Fee calculation, negotiation and
management for architects
A three part approach:
1. Calculating the fee (resource-based)
2. Negotiating the agreement (adding value)
3. Managing fee collection (cash flow)
THE ROLE OF BENCHMARKING
Fee calculation, negotiation and
management for architects
The value of the product is not what it costs to provide or
produce, it is the value the customer puts on it.
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Owen Luder:
“Cash is king! If you run out of money - you go bust!”
“You are more likely to become involved in a legal dispute over your
fees than any other issue in your practice.”
Paul Nicholson:
“The profession itself should treat architecture as a profession and as
a business, not just an exciting and a liberating profession.”
Andrew Sobell
“When it comes to improving profits and cash flow, the golden rule is:
what you can measure, you can manage.”
Value
The value of the product is not what it costs to provide or
produce, it is the value the customer puts on it.
Mark Twain:
“You can tell German wine from vinegar by the label.”
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Oscar Wilde:
“Anyone who lives within their means suffers from a lack of
imagination.”
Dr Scholl
“Early to bed. Early to rise. Work like hell and advertise.”
Victoria Beckham:
“I want to be as famous as Persil Automatic.”
Defining Value
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After Prof. Hennes de Ridder
Making a profit
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•put a realistic price on the product (accurately assess the
time and resources required)
•understand the market and its risks
•assess the value you place on your work
•establish robust management procedures
•regularly monitor professional performance
•issue timely invoices
•regularly monitor financial performance and cash flow
“The only element of a professional service that can be
measured is the time taken to provide it. All the hours in the
working day have a price; there is no 'free' time.”
(Architect’s Handbook of Practice Management)
Fee calculation
Calculating a Fee offer:
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Assess the risks and uncertainties:
• the client (resources, reputation, knowledge)
• project definition
• scope of services
• programme/timescales
• resources requirements
Assess the benefits and opportunities:
• enhanced profits
• employment for existing staff
• business expansion
• new market sectors
• quality of work
Fee calculation
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Key influences on resource requirements:
• Type of procurement and scope of services
• Size of project
• Complexity of project and specific project requirements
• Extent of works to existing buildings
• Repair and conservation of historic buildings
• Degree of design repetition
• Practice size and overheads
Key influences on brand value:
• Practice reputation
• Practice location
• Practice culture
• Specialist skills
Fee calculation
Traditional fee calculations:
Table 1: New Works
Image courtesy of Ernest von Rosen
(www.amgmedia.com)
Total construction cost
Up to £2,500
£2,500 - £8,000
£8,000 - £14,000
£14,000 - £25,000
£25,000 - £750,000
£750,000 - £1,750,000
£1,750,000 and over
Minimum per cent rate
10
8.5
7.5
6.5
6
5.75
5.5
Miniumum charge for completed
work stages C to H
£250
£680
£1,050
£1,625
£45,000
£100,625
Source: RIBA Conditions of
Engagement 1971 (mandatory
fee scale)
Fee calculation
Traditional fee calculations:
New work
Private housing
Image courtesy of Ernest von Rosen
(www.amgmedia.com)
£25K
£50K
£75K
£150K
£500K
£1M
10.7%
9.9%
9.5%
8.7%
7.3%
6.5%
Leisure
9.5%
9.1%
8.8%
8.3%
7.5%
7.1%
Offices
8.8%
8.4%
8.1%
7.6%
6.9%
6.4%
Industrial
6.3%
6.0%
5.5%
5.5%
5.0%
4.7%
Retail
7.1%
6.8%
6.6%
6.2%
5.6%
5.2%
Public housing
8.5%
7.9%
7.5%
6.9%
5.9%
5.2%
10.5%
9.6%
9.1%
8.3%
6.8%
6.0%
7.2%
7.0%
6.9%
6.6%
6.2%
6.0%
Health
Education
Illustrative table showing approximate values for average fees
based on the results of the independent annual fee survey
carried out by the Fees Bureau, 2007
Fee calculation
2D CAD
Resources
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BIM
A
B
C
D
E
F
G
Work stages
H
J
K
L
Fee calculation
Fee options:
(There is no standard or recommended fee scale and no standard method of calculation.
The fee is a matter for negotiation between the client and the architect.)
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•emperical calculations (traditional) v resource allocations + profit
margin and added value
•partial services
•fixed lump sums (higher risk than percentage fees, must have
provision for adjustment for client changes)
•calculated lump sums, based for example on estimated construction
cost at the start of each work stage
•time charges
•value-added or betterment fees
Fee calculation
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Work stage fees
Work Stage
(A and B Time charges)
C Concept
D Design Development
E Technical Design
F Production Information
G Tender Documentation
H Tender Action
J Mobilisation
K Construction to hand-over
L Rectification period
*includes F2
Optimum
Alternative
20%
20%
15%
35%
25%
35%
20%
30%*
_____
100%
100%
Fee negotiation
Presenting the fee offer:
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Is the fee offer in writing only, or to be part of an
interview/selection process?
Is the fee offer made in competition?
How much do you know about your client?
Who will influence the decision?
What will add value to the project?
What type of fee arrangement is likely to be
acceptable?
Is the offer clear?
What is the product that you are selling?
Fee negotiation
Closing the deal:
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•recognise the client’s values and aspirations, both explicit and
implicit
•establish rapport
•explain the benefits of the offer
•remove any uncertainty and address objections
•a resource allocation approach is very helpful when a client is
seeking a fee reduction; monthly invoicing regimes ensure cashflow
•nothing is agreed until everything is agreed
•always confirm what has been agreed
•the client will probably desire certainty and a fixed fee, but the
architect has to balance this against the actual degree of uncertainty
and associated risk
•working without an appointment agreement and agreed fee
schedule is work at risk
Fee management
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GOLDEN RULES for a healthy fee regime
• have a comprehensive appointment agreement in writing
• check the name of the client in the agreement is the same
as you anticipated?
• state clearly the client’s requirements and the scope of the
services to be provided
• ensure the client understands the payment provisions
• don’t undertake work which is beyond the resources of the
practice.
• identify separate work stages and get each stage signed
off
• establish rigorous procedures for managing fee accounts,
invoicing and chasing debts and maintaining cash flow
• resist pressure to start any work until the agreement is
signed
Fee management
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Relationship between turnover and working capital
• Working capital = fixed assets + cash + debtors +
accrued income (work in progress) - creditors
• Faster turnover = less working capital required
• Architects require more working capital than many
other business because of the extended time period
of construction projects
• Prompt and regular invoicing and collection of fees is
the main lever to accelerate the speed at which
money circulates through the business and reduce
the need for working capital
• The “Tesco” model – money-in quick, money-out
slow
Fee management
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Relationship between project and practice finances
• Management of project finances and practice
finances simultaneously
• Businesses fail mainly because they run out of cash,
not because they are intrinsically unprofitable
• Monthly management accounts are essential to
monitor monthly and year-to-date variances
• Monitor key performance indicators (turnover by
director, turnover per fee earner, profit as percentage
of turnover, profit per director, profit per fee earner,
liquidity)
• Have effective project resource plans and monitor
project performance
Fee management
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Fee forecasting
• Future captive fees (fees that are agreed,
documented, contractually binding and scheduled for
invoicing)
• Possible fees – prospects (50%+ chance of
conversion, 3x turnover) and suspects (50% chance of conversion, 2x turnover)
• Resource forecasting is the hardest forecasting
element
• Cashflow forecast – of particular interest to the bank!
• Have effective project resource plans and monitor
project performance
Fee management
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Fee forecasting
• Use a Standard Form of Appointment Agreement
(key for risk management)
• Invoice on a regular basis (monthly fee invoicing
assists cashflow and reduces risk)
• Collect money owed (within 60 days)
• Charge additional fees when the brief is changed
• Charge additional fees when extra work is added to
the scope of service (avoid commission creep)
• Monitor project costs
• Target fee bids on winnable work
• Relate fee bids to resource analysis
Fee management
Options in the event of non-payment of fees:
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•Enquiry and negotiations
•Interest charges and debt collection costs
•Adjudication, arbitration or court action
•Suspension/termination
•Revocation of licence
Fee management
Fee adjustment:
RIBA Standard Agreement, clause 5.8
The Basic Fee shall be adjusted:
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(5.8.1)
including due allowance for any loss and/or expense if:
(a) material changes are made to the Brief and/or the
Construction Cost and/or the Timetable…….and/or
(b) the Services are varied by agreement.
Fee management
Additional fees:
RIBA Standard Agreement, clause 5.9
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Where the Architect for reasons beyond the Architect’s reasonable control
incurs extra work or loss and expense……the Architect shall be entitled to
additional fees calculated on a time basis……Matters in relation to which the
Architect shall be entitled to additional fees include:
(5.9.1) the Architect is required to vary any item of work commenced or
completed….or to provide a new design after the Client has authorised the
Architect to develop an approved design;
(5.9.2) the nature of the Project requires that substantial parts of the design
cannot be completed or must be specified provisionally….before construction
commences;
(5.9.3) performance of the Services is delayed, disrupted or prolonged; and
(5.9.4) the cost of any work, installation or equipment for which the Architect
performs Services is omitted from or not included in the Construction Cost
The Architect shall inform the Client on becoming aware that this clause will
apply.
Fee management
Evidence needed to claim additional fees:
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In order to establish that you have been involved in extra
work and have incurred extra expense, for reasons
beyond your control; i.e. not as a result of lack of skill,
care or diligence on your part, you need:
• Evidence of the work you would have been involved in
and the expense you would have incurred in performing
the contractually agreed scope of services.
• Evidence that the reasons for the need for the changes
in the scope of services were beyond your control.
• Evidence of how the work and expense is affected by the
material changes that have occurred.
Fee management
Records (contemporaneous) required to support a claim:
•
•
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•
•
•
•
•
Project budget, demonstrating the costing of the original scope of
services.
Statement of net fee, after contributions to profit and overheads
(excluding those included in the hourly rates).
The number of hours (costed at the appropriate hourly rates)
available at each work stage to complete the Services.
(Check that the hours are realistic for the scope of services
required).
Records of monitoring against budget at each work stage using
coded time management records.
Record of material changes and variations and their consequence
for the Services and their delivery, with accurate time records for
the extra work involved.
Correspondence with Client to inform them of the material
changes and their impact.
Out now………
RIBA Fee Calculator:
•Guide to using the RIBA Fee Calculator
•Resource calculator
•Fee calculator
•Model answers to client FAQs
•Good practice guidance notes on fee
management
RIBA Fee Calculator
As I have a very limited budget, why should I pay you so much?
The fee we charge relates to the amount of work we will have to do. By reducing the
scope of our services we may be able to reduce the fee but this could increase the
risk to you. In our experience clients save on project cost by getting the design right
before starting construction and not changing things during the build. Very often it
turns out that this saving is greater than the amount clients spend on architects’
fees.
When can I have cost certainty on the project?
Absolute certainty on the overall cost of a project is very difficult to achieve. We can
put mechanisms in place to help you manage your cost such as early estimates and
well planned designs. Minimising changes keeps cost controlled and putting aside a
contingency sum helps to cope with unplanned occurrences.
Can I have this all finished by Christmas?
Which Christmas?
RIBA Business Benchmarking
RIBA Business Benchmarking Service
• available to all RIBA Chartered Practices
(obligatory for RIBA Chartered Practices)
• a business enhancement, planning and development
tool
• business benchmarking is widely used by the legal
profession
• analysis focuses on four key areas:
financial performance
day-to-day management
business development
human resources
RIBA Business Benchmarking
Key Benchmarks
RIBA Business Benchmarking Service
RIBA Business Benchmarking
• Over 60% of practices meet the Colander
Benchmark, achieving 15% profit as a percentage
of turnover.
• 45% of all fees come from the residential market.
• 60% of practices do not have a business plan:
only 16% plan beyond one year.
• Practices in this survey average £15.3k profit per
fee earner.
• Average turnover per fee earner has fallen to less
than £60k.
RIBA Business Benchmarking
Charge-out rates:
RIBA Business Benchmarking
Client types – by number of clients (%)
Micro practices: headcount 1 – 4; Large practices: headcount 50+
RIBA Business Benchmarking
Client sectors by percentage of income (%)
Micro practices: headcount 1 – 4; Large practices: headcount 50+
RIBA Business Benchmarking
Interesting benchmarking facts:
• D and B can be more profitable than traditional procurement for
architects
• Large projects generally equal higher profits but project size needs
to related to practice resource
• Partners/directors need to spend 20 – 30% of their time on nonchargeable activities
• The ratio of support staff to fee earners typically varies from 1:3 to
1:5
• Education sector is moderately profitable but profit levels are
consistent
• Commercial sector is very cyclical but can be highly profitable
• Historically over the economic cycle housing has seen low profit
levels
• RIBA Benchmark suggests that no more than 40% of practice
workload should be in a single sector
RIBA Future Trends Survey
•
•
•
•
•
•
•
•
RIBA Future Trends Survey launched in January 2009
RIBA Future Trends Workload index for Sep 2012 is -3
RIBA Future Trends Staffing index for Sep 2012 is -6
Private housing sector workloads forecast to be stable over the
next quarter
Practices in London and the South East are currently most
optimistic about future workload and staffing levels; some growth
anticipated here in the commercial and private housing sectors
Current workloads are approx. at 60% of those at the peak of the
boom (i.e. just over a one third fall in workload)
Current staffing (architects and support staff) at approx. 75% of its
peak level (i.e. about a one quarter reduction in total workforce)
Student (Parts 1 and 2) employment levels down by approx. 40%
Future Trends – three month
workload forecast
Future Trends – three month
staffing forecast
Future Trends – three month
sector forecast
Fees and Fee Negotiations
“Good Practice Guide: Fee management” by
Roland Phillips
RIBA Publications Ltd
ISBN 978-1-85946-180-8
Getting Paid and Maximising Profit
RIBA Good Practice Guide – Painless Financial
Management
By Brian Pinder-Ayres
RIBA Publishing Ltd
ISBN 978-1-85946-289-8
AIA Best Practice Guide
Financial Management: 10 Key Performance
Indicators
http://www.aia.org/aiaucmp/groups/ek_me
mbers/documents/pdf/aiap016508.pdf