Fee Calculation – Part Two
When it comes to making decisions on an appropriate project fee, time isn’t the only consideration. ACA Vic/Tas President Paul Viney continues his fee discussion with Madeleine Swain from AR, exploring other important factors to consider, such as risk and the value of innovation.
Ask any architect what topics are top of mind, and invariably fee discounting will be up there. It’s an ever-present and ever-evolving issue. Once a practice has worked out its break-even point (See Fee Calculation, part one), there are several other stages that need to be worked through. Once these are addressed, settling on an appropriate fee to charge clients should be much more considered and empirical.
The ACA Time Cost Calculator requires each practice to individually consider a range of variables to assist in finally determining a fee. It should be noted that these variables are unique to each practice and result in a different outcome for each practice and each project.
Determine what staff to appoint to the project
How many staff will need to be involved with the project, with what degree of experience and for how long? Perhaps a practice’s most experienced architects have a higher involvement during the design and construction phase of the project, with a higher proportion of less experienced staff during the documentation phase. An accurate assessment of each team member’s involvement helps to determine the internal project costs. The different charge-out rate for staff will have a significant influence on the final fee. This is then represented in the calculator as a net hourly rate and can be as simple as the average rate across the office or a more accurate reflection that takes account of the average hourly rate of only those staff allocated to the project.
Determine the billable hours available to the practice per annum
To amortise your overheads against your hours, you need to determine the number of professional staff that you can bill against and the number of hours they are likely to work in a given year. These need to be entered into the office variable section of the calculator to contribute towards the calculation of a charge-out rate.
Determine the non-billable hours for the practice
All technical staff have a range of activities that cannot be billed to a client, including professional development activities, marketing time or internal administration requirements such as QA (quality assurance) obligations etc. If you do not account for these in your calculations, they could be greater than the profit margin you are proposing, which results in a net projected loss even before the project starts – these are the dreaded ‘other’ on the timesheet that signifies internal costs and cannot be charged to a client.
Determine if it’s possible to provide extra value/innovation
While this may be a little harder to quantify, there are many situations in which architects can add significant value to the project through innovation. This is often the case in PPP (public private partnership) projects, where the viability of the project largely hangs on the effort and expertise of the architect. There are also examples where design excellence can be used to increase the plot ratio of the project, giving a better economic return to the developer. Architects need to charge not only for their hours, but also the value they bring to the project.
Determine the level of risk on the project
Not all projects are created equal, and some come with greater risks than others. These risks can be financial, reputational or legal, and any consideration of a fee should take these into account. Risks to be considered include:
- the nature of the client – for example, institutional versus private developer
- the litigation history of the client – for example, the frequency with which they have sued consultants or made claims against the consultant’s professional indemnity insurance
- whether they have a history of late payments or bad debts
- the nature of the contract you are being asked to sign – an ACA Short Form Agreement versus a bespoke contract with innumerable uninsurable and unreasonable clauses, whether they are by way of the contract seeking to offset all or most of the risk to the consultants
- if you are being novated and at what stage during the project – the risk becomes higher the earlier in the process you are novated to the builder
- the terms of the novation contract, and
- the services for which you are being contracted – are they partial services? Are they likely to get you to provide all your intellectual property (IP) at the front end of the project, and then the project is sold with TP/DA (town planning and development act) approval? Or are they likely to replace you with a cheaper documentation service?
Architects have traditionally been silent with respect to considering risk in calculating fees. The calculator requires you to at least consider the issue and enter a value, even if you determine it to be negligible.
Decide what profit the practice is proposing to make for the project
Practices must understand that to survive and flourish they need to make a profit, so that they can reinvest in the business. The profit level needs to be based on your knowledge of the marketplace, the known competitors’ pricing strategies, the nature of the expertise and the practice’s financial history of similar projects undertaken in the past. Did you make a profit on the last project? Did you price yourself out of the marketplace? The calculator requires you to enter a value, but it is up to each practice to determine on a project-by-project basis.
Calculate the number of hours likely to be required to undertake the project
How long is a piece of string? Working out the time required to complete a project can be daunting, but comparing with previous similar projects is the best starting point. The ACA Time Cost Calculator can give you a guide based on historical data.
You need to enter:
- the stages of service that will be undertaken
– schematic design
– design development
– contract documentation
– contract administration
- the percentage of effort you expect against each stage
- whether it is a greenfield or brownfield project
- the type of project it is – residential, educational etc, and
- the project value.
The calculator will then give you a range of hours for each stage of the project based on historical precedent, but it’s up to you to determine whether you will be within or outside that range. For example, if you are highly experienced in a particular type of project you may wish to reduce the hours accordingly. However, if you are new to that project type you may prefer to err on the side of caution.
The calculator will then tally the hours you have calculated and the fee that you have derived to give you an indicative fee.
It is important that you then interrogate the fee by doing the following:
Test the fee against other methodologies
Once there is an initial set of figures, these should be tested against alternative fee methodologies; for example, what is the project program, how many staff have been allocated and how does this time compare to the calculator? If the outcomes vary wildly, what element has been overlooked or miscalculated?
1800s: Architectural fee scales introduced
1860s: US – Architect sues for 5% fee – becomes standard
1971: US – Justice Department rules fee schedules are contrary to the law
1950s: US – Fee schedules in use nationally
1982: UK – Fee scales amended to ‘recommended’, not mandatory
1990: US – Institute cannot ‘restrain’ fees in any way
1992: UK – ‘Recommended’ scales dropped, in favour of ‘just a guide’
2005: Aus – Fee guide abolished
Test the fee against knowledge of the market
Looking at the figures that have been calculated, practices should now compare them against what they know about the market and what it will support.
These steps combined will all help to calculate a reasonable fee to charge on any given project, but there are also other factors to consider. Concrete figures on the following may be rather more nebulous and harder to predict, but allowances should be made nonetheless.
The final step is to determine whether to accept the commission – with all the pre-work and calculations made so far, practices should now be able to make a fully informed decision. But before presenting the client with any proposal, you should reconsider the following pivotal questions:
- Is the budget realistic for the desired outcome?
- Does the practice have the expertise to undertake the project as it stands?
- Has the practice checked and double checked (erring on the side of caution) that enough hours have been allowed to complete the project in a proper and professional manner?
- Does the practice have the resources to complete the project within the contract time requirements? If not, are there partnerships available that would allow this?
- Finally, and perhaps most importantly, will the commission bring the practice at least two of these three factors – fun, fame, fortune?
This article was originally published in AR and has been republished with permission.