the economy, salaries have risen to compensate for a skills shortage. This is borne out by the figures that show the collective sum spent by all practices on payroll and other staff costs has increased by 14%. At the same time, inflation has sky-rocketed, affecting a wide range of cost elements. The average (median) spend on PII, for example, has increased by 11% this year.

The squeeze on profits manifests itself in lower average earnings this year for partners/directors/sole principals. Their average earnings are down by 2%. This fall compares with inflation-matching rises among more junior salaried staff. Architectural employees, particularly younger or less experienced staff, appear to have secured the largest pay rises this year. Practices report a 6% rise in salaries paid to Part 1 assistants while those at Part 2 record an average pay rise of 7%.

Against this backdrop average pay for architects with five or more years’ experience has fallen by 6%. That is an unexpected result. We might speculate that it could indicate senior architects are being promoted to associates – with a consequential pay rise for the individual but a fall in the average for those remaining immediately below associate level. Average pay for associates has increased by 3% during the year.

Allied to salaries is productivity and staff utilisation, and this year a new benchmark in the survey begins to examine this aspect. The new business benchmark measures how much staff time is spent on billable work. Over 70% of the hours of architects, technologists and assistants are spent on billable work. A slightly smaller proportion of associates’ time, 64%, is spent on billable work while partners/directors/sole principals spend an average of less than half (46%) their time on work billed to clients. In 100+ practices, the average proportion of billable time is higher, at over 80% for architects, and assistants – but at the same time these practices report a slightly lower proportion of partners/directors’ time. As the wider argument about economic productivity continues, against the narrative of poor productivity growth generally in the UK since before the financial crisis, it will be interesting to see how this benchmark changes over time.

Looking ahead

So what about next year? The survey asked RIBA chartered practices how they thought their own practice revenue might change in the next 12 months. Their encouraging prediction is that revenue will grow by 6%. Within that figure, most expect rising revenues and just one in four thinks revenues will fall.

But here’s the catch – expenditure is predicted to rise by even more than revenue, by 7%. This year’s squeeze on profits looks set to continue into next year. The mismatch between rising revenue and rising expenditure is evident in all but the very smallest practice size groups. Payroll costs are the largest factor in practice expenditure. We do not know by how much practices expect salaries to increase but respondents say that staff numbers are expected to rise by 5% so the payroll bill may rise by a similar amount even before any salary increases.

Respondents to the benchmarking survey suggest they expect to raise their hourly rates by 5% in the coming year. Again, that figure seems to be less than the predicted rise in expenditure and is also lower than the average revenue growth – implying greater productivity or larger workloads.

Assuming practices achieve what is predicted, we’ve calculated that if revenue were to rise by the average 6% predicted by practices, the total revenue for all RIBA chartered practices in 2024 would be £3.8 billion. That would be a new record and a testament to architects’ business skills, resilience and adaptability. 

The full 2023 report, with detailed commentary, data tables and visualisations, is exclusively available to RIBA chartered practices. The Survey and the report have been refreshed for 2023, following member consultation. As well as the full report, members/ practices can read summary reports for different practice sizes and explore data visualisations on the RIBA Benchmarking website/pages on architecture.com. Our thanks to those who completed the survey on behalf of their practice.

 

TOWARDS A LEVEL PLAYING FIELD

Pay gap  

This year has seen a small narrowing of the pay gap between men and women from last year and a slightly greater reduction in the ethnicity pay gap. While welcome, it follows significant widening over the last few years. We will need to see this improvement increased in scale and pace if we’re to be confident that that we’re advancing equity in architecture.  

From the data we can see two related but distinct areas which feed into the overall pay gap. First, there is a structural imbalance in gender and ethnicity representation between the highest and lowest paid staff. People who are male and white are more likely to be among higher paid staff, and less likely to be found in the lowest paid roles. Secondly, white staff and men are typically paid more than their peers, even when they are working in similar roles. For example, women are less likely to be in senior roles such as partner or director, and even when they are, they are paid less than their male peers, on average.  

EDI interventions 

Headline pay gaps indicate systemic inequality not only in employment, but also in education and society. Addressing them requires targeted interventions.  

The RIBA collects data on a range of staff benefits, some of which are likely to help improve equity and inclusion. While this is the first year we have collected data on ‘family leave beyond the statutory minimum’, it is already clear it needs work, recognising the disproportionate impact that childcare responsibilities have on women and their careers. And, as has been shown by the Fawcett Society, ‘it is Black and minoritised women and lone parents who are at the sharpest end of restrictive stereotypes’ of working mothers. 

Encouragingly, we continue to see growth in the uptake of EDI policies showing the willingness of practices to engage with the topic. It is essential this translates into sustained action.  

Data 

While the data set used to create the RIBA Benchmarking report is large, the representation of people from marginalised or minoritised groups is often small. This presents us with challenges of how we can report the data meaningfully and with confidence. This is particularly apparent in the data we have on ethnicity. In reporting on ethnicity pay gaps we have used two classifications: Asian/Asian British, Black/African/Caribbean/Black British, mixed/multiple and other ethnic groups; and White. We recognise that there will be huge variations between groups within the classifications we have used and that by using them we are losing an opportunity to identify further areas of inequity. However, this reflects the data we hold. Our approach to collecting and reporting data will improve over time, and we encourage more practices to share their detailed pay date through the Benchmarking Service, but it is important that we publish this data even with its limitations. 

Robbie Turner is director of inclusion and diversity at the RIBA

For guidance on how your practice can address equity and pay gaps download the RIBA Close the Gap Toolkit on architecture.com

 

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