PcM Practice Question

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    Michael Ermann

    (Y * 2.3) * 1.12 = 95

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    Rajan Karmacharya

    Thank you Michael!

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    Michael Ermann

    Rajan, you asked me to elaborate (I got an email, but your request hasn't shown up here yet). . . 

    Many architecture firms cover their expenses and make a profit by charging the client three or four dollars for every dollar they pay an architect to work on a client's project. 

    In this example, for every dollar spent on direct salary, the firm spends an additional $1.30 to cover non-billable expenses. 1.30 is called the "overhead rate." Add them together to get the break-even rate of $2.30. The firm will need to charge more than $2.30 to make a profit, and in this case, we're going to charge 12% more (multiply by 1.12 to charge 12% more than something).

    If Y is the hourly wage we pay our architect, to figure out what we'd need to pay him to break even (pay for his salary plus healthcare insurance, the office furniture he sits at, his pro-rated share of HR staff time, plus the plotter ink and the marketing department) we'll need to multiply Y * 2.3

    Y * 2.3 = what we'd charge per hour if we weren't interested in making a profit.

    (Y * 2.3) * 1.12 = what we'd charge per hour if we wanted to earn a 12% profit as a firm (a good idea).

    Because we already know that we charge clients $95 per hour for his time we can say that 

    (Y * 2.3) * 1.12 = 95

    Solving for that. . . 

    2.576Y = 95

    Y = 36.88

    *Never stop at a number without translating it to words to make sure you understand it and that it "makes sense." That will protect you in the event that you set up the equation incorrectly or made a dumb math error. In this case, we can say that "We can pay our architect $36.88 per hour and charge our client $95 per hour for his time, and still have enough to pay the firm's rent, fix the firm's copier, and make a 12% profit." That sounds right to me.

    --Michael Ermann, Amber Book creator

     

     

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    Valerie Galchenko

    Hello Michael.

    (Y * 2.3) * 1.12 = what we'd charge per hour if we wanted to earn a 12% profit as a firm 

    Michael, if we wanted to earn 12% profit, we'd have to DIVIDE by 0.88. You are calculating mark up and not a profit. 

    Thank you. 

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    Michael Ermann

    Great catch, Valerie! I just made the same mistake that NCARB made on the demonstration exam! I'll try this again (the numbers will come out almost the same). . . as you noted, if we want a 12% profit, we have to take 12% of the total $95 charged to the client, not add 12% to the break-even rate. Adding 12% to the break-even rate would return a "mark-up."

    Many architecture firms cover their expenses and make a profit by charging the client three or four dollars for every dollar they pay an architect to work on a client's project. 

    In this example, for every dollar spent on direct salary, the firm spends an additional $1.30 to cover non-billable expenses. 1.30 is called the "overhead rate." Add them together to get the break-even rate of $2.30. The firm will need to charge more than $2.30 to make a profit, and in this case, we're going to set aside 12% of the $95 as profit so we'll need to multiply the $95 by 0.88.

    If Y is the hourly wage we pay our architect, to figure out what we'd need to pay him to break even (pay for his salary plus healthcare insurance, the office furniture he sits at, his pro-rated share of HR staff time, plus the plotter ink and the marketing department) we'll need to multiply Y * 2.3

    Y * 2.3 = what we'd charge per hour if we weren't interested in making a profit.

    (Y * 2.3)  = 95 * 0.88 . . . This balances things out: on the left side of the equation is what we need to break even, and on the right side is what we'll charge, minus our profit (so also what we need to break even)

    Solving for that. . . 

    2.3Y = 83.6

    Y = 36.34

    *Never stop at a number without translating it to words to make sure you understand it and that it "makes sense." That will protect you in the event that you set up the equation incorrectly or made a dumb math error. In this case, we can say that "We can pay our architect $36.34 per hour and charge our client $95 per hour for his time, and still have enough to pay the firm's rent, fix the firm's copier, and make a 12% profit." That sounds right to me.

     

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    Rajan Karmacharya

    Got it! Now I get the complete picture of these calculations... Thank you so much Micheal and Valerie for the explanation. 

     

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    Rajan Karmacharya

    Correct me if I’m wrong, this is what I understood from this problem:

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    Valerie Galchenko (Edited )

    Break-even rate                                                           NOR (Net Op Rev)
    -------------------------------= Net Multiplier = ---------------------------------

    Inverse target profit percentage                                    Total Direct Labor

     

    This is basically the only formula you will need to answer all possible financial questions on PcM exam (easy 7 points). 

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    Rajan Karmacharya

    Awesome! Thank you again Valerie!!

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    Gang Chen

    The following article may help:

    https://entrearchitect.com/2015/04/20/7-key-financial-performance-indicators-for-a-successful-architecture-firm/

    Gang Chen, Author, AIA, LEED AP BD+C (GreenExamEducation.com)

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    Gang Chen

    My post is locked up again. Can someone at NCARB unlock my post above? Thanks!

    Gang Chen, Author, AIA, LEED AP BD+C (GreenExamEducation.com)

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    Mark Baker

    Sometimes getting something wrong and having to rework it - is an amazing way to cement the learning that you are doing.

    For the Exam, I always recommend doing the detailed math problems (like this) twice.

    First, give it your best QUICK attempt to get an answer to be scored.

    The second time- try it in a little different way (make it a word problem, or try to solve backwards for the answer you think is correct) - and see if your answers match.  If not, pick one and walk through it again to see if it is making sense and what that answer comes out to.  

    Great demonstration of that concept Michael!

    Mark, Archizam - ARE 5.0 Practice Exams

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    Matthew Bowers (Edited )

    Because the question asks to round to the nearest cent, the final answer should be $36.35, not $36.34

    When calculating, the solution is 36.347, so you'll want to round up to 36.35 for your final answer.

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    Rajan Karmacharya (Edited )

    I have another question on PCM (from a practice test which I'm confused about),

    14. A claim has been filed against an architect for negligence to perform duties in accordance with industry standard. The claim is for water infiltration due to heavy precipitation and alleged improperly graded slopes, which allow water to pool against the exterior foundation wall. The architect believes to have acted in accordance with the professional standard of care and is looking for precedent studies to support the case.

    Which of the following projects should the architect review to determine the standard of care?

    1. A similar project by the same firm located in a different climate
    2. A similar project in a high precipitation area, constructed with different finish materials.
    3. A project constructed with similar materials and a different program
    4. A project located in the vicinity of the project the claim is being brought against

    I would really appreciate if you could also explain why it is the correct answer.

    Thanks,

    Rajan

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    Haytham Abdelrahman Abdelall

    4- A project located in the vicinity of the project the claim is being brought against.

    This will insure that the same climate cause " high precipitation area " could be incidental.

     

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    Rajan Karmacharya (Edited )

    That is what I thought too but apparently it is "Incorrect. Not enough information is given to properly assess if the projects are similar." That is what the explanation says.

    According to the practice test, here the correct answer is #2. Since. "The standard of care measures how another professional party would act under similar circumstances. There can be differences/deviations in materials and/or details, as these vary with design."

    I am still not convinced on this. So I would really appreciate if anyone could explain it more clearly.

    Thank you,

    Rajan

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    Matthew Bowers

    Rajan -

    Was this a question from WeARE? I remember a question like this and being similarly confused by the 'correct' answer and explanation. Answer #4 was my selection, as well.

    I would not dwell on this particular question too much. I've found many of the WeARE questions to be poorly phrased or overly vague, particularly for the PcM section. Having said that...

    I believe the rationale for #4 not being the correct answer is because, even though a project may be within the vicinity, you can't assume the site deals with similar ground slope/topography issues. It could be a correct answer, but you don't have enough information to make that decision. You also do not know the type of structure, as the foundation systems may be vastly different.

    I believe the rationale for #2 is based on the key phrases of "similar project" and "high precipitation area." You can (obviously) argue that this option is not correct for the same reason as #4 - that even though it may be in a high precipitation area, you don't have enough info regarding the foundation and ground slope condition to make that determination - which is why the phrase "similar project" is so important.

    Again, I wouldn't dwell on this too much. In my opinion, it's a poor example of how to measure standard of care.

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    Rajan Karmacharya

     I think I got this question from Black Spectacles but I agree with you. Thank you Matthew.

    Rajan

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