We need to discuss a gross subject.
Gross Fees, to be precise. Gross Revenues, if you prefer.
As in the study of gross anatomy in medical school, we can learn a lot through dissection.
So, let’s dissect our subject.
If you’ve followed my recent thread of posts describing a simple approach to forecasting profitability, then you know that I stress a focus on Net Fees rather than Gross. This simple forecasting approach will not succeed if the fees being forecasted are something other than pure Net Fees.
For further background, you may wish to read the paper on Net Fees on the Reference Shelf.
So, Who Cares?
Only two groups come to mind who are eager to see our Gross Fee volume– the professional liability insurance carriers, and the business journals who like to create lists of firms.
The former sees our Gross Fee volume as an indication of their total risk in insuring us, and this makes sense, as they must absorb the risk created by the entire project team that contracts through us, consultants and all. The latter must believe that Gross Fees are a reliable indicator of the size of a firm. Well, yes and no, but that’s for another day.
For those of us with firms whose revenues are primarily derived from architectural or design fees, Gross Fees are just not that important.
Some practitioners may have a different point of view, based on the nature of their practice and their sources of revenue. And, certainly, for multi-disciplinary firms, Gross Fees become much more important.
Under the Knife
We do need to look very closely at what constitutes our Gross Fees, however, and focus on that portion that we can actually manage and control.
This strongly suggests that we must cut away the fees paid to consultants and the reimbursable expenses that get reimbursed. Once we’ve agreed to a consultant’s fee proposal for a particular project, we’re done worrying about that money. It’s really none of our business, unless that consultant’s performance is in question.
One Last Look
So, once we’ve reported our Gross Fees to our insurance carrier, completed the business journal surveys, and established what our Net Fee portion is, is there anything more to be learned from our Gross Fees?
Perhaps one more thing.
We can look at whether the Net-to-Gross ratio makes sense for our practice. If it seems low, it might suggest that we are carrying too many consultant fees in proportion to ours. We may want to strive for higher fees, as well as mark up the consultant fees to reflect the risk we are taking for their work.
Take a look.