There is almost no coverage in the mainstream media, or professional publications, of cost increases which are threatening to decimate profits for architects, engineers and other consultants.
Professional Indemnity increases
The AJ has not mentioned the cost of professional indemnity (PI) insurance this year. And yet client after client is tells me that renewal quotations are 2 to 3 times last year’s premiums.
I know PI is not an exciting subject, but with rising rents and rates, this is significant further pressure on already lean profit margins.
This is not a new problem; brokers tell me that increasing litigation and claims on auditors and accountants, architects, building inspectors, engineers and other professionals over the last decade has gradually made underwriting PI insurance policies less profitable and thus caused businesses that provide this service to leave the market. The remaining providers are therefore able to increase prices.
RIBA’s benchmarking suggests PI cover should cost around 2% of revenue for a mid-size architects practice.
Our own benchmarking bears this out; we have historically advised clients to aim for a premium of 1.8% to 2.1% of revenue. And yet many clients are seeing premiums jump to over 5% for 2019/2020.
Whether this is merely a temporary blip caused by lack of underwriting capacity or a longer term trend remains to be seen. Practices must however budget for the increase whilst doing everything they can to mitigate it.
Certainly it is important to ensure that cover levels and exclusions are in line with, but not exceeding, current contractual commitments. It is also important to shop around, as not all brokers have access to all underwriters.
To place this one issue in context; the typical mid-size or large architects practice achieves a profit before tax (but after market rate remuneration to principals in their capacity as architects) of between 10% and 20%. This means that PI premium increases could swallow 1/3 to 1/6 of the practice’s profit!
We would encourage all professional practices to ensure that they have a robust budget model for at least the next 12 months, ideally running to 24 months, and to proactively identify unavoidable cost increases and take steps to defend profits.
For help and advice on forecasting models and budgets, get in touch here or via the buttons below.
Want to know more? Call us on 0207 025 4650 or email email@example.com