Fee Negotiation 101 is not part of the curriculum for any architectural degree program that I’m aware of. It should be. The price we charge and the services we’re providing are key elements of the client transaction. Without a successful negotiation on fees, there is no project. Although successful may be a poor choice of words. On average, architects lose money on one project out of every four.
If our customers are prevailing in most negotiations they should be happy, right? Well, actually, they might be. According to a 2008 AIA report, “clients generally feel they are getting good value for the money with their architects’ fees…(however) clients feel they (the architects) could improve on accurate cost estimates and budget management skills”. That last part might be easier if architects were more adept at managing their own finances.
Last segment, we discussed how architecture became a profession. It’s significant that the story revolved around fees. Client expectations and acceptance of what is a fair price for our services are key to our existence. Yet most architects avoid or constrain fee discussions with their clients, while still expecting to make a profit on their work. It’s easy to understand why establishing a standard percentage, thereby eliminating much of the negotiation, was popular among architects in the past. Unfortunately, the standard did not contribute to business success. So what did we learn? Has anything changed? In 1999, the AIA reported that “over a quarter of firms indicated that only about half the times do the fees reflect the actual amount of work expended”. This result was almost identical to a study conducted in 1966.
If “clients generally feel they are getting good value”, why do architects continue to negotiate so many bad deals? There are a lot of opinions on that point but its clear architect themselves bear most of the responsibility. In general, architects do a poor job of communicating the value they add to a project and the fees necessary to make that possible. This is compounded by a lack of understanding by most principals about their own cost structure. All firms want to do great projects but attempting to do so under severe financial constraints does not benefit the project. So owners beware.
The best advice we can offer our clients is to hire the most qualified architect that can provide the level of service you expect. That will seldom be the lowest bidder. Specialized expertise and a high level of service are value propositions but they also have a direct correlation to the fee an architect requests. How so? Expertise requires specialized staff and equipment. Our animation department is one example at WorthGroup. And exceptional service can only been provided when staff has the time available to provide it. This will result in a higher fee than a competing firm that is not offering the same quality, expertise or level of service. There are still many ways for clients to meet fee objectives. But a mismatch between fees and expectations is certain to fail at some point in the project.
No one wants to pay their architect more than they should. The best way for an owner to avoid this is to take the time to discuss project needs and level of service expected. A client with significant development experience and resources does not require the same services that a client without that capability would. If that’s communicated, we can adjust our fee request accordingly. This is best illustrated by eliminating some of the mystery from how WorthGroup prices its services. Each project is unique and has distinct variables so we’ll just cover the fundamentals. We’ll assume our client has significant experience with the construction process and just needs the basic services identified in a standard AIA agreement
Let’s start by ignoring type of fees. Whether you call it a fixed fee, percentage of construction costs, price per square foot, or hourly rate, the underlining basis of an architect’s fee is still the time and material required to complete the desired scope of work. At WorthGroup, we estimate our labor hours, by position, required to complete the necessary tasks based upon the size, complexity and design schedule for the project. If we know our client is knowledgeable, we can reduce our labor hours accordingly.
We then apply a multiplier to the labor costs; which varies from firm to firm but most use a factor between 1.5 and 1.75, to cover overhead. The next step is to add the costs of our consultants. Basic services will usually require structural engineering, civil engineering, mechanical/plumbing engineering, and electrical engineering. We request pricing from these consultants in the same manner our clients negotiate with us. Our projects typically also include Interior design services; which we staff internally, but other firms hire consultants for that part of the work, as well. Adding those amounts together, along with our profit ratio, derives our fee. When possible, we’ll validate our fee calculation against the anticipated percentage range (of construction costs) and make adjustments, if there’s significant deviation. From there, the information is written into a proposal covering scope, a fixed fee with detail for each phase of work or task, payment terms, and schedule.
Simple? Maybe not but it serves to demonstrate the logic behind the number. Defining the scope of the work is the challenging part and the stage where clients can most effectively limit their architectural costs. It seldom works that way but it should.
When our clients requests a specific fee type, assumption of risk becomes a controlling viable. For example, working for an hourly rate limits our exposure. When a project is in its infancy, this is often a good initial approach. It is an expedient first step to define the project and level of service expectations. On the other hand, establishing a fixed fee when the program and budget are undefined is the opposite end of the risk spectrum. An experienced firm will add contingency or add extra labor hours to address the unknowns. The client benefits from having an early fee commitment but they are paying more to do so.
A fee based upon a percentage of construction costs remains a popular option for both architects and clients. It provides the benefit of a price commitment for the client but protects the architect against scope and budget change during design. However, fee percentages now vary based upon project type and size; which is a significant difference from the flat percentages promoted by the AIA in the early 20th century. A key disadvantage to this approach is that there is little incentive for the design team to meet budget goals.
The creative process is the most rewarding aspect of our profession. It tends to overwhelm any discussion of the business transaction itself and rightfully so. But one fact should be clear. There is not a one-size-fits-all approach to architectural fees or the services provided. We will always welcome a frank discussion about the value we provide and the costs related to our services.
ABOUT THE AUTHOR
With over thirty years of experience working on hospitality and gaming projects, Doug has one of the most respected names in the industry. He is both a registered Architect and a licensed General Contractor; which has led to a passion for hands on building. Since founding the firm in 1990, WORTHGROUP has contributed to over $4 billion in completed construction value as planners, architects, and designers.
Doug received his Architectural degree from the University of Nebraska and maintains deep roots in the Midwest. He attributes his success to the persistence and work ethic he learned growing up in rural America.