Financial Data Comparing Professional Services Contractors
(Editor’s Note. Most firms want to know how they compare with others. Unfortunately, most useful information is proprietary and almost all surveys we encounter are limited to generally useless financial data extracted from annual reports of publicly traded companies. We recently encountered an exception - a summary of a recent financial survey by Birnberg & Associates entitled "1998 Financial Performance Survey for Design Firms" in the September 1998 issue of A&E Business. The survey is unique because it surveys actual firms of varying sizes and offers very relevant data for government contractors. Though it surveys engineering and architectural firms, we find the results closely mirrors those of most professional service organizations. This is not surprising since most labor intensive businesses, particularly in professional services, incur similar costs. Unfortunately, surveys we are aware of that seek to compare manufacturing firms are not very meaningful since there is so much variation across such organizations.)
The Birnberg & Associates survey compares data over the last five years and presents a wide range of useful information: profit and loss statements, key financial ratios (e.g. current ratio, average collection periods), identification of important cost elements (e.g. health benefits, insurance, etc.), key measures of productivity, and other financial measures (e.g. work-in-process incurred but not billed, number of firms that charge interest on late accounts). The following table and explanations represents a selection of measurements for 1998 we chose that will provide interesting comparisons for our government contractor readers.
1. Net Profit on Total Revenue before Tax and Distribution. Total revenue includes revenue generated from in-house labor (representing 85-90% of total revenue) as well as consultants or subcontractors and billable reimburseable expenses. Before distribution is before bonuses and profit distribution – since these items vary widely, the survey compares results before and after such distribution.
2. Net Profit on Net Revenue Before Tax Distribution. Net revenue refers to revenue generated only by employees and may be more relevant for firms having unusually high outside consultants and/or large reimburseable expenses.
3. Contribution Rate (before distribution). The portion of each dollar of revenue after direct project costs (labor and expenses) available for overhead and profit.
4. Overhead Rate (before distribution). This is the percentage of total office overhead to direct labor. What the survey calls "office overhead" is really what many contractors call overhead and G&A including the portion of employees labor not direct charged to projects. Adjustments for unallowable costs are addressed below.
5. Overhead Rate (after distribution). Same as above but the overhead includes bonuses, employee profit sharing and other distributions but not distribution of profit.
6. Net Multiplier. This is the effective multiplier achieved on direct labor and is calculated by dividing net revenue by direct labor. Consultants and reimburseables are excluded in order to determine an actual multiplier achieved by the firm’s own efforts. The figure indicates participating firms received $2.96 for each $1.00 of direct labor spent.
7. Unallowable Overhead as a Percentage of Direct Labor. This consists of total overhead that contractors either voluntarily delete or government auditors disallow as a percentage of direct labor.
8. Unallowable Overhead as a Percent of Total Overhead Before and After Distributions. Looking at unallowable costs from a different vantage.
9. Allowable Overhead as a Percent of Direct Labor. This is actual overhead applied to direct labor after unallowables have been removed. If your firm uses multiple overhead rates, you would have to adjust them to measure oranges and oranges.
10. Net Revenue for Total Staff. This rough productivity index measures net revenue for each employee or part-time equivalent. It is calculated by dividing net revenue by average total staff, including principles and part time equivalents.
11. Net revenue Per Technical Staff. This is probably more relevant because it measures revenue by those directly responsible for generating it.
12. Chargeable Ratio. Measures the percent of total staff time charged to projects (whether billed or not) and is calculated by dividing total direct labor by total firm labor (direct labor plus indirect labor, vacation, sick leave and holidays actually paid).
(Editor’s Note. The survey can be obtained through our office by remitting $75 by check or VISA/MASTERCARD to GCA REPORT, PO Box 1235, Alamo, CA 94507. Feel free to call (925) 362-0712 or email us at
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To discuss your needs, contact Bill Lennett, Principal, at 1-925-362-0712 or email him at
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