How Small Firms Survive an Economic Slowdown

By Rena M. Klein, FAIA

As part of the construction industry, the business of architecture is cyclic – subject to the ups and downs of the business cycle. The economy is said to be in a recession when economic activity, as measured by the percent change in the Gross Domestic Product (GDP), is negative for two quarters. Since design is early in the development process, many architectural firms see the effects of an economic slowdown long before a recession is officially declared. Starting with awareness of economic indicators, both internal and external, small firm owners can anticipate and prepare to survive an economic slowdown.

No matter what the economy is doing, all architectural firms experience ups and downs in work load as part of normal operations. Because firms operate in an environment of unpredictability, work load can be impacted by a variety of factors including client driven delays, regulatory procedures and gaps between project phases. In times of economic slowdown, suspension of projects by clients will be more common and may be an early indicator of trouble down the road.

Other internal indicators of a coming economic slowdown include:

• Fewer inquiries / proposals pending (leading indicator)
• Longer aging of accounts receivable (lagging indicator)
• Reduced size of potential projects
• Lack of ability to raise fees / more consideration of fee among potential clients
• Longer time between proposal submittal and start of project

External economic indicators are also important to watch. Particular indicators may track with certain market sectors. For example, a drop in the measures of consumer confidence may portend a drop in custom residential projects. Similarly, a rise in interest rates may affect the amount of commercial development undertaken.

During a recession, small architectural firms are particularly subject to economic stress. Many small firms operate with tight margins and little reserves. As revenues shrink due to reduced billings, smaller projects, and slower payments by clients, it may become more difficult for firm owners to pay salaries and other operating expenses. These circumstances may make it necessary to lay off valuable staff, in which much time and knowledge has been invested. And when work picks up again, firm owners are faced with the cost of hiring and training new staff.

The strategic keys to avoiding this viscous cycle are to:

• stay aware of current macroeconomic trends
• diversify project types
• establish a “rainy day fund” to build a cash reserve equal to three to six months of operating expenses
• establish a business line of credit for short-term bridge loans
• organize your staffing with the flexibility to handle the inevitable work load variations

Specific actions to prepare for a slowdown include:

• check out employee preferences in case of slowdown
• unpaid time off
• temporary part time
• reduced work week across the board
• Be prepared to use employees to accomplish value-added tasks – tasks that will enable more effective marketing and work processes
• redo marketing materials
• Web site update
• project close out and project documentation
• update detail library
• improve systems for routine processes
• organize files and hardcopy library
• enter competitions
• Set-up possibilities to “lend” employees to other firms
• Use slow time for learning new knowledge and adding competency – both for firm owners and for staff
•  Relieve anxiety by reviewing backlog and prospects – how much work is actually lined up?
•  Engage in marketing activities
•  postcard mailing to client base
• networking and community involvement
• professional alliances (contractors, other design professionals)
•  submit projects for publication
•  look for opportunities to diversify project types

During a work slowdown, it is important to resist the temptation to reduce fees. Losing money just to keep people working is not a good business practice. Don’t take just any job – working outside of the firm’s comfort zone will not help the situation. And don’t reduce the quality of the work or work for someone that seems untrustworthy. No matter what the circumstance, firm owners should always act as if they “don’t need the money.” Otherwise, they run the risk of making poor decisions. Awareness and strategic preparations can minimize this risk and enable small firms to weather an economic slowdown without compromise.

Rena M. Klein, FAIA, principal of RM Klein Consulting, in Seattle, Washington, is a member of the Soloso Editorial Content Review Board and serves as the Subject Matter Expert for Practice.

Navigating the Economy During Difficult Times:

The financial crisis and economic downturn are affecting architects, architectural firms, clients and AIA members. Everyone needs information and tools to help them deal with the current economic environment and fluctuating financial markets.

The AIA is providing practical resources to help you manage through these unprecedented times more confidently. These tools include web seminars with industry experts, weekly podcasts, articles, and events. In each issue, AIArchitect will have stories sharing the effects of the latest economic developments on members. We continuously strive to respond to members' needs and deliver the resources to help you deal with the challenges at hand.

Current information and helpful tools are available and constantly updated through the Navigating the Economy Resource Center on the AIA website. Recent articles include Surviving an Economic Downturn, Putting Panic in Perspective, Surviving the Crunch and Marketing Ideas for Small Architecture Firms.