Practice Management: The Business of Architecture
The business model
Practices operate as sole proprietorships, general partnerships, LLPs, LLCs, or professional corporations. Entity choice affects personal liability and taxation, but never substitutes for insurance. Professional liability (errors and omissions) responds to negligent design; general liability responds to bodily injury and property damage; workers' compensation is statutory. Know which policy answers which claim.
Financial metrics you must be able to compute
- Direct labor = raw salaries plus payroll burden (taxes and benefits; typically 25–40%).
- Overhead rate = overhead ÷ direct labor.
- Direct labor multiplier = (direct labor + overhead) ÷ direct labor.
- Net multiplier = (direct labor + overhead + profit) ÷ direct labor.
- Utilization = billable hours ÷ total hours worked.
Fees and contracts
Fee structures include hourly or not-to-exceed, stipulated sum, percentage of construction cost (which normally declines as construction value rises), and cost plus fixed fee. Distinguish basic services from additional services and reimbursables. AIA B101 is the owner-architect agreement; scope, schedule, and compensation are all negotiable.
Traps
Questions conflate overhead with profit; assume a percentage fee is fixed regardless of scope; assume errors-and-omissions coverage pays for a missed schedule or a lost fee; and confuse the standard of care (what a reasonable architect would do) with a warranty of perfection. A contract can be formed orally or by conduct, and licensure is jurisdiction-specific.
Worked example
A $40/hour employee with a 30% payroll burden costs $52/hour in direct labor. At 150% overhead the direct labor multiplier is 2.5, so the break-even billing rate is $130/hour. Adding 15% profit gives a net multiplier of 2.875 and a target rate near $149.50/hour.