Practice Management (PcM) Flashcards
Business Organization
the legal structure of an architectural firm
Types:
Sole Proprietorship
General Partnership / Limited Partnership
Corporation (C vs. S)
Limited Liability Company / Limited Liability Partnership
Joint Venture
Office Organization
the way the firm organizes to complete its work
work organization
support staff
regulations governing architectural practice
Work Organization
Departmental Organization - also called horizontal or flat organization
Studio Organization - also called vertical or tall organization:
smaller firms can work more informally and divide work as needed
Outsourcing:
contracting with another company to do some of the work needed for a project (ex: renderings)
Support Staff:
employees other than the professional staff and senior management (admins, IT, etc.)
Departmental Organization
also called horizontal or flat organization
staff is organized into departments, each specializing in a different function (marketing, design, etc.)
very efficient with a standardized process of moving a project through different departments, makes use of many specialists, and
creates economies of scale
can also make a business inflexible/resistant to innovation and change, tough to communicate, lack of shared knowledge
Studio Organization
also called vertical or tall organization
organized around studios with each completing a project start to finish without the need for outside assistance
encourages communication among the team
can be combined with other departments such as those that provide specification writing
Ethical Standards
the accepted principles of correct professional conduct
Human Resources
the practices and legal responsibilities pertaining to employing others
Business Development
the use of marketing and public relations to increase business
Sole Proprietorship
Business is owned by an individual.
Advantages: ease of setup, total management control by the owner, and possible tax advantages to the owner because business
expenses and losses may be deducted from the gross income of the business
Disadvantages: owner is personally liable for the company’s debts and losses (owner’s personal income, personal property, and
other assets can be seized to pay any judgments in a lawsuit), raising capital and establishing credit depends entirely on the
owner’s personal credit rating and assets
When the owner stops practicing, the firm ceases to exist.
Partnerships:
General vs. Limited
General Partnership:
Two or more people share in the management, profits, and risks of the business.
Income is shared among these partners and is reported on personal tax forms.
Each partner is personally liable for business debts and liabilities.
Limited Partnership:
At least one general partner and at least one limited partner.
General partners invest in the business, manage it, and are financially responsible for it.
Limited partners are investors - receive a share of profits, but have no “general” roles like listed above. They are also only liable to
the extent of their investment.
Disadvantages: all the partners are responsible and liable for the actions of the others, personal assets are vulnerable (like w/ sole
proprietorship), income is taxed at individual rates, and if one partner withdraws then the business is usually dissolved
(C) Corporation
an association of individuals that exists as a legal entity apart from its members
can be created by formal articles of incorporation (drawn up by an attorney and then properly filed w/ the state)
shareholders: owners of the corporation in proportion to the # of shares they own; they elect directors; only financially responsible
for the amount of money he or she invests
directors: must act in the best interests of the shareholders with broad policy decisions; they elect officers
officers: carry out the day-to-day management of the corporation
Advantages: easy to raise capital through sales of stock in corporation, taxed at lower rates than individuals, reduced liability
Disadvantages: corporation is taxed on profits and shareholders are taxed on dividends (taxed twice), initial cost to start the
business, continuing paperwork and formal requirements to maintain it
(S) Corporation
similar to a C Corporation, but allocates its income and losses directly to shareholders in proportion to their holdings. Shareholders
then report this on their own tax returns and are taxed at individual rates (avoiding the tax on the corporation)
offers all the advantages of a C Corporation
can only exist as a domestic company with no more than 100 shareholders (along with other restrictions)
Professional Corporation
similar to other corporations, but liability for malpractice is usually limited to the person responsible for the act
Limited Liability Companies & Limited Liability Partnerships
combines the advantages of a partnership or sole proprietorship with the limited liability of a corporation
formed like a partnership with investors (members) and managers; it is possible for a non-member to be a manager
Advantages: liability is limited to a member’s investment with no personal liability, the business is not taxed, easier to setup and
operate than a corporation
Disadvantages: members must report profits and losses on personal tax returns, members are “self-employed” and pay taxes to
Social Security and Medicare
Joint Venture
a temporary association of two or more persons or firms for the purpose of completing a specific project or goal that is typically
dissolved when project or goal is complete/reached
based on a formal, written agreement describing the duties and responsibilities of each party involved, how profits will be divided,
and how the work will be completed
a “teaming agreement” or “memorandum of understanding” is developed which defines roles, responsibilities, and contractual
relationships that will be established if the joint venture is formed. The teaming agreement is not a formal business organization,
but is used to market the teams and forms the basis of the joint venture.
treated like a partnership (not a legal entity in itself separate from members and cannot be sued like a corporation)
profits are taxed according to the state in which the joint venture operates
Standard of Care
a legal concept, defined as the level of skill and diligence that a reasonably prudent architect would exercise in the same
community, in the same time frame (at the time the project is designed or built), and given the same or similar facts and
circumstances (budget, scheduling, complexity of the project, etc.)
Business License
allows the business to practice and usually serves as the basis for taxation
corporations have tax identification numbers
a certificate of authorizations (COA) is sometimes required in order to offer services to the public
Taxes
all businesses are required to pay taxes
businesses with employees must:
withhold taxes for each employee to be forwarded to the IRS
fill out a IRS Form SS-4 - Application for Employer Identification Number (EIN)
collect a copy of a Form W-4 - Employee’s Withholding Allowance Certificate from each employee
supply employees with Form W-2 - Wage and Tax Statement
for sole proprietorships and some partnerships:
federal and state income tax must be filed as estimated taxes every quarter
must pay self-employment tax to cover Social Security and Medicare taxes
some states apply a use tax on goods purchased from out of state and architect have to file a use tax certificate and pay what
amounts to a sales tax
some states charge a personal property tax on furniture and equipment used by the business
some cities have additional income, employment, occupational privilege, and use taxes
property taxes (if firm owns it’s own property)
Professional Licensing and Regulation
architects must have a license to practice and renew it annually or biannually
a min. # of continuing educational credits must be completed to maintain their license
to obtain license, a candidate must pass the Architect Registration Examination (ARE) given by the National Council of Architectural
Registration Boards (NCARB); states may require individual exams as well; a candidate must also have a bachelor or masters
degree from university accredited by the National Architectural Accrediting Board (NAAB); most states also require completion of
the Architectural Experience Program (AXP)
architects can apply to be licensed in other states by applying for a reciprocal licensure and submitting documentation of
education, experience, and exam status to the state’s licensing board; the architect must meet that state’s continuing education
requirements and take any additional tests that state requires
Ethical Standards
architect must abide by all federal, state, provincial, and local laws as well as any state laws governing the practice of architecture
main source of ethical standards for architects is from the American Institute of Architects (AIA) “Code of Ethics & Professional
Conduct” which provides min. standards of conduct, procedures for enforcement, and sanctions against AIA members who
violate the standards
AIA members who violate the AIA code can receive: non-public admonishment, censure (including a published description of the
violation in the AIA periodical), suspension of membership, or termination of membership
the AIA Code of Ethics is in three tiers - canons (broad principles of conduct), ethical standards (specific goas toward which
members should aspire), and rules of conduct (specific, mandatory statements that members must follow)
AIA Canon I, General Obligations
what members should do
maintain and improve their knowledge and skill
seek to raise architectural standards in aesthetics, education, research, training, and practice
respect and seek to improve society and the environment
exercise learned professional judgment
uphold human rights
not discriminate on the basis of race, religion, national origin, age, disability or sexual orientation
AIA Canon II, Obligations to the Public
what members should do
uphold the law
never try to influence a public official with a payment
never accept payments intended to influence their judgment
never help a client with anything fraudulent of illegal
promote and serve the public interest
render pro bono services
be involved in civic activities
strive to improve public appreciation of architecture
AIA Canon III, Obligations to the Client
what members should do
serve their clients competently and professionally
exercise unbiased judgment
not accept projects beyond their professional capacity
avoid conflicts of interest
be truthful in professional communications
keep clients informed about their projects
maintain client confidentiality
AIA Canon IV, Obligations to the Profession
what members should do
uphold the integrity and dignity of the profession
practice with honesty and fairness
not sign and seal documents for which they do not have responsible control
not knowingly make false statements
be honest about their qualifications and about the work they claim credit for
AIA Canon V, Obligations to Colleagues
what members should do
respect the rights of their colleagues and acknowledge their professional contributions
provide associates and employees with suitable working conditions and fair compensation
nurture fellow professionals through their education, internships, and careers
give credit to others for their professional work
AIA Canon VI, Obligations to the Environment
what members should do
be environmentally responsible
promote sustainable design in their professional work
advocate sustainable buildings and site design
use sustainable practices within their firms and encourage clients to do the same
Human Resources
known as “human resource management” or “personnel management”
involves the entire range of hiring, compensating, managing and terminating employees, along with any legal responsibilities
Compensation (examples of)
flextime flexible benefit packages office-sponsored events floating holidays sabbaticals flexible days off compensation alternatives (educational reimbursements, paid travel for seminars, etc.) annual performance bonuses profit sharing wellness (gym memberships) company cars community involvement (time off for volunteering) professional dues (AIA cost, payment for ARE exams, etc.) office amenities continuing education family and medical leave
National Labor Relations Act (Wagner Act)
allows private sector employees to organize into trade unions and protects union employees from unfair practices by employers
Equal Pay Act
requires equal pay for employees who have the same work duties, responsibilities, and experience
Employee Eligibility Verification
requires employers to verify the employee’s right to work in the US by maintaining an employee’s I-9 form for at least 3 years as well as for 1 year after termination
Wages and Fair Labor Standards Act (FLSA)
establishes minimum wage, overtime, pay, recordkeeping, and child labor standards in both the private sector and in government employment
Occupational Safety and Health Act of 1970 (OSHA)
requires employers to provide a safe work environment (first aid kits, posted material safety data sheets, fire extinguishers, etc.)
Health Insurance Portability and Accountability Act of 1996 (HIPAA)
protects the privacy of individually identifiable health information
Employee Retirement Income Security Act (ERISA)
sets minimum standards for pension plans in the private sector for those employees who have a pension plan program
Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA)
- over 20 employees
requires employers to continue group medical coverage if employment is terminated, working hours are reduced, employment is changes, or in the event of death, divorce, or other significant life events
Civil Rights Act of 1991
- over 15 employees
prohibits discrimination on the basis of sex, race, color, religion, or national origin
Age Discrimination in Employment Act of 1967 (ADEA)
- over 15 employees
prohibits age discrimination in employment for persons age 40 or over, including hiring, firing, segregation in the workplace, and reducing wages or salary
Family and Medical Leave Act of 1993 (FMLA)
- over 50 employees
requires that companies give an employee up to 12 weeks of unpaid leave for child, spousal, or parental care, without initiating retribution or jeopardizing the employee’s job
also applies to an employee with a serious health condition
firms that do any work for the federal or state government must comply with additional regulations
general ledger accounting
day-to-day operations
banking
taxes
auditing
provides firm-wide statements about the overall financial status of the business
project cost accounting
revenue
expenses
profit by individual projects
can help managers decide how to allocate resources, manage projects, and develop accurate proposals for new work
accounts payable
amounts owed to the suppliers of goods and services that have not yet been paid
accounts receivable
money that others owe to the business through invoices for services
assets
any type of tangible of intangible resource that can be measured in monetary terms, including current assets, fixed assets, and other assets
chart of accounts
a list of the various accounts a business uses to keep track of money, along with corresponding account numbers used for data processing
chart of accounts
a list of the various accounts a business uses to keep track of money, along with corresponding account numbers used for data processing
current assets
resources of a business that are converted into cash within one year
direct labor
all labor of technical staff, principals, and support staff that is directly chargeable to projects
direct personnel expense
the expense of employee salaries plus the cost of mandatory and discretionary expenses and benefits such as payroll taxes jand health insurance
discretionary distribution
voluntary distribution of profits to owners and nonowners, such as performance bonuses, profit sharing, and incentive compensation
fixed assets
resources that the firm uses and retains for a long period of time, such as equipment and property
gross revenue
all the revenue generated by a business during a stated period of time
indirect labor
all labor not charged to a specific project or revenue-producing account, such as administration, general office time, and marketing
liabilities
claims by people outside the business and claims by the owners of the business against the total assets of the business
net operating revenue (net revenue)
the money that remains from billing after deducting fees and expenses, reimbursable expenses, and non-reimbursable project-related expenses
other assets
miscellaneous resources such as securities and copyrights
overhead
expenses incurred to keep a business operating whether or not any revenue is being generated, such as rent, software leases, and fees for power and telephone service
cash accounting
revenue and expenses are recognized at the time the business receives the cash or pays a bill
better at tracking actual cash flow
simple and often used for single-person or small businesses
revenue and expenses are grouped into individual accounts for the purposes of auditing, review, tax preparation, management, and analysis
accrual accounting
revenue and expenses are recognized at the time they are earned or incurred, whether or not cash changes hands
gives a better picture of a business’ long-term financial status and provides information that is important for active financial management
businesses above a certain size or that maintain inventory are required by the IRS to use accrual accounting
revenue and expenses are grouped into individual accounts for the purposes of auditing, review, tax preparation, management, and analysis
uses double-entry bookkeeping
modified accrual basis (accounting method)
a slight variation of the accrual method
records fee revenue, expenses billed to the client, and invoices to the firm by outside consultants
it does not include the amounts of fees that have been earned but not yet billed to the client
double-entry bookkeeping
all transactions are listed chronologically in a journal, then posted to a ledger, where transactions are grouped into individual accounts
balance sheet (type of accounting report)
summarizes all assets and liabilities and shows the financial position of a business
all the assets listed must exactly equal all the liabilities listed
net worth
= the total assets - the total liabilities
owner’s equity
the money invested in a business by the owners or stockholders
the total assets = the total liabilities + the net worth (or) owner’s equity
profit and loss statement (or income statement)
shows actual inflows and outflows of cash (money, checks, etc.) or cash equivalents (short-term investments that can be quickly converted into cash, such as short-term certificates of deposit)
financial management
includes active planning, monitoring, and controlling of financial information as well as acting on that information
revenue = profit + expenses
project progress report
shows the hours and labor costs for each phase of a project, both for the current reporting period and the total to date, and compares these numbers with the estimated hours and costs
shows direct costs, such as for consultants, overhead allocations, and reimbursable expenses
office earnings report
summarizes each of the firm’s projects in terms of the amount of revenue it has generated, the expenses it has incurred, unbilled services, percentage of completion, and profit or loss to date
aged accounts receivable report
shows the status of all invoices for all projects, whether or not they have been paid and the “age” of each invoice, which is the time from the invoice date to the payment date (or to the current date if still unpaid)
time analysis report
lists each employee along with the number of hours he/she has spent on direct labor, indirect labor (including marketing and professional development), vacation time, sick leave, and holidays
shows the chargeable ratio
chargeable ratio (utilization rate)
the percentage of time (sometimes calculated as percentage of dollars) spent on direct labor, divided by the total tim (or dollars spent on direct and indirect labor, vacation, holiday, and sick leave
current ratio
current ratio = total current assets / total current liabilities
a measure of a firm’s ability to meet current obligations (generally the higher the ratio, the better)
- 5 is generally good
- 0 is acceptable
net profit before tax
the percentage of profit based on net revenue
net profit before tax = the total annual revenue - consultants’ fees and reimbursable expenses
overhead rate
overhead rate = total office overhead (or indirect expenses) / total direct labor
1.3 to 1.5 is normal
when used to calculate fees, this ratio is then multiplied by the estimated cost of direct labor and the resulting product is added to the direct labor amount
quick ratio
a more conservative measure than current ratio because it includes only the most liquid assets
quick ratio = [cash and cash equivalents + accounts receivable + revenue earned but not billed] / total current liabilities
revenue per technical staff
the amount of revenue produced per technical staff member or those staff members most directly involved with charging direct time and producing jobs
can be used to estimate the required net operating revenue for future budgets
can be used to estimate staffing levels (if a firm’s operating revenue is known)
revenue per total staff
amount of net revenue produced per staff member per year, including principals and part-time employees
revenue per total staff = the annual net operating revenue / the total number of employees
billing rate
hourly rate per staff member charged to a project which they are working on
billing rate = employee’s salary + cost for that employee’s fringe benefits + cost of office overhead + an allowance for profit
net multiplier
net multiplier = net revenue of the firm (excluding consultants’ fees and reimbursables) / cost of direct labor
break-even rate
break-even rate = the total cost of operations / total money spent on direct labor
this rate accounts for the salary of the employee along with the amount of overhead attributed to the employee
direct personnel expense (DPE)
the costs of providing taxes, benefits, etc. are included with the employee’s base salary, then the multiplier is calculated to account for indirect labor and profit
4 basic steps to collecting accounts receivable
contract terms:
basis for the fee, when invoices will be sent and in what form, when payment is due, and any penalties for late payment (such as
intertest charges after “x” amount of days, provisions for nonpayment (including stopping work)
timely billing:
invoices should be sent as soon as possible after the payroll period (avoid lump sum payments after phases of a project are
completed - this could take months)
complete invoices:
legibility and clear name and address of the client, project name and number, a reference to a contract, detailed breakdown of
the work performed, billing associated with each item, reimbursable expenses with backup documentation
regular procedures for tracking accounts:
follow up a couple weeks after invoices are sent out (can get questions answered and expedite payment), past due notices after
“x” amount of days, making personal calls and/or visits after an additional amount of time, taking legal action is account is
overdue for a longer period of time; any and all steps taken should be documented when collecting
agency
one person, the agent (architect), acts on behalf of another, the principal (owner or client), in deals with another, the third party (contractor)
architects must be careful to act on the owner’s behalf and to keep the owner informed of progress or issues
vendor
(contractor) who supplies a specific product for a fixed price
act primarily in their own interest
duties
defined by the law as what one person “owes” another in particular relations, such as contracts
important in the construction industry because of the many formal (contractual) and informal relationships involved
for architects, 3 ways that duty is established:
the terms of a contract, such as those outlined in the AIA contracts
legislative enactment, such as by means of building codes and architectural licensing laws
the architect’s conduct (implied duties), sometimes being held liable for either action or inaction
implied duties include:
cooperating with contractors
not interfering with the contractor’s work
giving relevant information to contractors
assisting the owner in coordinating work
liability
the legal responsibility for injury to another person or damage to property
negligence
the failure to use due care to avoid harming another person or damaging property
to be found negligent, 3 conditions must be met:
there must be a legal duty established between the parties
it must be shown that the architect breached that duty
it must be shown that the breach of duty was the cause of the damage/injury suffered by the other party
betterment
can apply to claims of omission by the architect
example:
a finish is agreed to by the client, but the architect shows a cheaper finish in the final work, resulting in a change order. The
architect can argue that the client would have had to pay for the first finish (a “betterment” to the project) and the architect should
only be held liable for the cost of labor to change the work, no the overall cost of labor and materials for the first finish
statute of limitations
sets a time limit within which a claim can be made, after this, the claim is permanently barred
this time period typically begins with the date of substantial completion
statute of repose
similar to a statute of limitations, except that the time limit is usually much shorter and does not begin until the problem is first discovered and typically has a second time limit within which any claim can be made
risk management
strategies for mitigating risk:
know the client
use well-written contracts and follow them thoroughly
make sure the appropriate employees are assigned to each project
maintain an active quality control program
maintain thorough documentation
be very careful about last-minute changes and substitutions
carry liability insurance
privity
(in theory) protects architects from claims by parties with whom they have no direct contractual relationship
ways to minimize liability:
- don’t include language in the contract that expressly states or implies responsibility to provide management, supervision,
coordination, or planning of construction, unless those services are specifically being provided
- don’t give directions concerning methods of construction (may imply that the architects’ responsibility extends to portions of the
work beyond what the contract requires)
- point out obvious construction safety problems to contractors and follow up in writing with both the contractors and owners. If
problems are not corrected, suggest to the owners that construction be stopped until they are corrected
indemnification clause
holds harmless both owners and architects for any damages, claims, or losses resulting from the performance of any work on the project, whether by contractors or others with whom the architects have no contractual relationship
copyright
1st category includes:
copyright for the drawings, specifications, and other pictorial or graphic representations of an architect’s work
2nd category includes:
the building itself (established under The Architectural Works Copyright Protection Act, applying to buildings after 12/1/90)
professional liability insurance
or malpractice insurance or errors and omissions insurance
protects architects in case one of their actions causes bodily injury, property damage, or other damage
covers problems resulting from incorrect specifications, mistakes on drawings, and negligence
excludes intentional wrongful acts, claims for cost estimates being exceeded, and claims arising from express warranties
general liability insurance
protects against claims of property damage, liability and personal injury caused by architects or their employees, consultants, or other people hired by the architects
property insurance
protects the architects’ building and the building’s contents against disasters such as fire, theft, and flood
personal injury protection
protects against charges of slander, libel, defamation of character, misrepresentation, and other torts (a civil wrong)
automobile insurance
covers liability and property damage to vehicles owned and used by the business (can also include protection against claims made by employees who use their own cars while on company business)
workers’ compensation
mandatory in all states and protects employees in the event of injuries caused by work-related activities
owner’s insurance
owner is required to carry boiler and machinery insurance, liability insurance, and property insurance for the full insurable value of the work
insures against physical loss or damage caused by fire, theft, vandalism, collapse, earthquake, flood, windstorm, and malicious mischief
provides for reasonable compensation for architect and contractor services and expenses that may be needed as a result of insured losses
policy must be the “all risk” type (much broader and includes all hazards except those that are specifically excluded by the policy) rather than the “specified peril” type
contractor’s insurance
must carry insurance that protects from the following:
workers’ compensation
damages because of bodily injury, occupational sickness, or death of employees
personal injury, including slander, libel, false arrest, etc.
damages other than to the work because of destruction of tangible property, including loss of use resulting from damages
damages relating to use of motor vehicles
bodily injury or property damage arising when an injury occurs after the job is complete and contractor has left the site
contractual liability insurance
dispute resolution - binding & non-binding
mediation/negotiation is a non-binding resolution where you have a 3rd party listen to both sides and gives a prediction of what the court outcome might be, given the information both sides have provided, then tries to have both sides come to a resolution
- two types of mediation: evaluative and facilitative
lawsuits and arbitration are binding resolutions
- lawsuits are expensive for both sides
- arbitration must have been previously written into a contract
- both must come to a legal decision (through courts or arbitration panel)
contract
an agreement between two or more parties and is enforceable under law
establishes predictability
oral contract
expressed or implied contract
quazi contract (implied by law)
bilateral contract - mutual obligations by both parties
unilateral contract - only one side has an obligation
