Design firms sell time, but they price by project. That gap is where profit disappears. A fixed fee is agreed at concept stage, the client changes the brief three times, documentation takes twice as long as planned, and nobody sees the overrun until the final invoice. Multiply that across thirty active projects and a firm can be busy, growing and barely profitable.
Most accountants report your results by month and by expense type. We report them by project, stage and person, because that's how you make decisions.
What goes wrong in engineering and architecture firm finances?
- Projects that bleed quietly. Fee-stage budgets aren't compared to actual hours until the project is over. By then the loss is locked in.
- WIP that nobody tracks. Work done but not yet billable under the contract sits off the books. Cash looks worse than performance, and performance is invisible.
- Fee proposals based on gut feel. Without history on how long stages really take, every fee is a guess, and the pressure is always to guess low.
- Principals disagreeing over the numbers. One principal wins the work, another delivers it. Without project data, profit splits become personal.
- Long tails of risk. PI insurance, claims that surface years after a project, and retired principals still needing run-off cover.
What do we do for engineering and architecture firms?
| Area | What we do |
|---|---|
| Project accounting | Xero tracking categories or a practice management integration, so revenue, staff time and consultants' costs sit against each project and stage |
| WIP | Monthly WIP schedule by project: hours worked, value, billed to date, percentage complete versus percentage billed |
| Utilisation | Chargeable hours against available hours by person and team |
| Billing | Progress claims raised on time, variations captured, debtor follow-up |
| Profit allocation | Principals' profit allocation tested against PCG 2021/4 each year |
| Compliance | BAS, payroll, Payday Super, payroll tax monitoring, company and trust returns, principals' returns |
| Forecasting | Cash flow forecast built from your project pipeline and billing schedule |
Our cash flow forecast agent builds the forecast from your pipeline and billing stages, and our management report agent drafts the monthly pack. Your accountant reviews both and explains what's changed.
Which KPIs should a design firm track?
| KPI | What it shows | How it's worked out | Typical warning sign |
|---|---|---|---|
| Project margin | Whether each project makes money | (Fee earned − staff cost at cost rates − consultants) ÷ fee earned | Margin falling as the project progresses |
| Earned vs billed | Whether billing keeps up with work | % complete by hours or deliverables vs % of fee billed | Earned well ahead of billed |
| Utilisation | Share of time spent on chargeable work | Chargeable hours ÷ available hours | Principals and seniors buried in admin |
| Effective charge-out multiplier | How much fee each dollar of salary produces | Fees earned ÷ direct salary cost of chargeable time | Multiplier drifting down on fixed-fee work |
| Lock-up days | How long work takes to become cash | WIP days + debtor days | Growing as projects get larger |
| Variations captured | Whether scope changes are being paid for | Variation fees billed ÷ variation hours worked | Hours logged to variations with no fee |
| Revenue per FTE | Productivity of the whole firm | Fees ÷ full-time equivalent staff | Falling while headcount grows |
The single most useful report we produce for design firms is the WIP schedule, because it shows which projects are over budget while there is still time to talk to the client about variations.
A worked example
Say a practice agrees a $120,000 fixed fee for a medium-sized project, budgeting 800 hours at an average charge-out value of $150. Halfway through documentation, timesheets show 600 hours used, but only 50% of the deliverables are complete. At that rate the project will take around 1,200 hours, about $60,000 of time beyond the fee. Caught at the halfway point, that's a variation conversation with the client and a resourcing decision. Caught at the end, it's a write-off.
Which tax and compliance issues matter for engineers and architects?
How principals take profit (PCG 2021/4)
Engineering and architecture are knowledge-based professions, so the ATO's guideline PCG 2021/4 on the allocation of professional firm profits applies where a principal who works in and owns the firm directs some of their profit to a spouse, family trust or company. The arrangement must first pass two gateways (commercially driven, no high-risk features). It's then scored on the share of profit the principal returns personally, the total effective tax rate across the principal and associates and, unless a benchmark is impractical to work out, how the principal's remuneration compares with a commercial benchmark. The result places it in a green, amber or red zone. A principal who returns all of their profit entitlement personally is automatically in the green zone, provided the gateways are passed. Our professional firm profits agent scores the arrangement; your accountant checks the score and the facts behind it.
Personal services income
Sole engineers, drafters and architects contracting through their own company or trust may be subject to the personal services income rules. If the business doesn't pass the results test or another personal services business test, the income is taxed as the individual's and deductions are limited. Being paid for a result, supplying your own equipment and being liable to fix defects at your own cost all point towards passing the results test. Our page on consultants and agencies goes through the tests.
Professional indemnity insurance and claims
PI insurance is usually one of a design firm's largest overheads. Premiums are generally deductible. Excesses paid on claims, and settlements paid to clients in the course of the business, are usually deductible too, but legal costs and any recoveries need care. When a principal retires or a practice closes, run-off cover is often required for years, and who pays for it should be in the partnership or shareholders' agreement.
Payroll tax and contractors
Design firms often use sub-consultants and contract drafters. In most states, payments to contractors can count as wages for payroll tax under the contractor provisions unless an exemption applies. Firms near the threshold are frequently caught out. Our guide to payroll tax by state explains the thresholds and grouping rules.
R&D tax incentive
Engineering firms doing genuinely new technical work, rather than applying known design methods, may be eligible for the R&D tax incentive if they operate through a company. Eligible activities must be registered within 10 months of year end, and records need to be kept as the work happens.
Which structure suits an engineering or architecture practice?
| Structure | Fits | Watch for |
|---|---|---|
| Sole trader | A single principal starting out | No limited liability, which matters for a profession with claims risk |
| Partnership | Two or more principals in a traditional practice | Joint liability, PCG 2021/4 scoring for any splitting |
| Company | Most growing practices | Limited liability (but not for your own professional negligence), company rate on retained profit, Division 7A on money taken out |
| Company owned by principals' family trusts | Established practices | Flexibility and some asset protection; distributions need PCG 2021/4 review |
| Separate entity holding premises | Practices that own their office | Keeps property away from trading risk; consider super or a separate trust |
A company won't protect a principal from liability for their own professional negligence, which is why PI insurance stays essential. What a good structure does is keep the family home, investments and premises outside the entity that signs design contracts. Our business structuring and asset protection page explains the approach.
How do we work with engineering and architecture firms?
- Free strategy call. We talk about how you price, bill and track projects now, and what you'd like to see.
- Project costing set-up. Projects and stages set up in Xero or connected to your practice management software, with charge-out and cost rates for every person.
- Clean-up. Historic WIP, debtors and contractor payments reviewed; profit allocation scored.
- Monthly. WIP schedule, utilisation by person, project margins, cash and forecast, with a call to go through it.
- Year end. Profit allocation finalised, returns lodged, tax planned before 30 June.
- Strategy. Fee pricing, principal admissions and retirements, succession and sale.
Everything runs on Nagaris. The AI agents draft; qualified accountants review and sign off before anything reaches you or the ATO.
What does it cost?
Smaller practices usually start on Business Insights (from $249 per week + GST), which includes payroll for up to 10 staff and monthly KPI reporting. Larger practices that want project forecasting, a monthly strategy meeting and annual benchmarking usually choose the Fractional CFO plan (from $499 per week + GST). See our pricing page.
If you're a sole engineer with two clients and no staff, you don't need project accounting. A simple setup with good tax advice on the PSI rules may be all you need.
What should you send us?
- Last two years' financial statements and tax returns for every entity
- A list of active projects with fee, stage, percentage complete and billed to date
- Timesheet data by person for the last 12 months
- Staff list with salaries, so we can set cost rates
- Partnership or shareholders' agreement, including any profit-sharing formula
- PI insurance policy schedule and any open or past claims
- Contractor and sub-consultant payments for the year
For help turning project data into better margins and cash, see our cash flow and profit optimisation service, or read how to do a cash flow forecast.
Frequently asked questions
Is professional indemnity insurance tax deductible?
Premiums for PI cover that relates to earning your business income are generally deductible to the entity that pays them. If you prepay a policy that runs past year end, the prepayment rules may spread the deduction, although small businesses often get an immediate deduction for prepayments covering 12 months or less. Run-off cover bought when you close or sell a practice needs separate thought.
Do engineering firms qualify for the R&D tax incentive?
Some do, but routine design work rarely qualifies, even when it's complex. Eligible activities involve genuine technical uncertainty resolved through systematic experimentation, such as developing a new structural method or testing a new material. If R&D is done for a client, who owns the results and bears the cost affects who can claim.
What fee should we charge for a project?
Start from the hours each stage really took on similar past projects, multiplied by each staff member's charge-out rate, plus a margin for risk and variations. Your project accounting history is the most reliable pricing tool you have. We build a simple fee estimator from your own data once project costing is running.
Should we bill monthly or by stage?
Monthly progress billing against stage percentages usually beats waiting for stage completion, because it shortens the gap between doing work and being paid. Your client contracts decide what's allowed. Where contracts require stage billing, we track WIP closely so long stages don't strangle cash.
Does the personal services income regime apply to engineers?
It can, particularly to a sole engineer contracting through a company to one or two clients. If the business doesn't pass the results test or another personal services business test, income is attributed back to the individual and many deductions are limited. Firms with staff, multiple clients and their own premises usually pass.
Official sources
General information only, current as at 23 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.