A S H R A E J O U R N A L a s h r a e . o r g F E B R U A R Y 2 0 1 41 2

The number one asset in any professional services

firm is the staff—they not only bring in the work but

they must also do that work in a way that allows a firm

to prosper. In the past, compensation analysis may have

been more focused on cutting costs, but in today’s econ-

omy, compensation is a strategic tool used to rebuild and

position a firm for growth. Understanding the current

financial position of the A/E industry as well as using

benchmarking data can help answer both the engineer’s

and the employer’s questions.

Total compensation, which is defined here as base

pay and bonus, has been under substantial pressure

in the last few years—expenses continued to increase

yet net revenues were not increasing at the same rate,

resulting in lower profitability. Beginning in 2011 and

continuing through 2013, net revenues are finally ris-

ing faster than expenses; overall profit has improved

but is still slightly below the 2009 high of 11.7%

(median) and well below 2007/2008 highs of just over

15% (median).

Because base pay is an expense and is part of the cost

of doing business, many firms adopt a philosophy to

pay a lower base pay and make up the difference with

bonuses. This approach allows firms to weather vari-

able market conditions and provides a small cushion

of protection when the economy goes into recession.

However, this approach demands that firms drive

profit levels that not only fund retained earnings and

pay shareholders a return on their investment, but also

award bonuses that ensure that total compensation is in

step with the market.

The financial performance of a firm and compensa-

tion are an integrated system and the more successful

a firm is the more options they have to attract and

retain key talent. So what is the financial position of

firms in the A/E industry today and have they fully

recovered from the recent downturn? Have compen-

sation levels recovered as well after several years of

cuts, freezes and minimal bonuses? Have billing rates

been increasing to allow firms to recover costs? Many

firms have been in survival mode and not all are on

the road to recovery but we can learn more from what

the data is telling us.

Overall Firm Performance Impacts Compensation OptionsFirms in the A/E industry continue to struggle in this

economy – fact or fiction? Reviewing several key finan-

cial metrics can provide some insight:

Direct labor costs are the raw labor costs (without labor

burden or fringe benefits) allocated to project-related work.

A firm’s compensation strategy and philosophy clearly communicate firm leaders’ expectations and reward systems to existing and potential new hires. Engineers want to know how much pay they should be getting and employ-ers want to know how much they should be paying. As the industry continues to recover from the recent recession, compensation strategies to retain and attract key staff are crucial.

Still on the Road to Recovery?

Understanding Salaries In the A/E Industry BY KATE ALLEN, P.E.

SPECIAL REPORT

ABOUT THE AUTHOR Kate Allen, P.E., is director of A/E/C Industry Surveys for PSMJ Resources, Inc.

This article was published in ASHRAE Journal, February 2014. Copyright 2014 ASHRAE. Posted at www.ashrae.org. This article may not be copied and/or distributed electronically or in paper form without permission of ASHRAE. For more information about ASHRAE Journal, visit www.ashrae.org.

F E B R U A R Y 2 0 1 4 a s h r a e . o r g A S H R A E J O U R N A L 1 3

SPECIAL REPORT

Net Revenues are the revenues generated by in-house

labor.

Overhead includes indirect labor or raw labor costs

allocated to non-project related work; labor burden,

which includes group insurance, payroll taxes, paid

time off, and mandatory retirement plan contributions;

and non-labor costs required to run the firm, such as,

rent, training and development costs, etc.

Profit is the remaining earnings after overhead and

direct labor expenses are paid. Profit will be defined

throughout this article as profit before bonus and taxes,

due to the vast variation in the allocation of year-end

profits from firm to firm.

Direct labor costs, direct labor hours (DLH), and net

revenues are all project-related measures commonly

used as the basis of key financial metrics.

Figure 1 indicates the variation in direct labor,

overhead costs, and profit as a function of direct

labor costs over the past 12 years. It shows that

reasonable profits were being achieved until 2003,

when the impact of an economic downturn hit the

industry. As the design industry recovered between

2004 and 2007, firms were able to raise prices, hold

the level of overhead costs steady, and generate

higher profits.

Compensation TrendsDuring the recent recession, many firms went into

survival mode and some had to freeze salaries while

others instituted firm-wide salary reductions. The reces-

sion of 2006 to 2009 resulted in record job losses and

high unemployment across most industry segments. In

2009, the stimulus plan provided some opportunities

for public infrastructure projects, and in 2010 we began

to see a slow recovery in the private sector as well. Long-

term capital investment coupled with construction’s

FIGURE 1 Direct labor benchmark trends.

$120

$100

$80

$60

$40

$20

$02001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Profit

Overhead

Direct Labor

Net Revenue Per DLH

Direct Labor Costs Per DLH

Breakeven Costs

TABLE 1 Comparison of key financial indicators, 2010 – 2013

(MEDIANS) 2013 2012 2011 2010

Net Revenues Per Direct Labor Hour $101.66 $100.32 $94.69 $86.63

Direct Labor Costs Per Direct Labor Hour $31.90 $31.31 $30.99 $30.99

Total Costs Per Direct Labor Hour (Overhead +

Direct Labor) $86.50 $88.73 $86.06 $87.78

Operating Profit (Net Revenues) 11.42% 9.31% 9.86% 9.49%

FIGURE 2 Operating profits as a percentage of net revenues.

16%14%12%10%8%6%4%2%0%

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Unfortunately, as the economic climate

shifted to severe contraction and recession,

2010’s survey results indicated that prof-

its were being squeezed again as overhead

costs increased faster than net revenues

over the previous three years. This year’s

results indicate higher profits, though not

all firms are enjoying these positive results.

Whether these higher profit levels can be

sustained and remain for a comparable

period of time will be the subject of future

surveys.

A detailed comparison of these key financial indicators

for 2010 through 2013 is provided in Table 1.

So while Table 1 indicates that the financial position of

firms that practice in the A/E industry is improving, let’s

take a closer look at profit. Profit is commonly expressed

in terms of a percentage of net revenues which reflects

invoiced income for a firm (less reimbursable expenses

and sub-consultants). The industry is still struggling

to earn a reasonable profit, but it’s headed in the right

direction (Figure 2).

A S H R A E J O U R N A L a s h r a e . o r g F E B R U A R Y 2 0 1 41 4

SPECIAL REPORT

TABLE 2 Historical total compensation results (median).

2013 2012 2011 2010 2009

CHAIRMAN OF THE BOARD $215,000 $212,066 $233,589 $250,000 $240,144

CH IEF EXECUTIVE OFFICER 265,342 233,000 233,216 247,500 250,000

EXECUTIVE V ICE PRESIDENT 203,913 221,933 224,133 246,500 231,061

SEN IOR V ICE PRESIDENT 198,674 200,000 178,092 210,137 200,500

OTHER PRINCIPALS 145,000 143,415 150,000 146,641 149,327

DIRECTOR OF FINANCE 175,000 184,538 175,905 170,226 171,290

CONTROLLER 100,807 101,109 96,000 97,000 100,500

BUSINESS MANAGER 78,972 78,630 82,994 95,000 77,845

DIRECTOR OF ADMIN ISTRATION 140,246 128,750 80,528 123,668 85,280

DIRECTOR OF OPERATIONS 146,000 137,510 149,740 154,686 150,000

DIRECTOR OF QUALITY CONTROL 143,364 128,750 156,826 182,000 178,500

DIRECTOR OF BUSINESS DEV. 135,229 120,800 108,768 119,724 130,523

DIRECTOR OF HUMAN RESOURCES 102,231 100,000 91,655 92,867 99,309

DIRECTOR OF COMPUTER OPS. 104,589 97,000 96,000 100,000 105,500

BRANCH OFFICE MANAGER 125,521 125,377 118,000 128,608 130,742

DEPARTMENT HEAD 120,000 120,560 112,677 114,000 115,752

SEN IOR PROJECT MANAGER 102,000 98,315 98,000 95,554 97,500

JUN IOR PROJECT MANAGER 78,285 77,000 76,000 75,000 73,883

longer lead times tends to buffer the A/E design

industry from economic downturns. However,

the recent recession lasted longer and proved

more severe than the past two downturns. The

goal for many firms was to keep as many staff

on board as possible while also making sure the

firm could ride out the recession.

Annually, for the past 31 years, PSMJ

Resources, Inc. has conducted a management

compensation survey that solicits data from

both engineering and architectural firms for 18

management positions, from chairman of the

board to junior project manager. Historical Total

Compensation is presented in Table 2 for the

past five years. It’s important to note that com-

pensation rates generally increase with firm

size, so use the information in the table with

caution. The table is presented to demonstrate

trends only, and for more detailed information

a full compensation study would be required.

Total compensation generally reached a five-

year high in the 2009/2010 time period and a

five-year low in the 2011/2012 time period, for

most positions. We see mixed results for 2013,

for example, total compensation for CEOs,

senior project managers, and junior project

managers exceeded 2009 results, but many

other positions have not, such as other princi-

pals and director of operations.

Billing Rate TrendsCompensation is directly related to hourly

billing rates. The billing rates are intended to

recover all design firm costs (including direct

labor and overhead) and provide for profit.

Reimbursable expenses are recovered from the

client directly and not included in these billing

rates. If compensation rates exceed what can be

recovered in billing rates, then profits may be

negatively impacted.

Many are familiar with the 3.0 target direct

labor multiplier which held steady for decades,

meaning that most firms at the end of the day

are targeting fees that are triple their direct

FIGURE 3 Target vs. achieved direct labor multiplier (net revenues deficit).

3.20

3.10

3.00

2.90

2.80

2.70

2.60

2.501978 1990 1995 2000 2005 2010 20131985

Net Revenue Deficit

Target Direct Labor Multiplier

Achieved Direct Labor Multiplier

or exceeding their target multiplier, which results in

reduced net revenues (net revenues deficit) and an over-

all reduction in profit. In 2013 the results are beginning

to see improved performance and the market is either

labor costs in establishing their billing rates. The target

multiplier began to rise in 2005 and has remained at or

near 3.10 since 2007. However, as shown in Figure 3 many

firms’ achieved direct labor multiplier is not meeting

A S H R A E J O U R N A L a s h r a e . o r g F E B R U A R Y 2 0 1 41 6

SPECIAL REPORT

FIGURE 4 Historical management staff hourly billing rates.

$200$180$160$140$120$100$80$60$40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Principal Associate Project Manager

$160$140$120$100$80$60$40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Project Engineer Senior Engineer Engineer .. Junior Engineer

FIGURE 5 Historical engineering staff hourly billing rates.

allowing firms to charge fees that cover their costs or

project management is improving and more projects are

being done within budget. Whether these higher multi-

plier levels can be sustained will be the subject of future

surveys.

Annually, for the past 28 years, PSMJ Resources,

Inc. has conducted a fees and pricing survey that

solicits data from both engineering and architec-

tural firms for 17 different positions. See Table 3,

Figure 4, and Figure 5 for the historical trends for

TABLE 3 Historical trends median hourly billing rates.

2013 2012 2011 2010 2009

PRINCIPAL $185 $177 $178 $183 $175

ASSOCIATE 149 146 145 150 152

PROJECT MANAGER 140 133 130 131 132

PROJECT ENG INEER 125 124 120 120 120

SEN IOR ENG INEER 140 135 125 125 130

ENG INEER 108 105 99 101 100

JUN IOR ENG INEER 90 90 90 90 90billing rates for common engineering

positions. As expected, billing rates hit

a five-year high in the 2009/2010 time

period and a five-year low for most

positions in the 2011/2012 time period.

Nearly every position reports that billing

rates increased between 2012 and 2013,

which reinforces the thought that the

A/E industry is recovering. In fact billing

rates for all engineering positions have

exceeded their 2009/2010 time period

high.

ConclusionQuality engineering talent are becom-

ing harder to find each passing year; the

number of graduates is not keeping pace

with the number of retirements or peo-

ple choosing to leave the industry. This

situation was exacerbated by the recent

downturn when many of those that were

laid-off left the A/E industry for other

career options. Engineering firms are

going to continue to be challenged to do

more with less yet still attract and retain

quality talent, and a firm’s compensation

options are dramatically expanded with strong

profitability.

The industry is improving but has not fully recovered

from the recent recession. Profit levels are still below

all-time highs, compensation rates for many positions

have recovered to 2009 rates, and target multipliers

are on the rise, which results in higher billing rates.

However, if the project work can’t be done within that

rate, then profit is compromised as well as the overall

financial health of a firm (Figure 3). Small improve-

ments in the achieved direct labor multiplier can yield

significant improvements in profitability.

Understanding the financial position of the indus-

try as well as key data trends can help both the engi-

neer and the employer to better understand their

compensation options. Firms that are growing and

prospering are in the best position to move away

from industry trends and develop compensation

strategies that allow them to differentiate them-

selves from their peers to attract and retain high

quality engineers.

Note: If you are interested in participating in PSMJ’s 2014 sur-

veys you can find out more about the benefits of participation at:

www.psmj.com/surveys-research/participation.cfm.