Cost Structure and Profitability of Design Services Industry

Abstract

This paper is a financial analysis of several key parameters that affect the cost structure of design firms in the United States. Using results of surveys conducted over the past 15 years, we have examined the cost trends and profitability of design firms. The firms’ profitability is examined as a function of utilization and overhead rate and expense ratio. The impact of overhead caps imposed by public agencies and the reimbursement of CADD costs in public projects on the profitability of design firms are discussed. To evaluate these factors, the paper first discusses in detail the four elements of cost within the design services industry. These four elements are: direct salary costs, indirect salary-related costs, direct nonsalary costs, and general and administrative costs. These design costs are usually summarized and presented as labor, overhead, and direct nonsalary costs. A detailed analysis of the elements that comprise overhead and the key elements that affect overhead are presented. Profitability is then expressed in terms of the factors described, and the effect of overhead caps and nonreimbursement of CADD costs on the firms’ profit is quantified.