Profit Planning: Path A (Workload) vs Path B (Resources) and Annual Budgets

Compares the two standard approaches to architectural firm profit planning: Path A starts with projected workload and backs into staffing needs, while Path B starts with existing staff capacity and projects achievable revenue. Covers annual budget creation, mid-year adjustments, and the strategic choice between approaches based on firm conditions.

ARE · Practice Management

Overview

Every architecture firm needs a profit plan, but the starting point changes everything about how that plan gets built. Path A begins with projected workload. You estimate the revenue your firm expects to earn from signed contracts, probable projects, and pipeline work, then figure out how many people you'll need to deliver it all. Path B flips the script. You start with your current staff and their billable capacity, then calculate how much revenue that team can realistically produce.

Neither path is inherently better. Path A works well when your firm has strong backlog and a clear picture of upcoming projects. Path B makes more sense during lean periods or when you're trying to right-size the team you already have. Many firms run both paths side by side and reconcile the gap between them.

Once you've chosen your approach (or blended both), the numbers flow into an annual operating budget covering direct labor, indirect costs, overhead, and target profit. That budget isn't a "set it and forget it" document. Mid-year reviews compare actual results against projections, and smart firms adjust course when reality diverges from the plan.

For the ARE, expect questions that hand you a firm scenario and ask you to evaluate which planning path fits, identify budget line items, or spot where a mid-year adjustment is needed. The cognitive demand here is analysis and evaluation, not just plugging numbers into a formula.

Essential

Profit planning is the process of projecting where your firm's money will come from, where it will go, and what should be left over at the end. In architecture, two well-established paths structure this process. They ask the same question from opposite directions: "Can our revenue support our team, or can our team produce enough revenue?" ## Path A: Start with Workload Path A is revenue-driven. You begin by listing every project your firm expects to work on during the planning period. That includes signed contracts with remaining fees, projects in negotiation with high probability of closing, and pipeline opportunities weighted by likelihood. From that revenue forecast, you subtract consultant costs and reimbursable expenses to arrive at projected net operating revenue (NOR). Then you work backward through your firm's financial structure: 1. Apply your target profit margin to NOR.

Professional

Consider a 20-person firm that just landed a large institutional project worth $1.8 million in fees over 18 months. The principals want to build next year's profit plan. They have $3.2 million in projected NOR from all sources, including the new project. Using Path A, they set a 12% profit target ($384,000), estimate $960,000 in overhead, and calculate that $1,856,000 is available for direct labor. At an average loaded cost of $85,000 per person, they need approximately 22 staff members. They currently have 20. The plan calls for two new hires. But the managing principal runs Path B as a reality check. The existing 20-person team at 62% average utilization and a $100 average billing rate produces about $2,579,200 in gross revenue (20 x 2,080 x 0.62 x $100). After subtracting $400,000 in consultant pass-throughs, Path B projects $2,179,200 in NOR.

TLDR

Path A (Workload): Start with projected revenue, subtract profit target and overhead, and the remainder tells you how many staff you can afford.
Path B (Resources): Start with current staff, calculate their billable capacity, and project the revenue they can produce.
Run both paths. The gap between them reveals whether you need more people, more work, or both.
Profit is planned first, not whatever's left after expenses. Budget it as a line item.
Annual budgets cover direct labor, indirect labor, overhead, consultant costs, and target profit.
Mid-year reviews compare actuals to the plan. Adjust overhead and utilization before cutting the profit target.
Industry benchmark: Average firm profitability was 13.2% of net billings in 2023 (AIA Firm Survey).
Exam focus: You'll get a firm scenario and need to identify which path applies, spot budget problems, or recommend mid-year adjustments.

ELI5

Imagine you run a lemonade stand and you want to figure out how much money you'll make this summer. Path A is like saying, "The neighborhood block party is coming up, the county fair starts in July, and my friend's birthday party is in August. I think I can sell 500 cups of lemonade. Now let me figure out how many helpers I need to make all that lemonade." You're starting with how much work is coming and then figuring out the team. Path B is like saying, "I have myself and two friends who can help. Together, the three of us can make about 300 cups of lemonade this summer. So that's probably about how much money I'll bring in." You're starting with the people you have and figuring out how much work they can handle. Neither way is wrong.

AREPractice Management

Profit Planning: Path A (Workload) vs Path B (Resources) and Annual Budgets

2 min read234 words

Two Paths to a Profit Plan

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