In its Architecture Forensic Report, the Creative Industries Innovation Centre says profit margins of many small to medium sized practices are being squeezed amid growing competition and a commoditisation of architectural services. The Centre adds, however, that opportunities exist to expand overseas and specialise in niche areas and that significant potential for growth remained in the domestic market.
“When the global economy slumps, so does demand for architectural services,” the report says. “Many architectural firms have only just begun to feel the pinch, protected by government stimulus packages in the wake of the Global Financial Crisis.”
“Small- to medium-sized architectural businesses continue to be sandwiched by lean and digitally literate start-ups and by large, financially stronger, interdisciplinary firms, squeezing margins from both sides. Architectural services are further being commoditised as building and construction firms encroach in areas such as project management.”
In its report, the Centre found that:
- Architecture firms were involved in a ‘race to the bottom’ as margins were being squeezed from below by a new breed of start-ups with low overheads and from above by large multi-service one-stop-shops such as engineering and construction firms
- Principals were often too heavily involved in ‘doing the business’ rather than running it, leading to an erosion of margins, poor cash flow and a weak sales and marketing strategy
- Work in documentation and contract management was increasingly being ‘offshored’ to cheap overseas companies
- Many tasks which were once performed manually by architects associated with things such as administration, documentation and contracts were increasingly being performed by new technologies
- Small- to medium-sized firms with fewer employees were less exposed to progressive ideas and emerging skill sets and many suffered from insufficient staff development
- An over-reliance on the part of many firms on a particular design mantra or signature style proved to be a weakness when styles or client preferences shifted or when the market was tight
- Margins were further being squeezed by significant volumes of time being spent on unpaid design concepts via design tenders or competitions and the practice of rarely billing for subsequent variations to overall designs
It said firms needed to better understand the future, generate a compelling sales proposition, better understand cost structures, job costing and credit controls, and replicate the interdisciplinary nature of large firms by creating a network of specialist consultants and subcontractors.
It also encourages practices to look for niche strategies or opportunities for overseas work, with possible examples of the former including heritage and conservation work, sustainable buildings, hospitality, aged care, interior design, surveying and mapping and urban planning and possible destinations associated with the latter including China, Vietnam, Singapore, the Philippines and India.
“Architecture principals need to free themselves from the day-to-day running of the business and allocate time and resources to longer-term thinking, trend forecasting and action,” the report concludes.
“Many architects understand their direct competitors, but not their indirect competitors such as builders, draftsmen and construction firms. It is important to understand the total competitive landscape to better differentiate your business from companies that compete aggressively on cost.”
According to the report, a snapshot of the current state of the architectural services business landscape in Australia is as follows:
- As of 2011, there were 14,006 registered architectural businesses in this sector
- The majority of firms are small, with 70 per cent turning over less than $200,000 and 98 per cent employing 20 or fewer staff
- The average architectural firm in Australia has been in business for 17.5 years and has annual turnover of $1.76 million, employs 10 staff and makes a profit before interest and tax of around 10 per cent. These figures are being skewed toward the upper side by a relatively small number of larger firms
- The average weekly earnings before tax of ‘specialist creatives’ working within architecture was $1,107; those of architecture professionals embedded within non-creative industries was $1,234.