Fees and services

On the first day of the seventh week Eberle hands each student a single sheet of paper: a request for proposal from Greenway Homes for architectural services on the Stanfield conversion, with a construction budget of 22.5 million dollars and a schedule of eighteen months for design and approvals. By Friday each student must submit a fee proposal. Eberle warns them that this is the exercise that young architects find hardest, because it asks them to put a price on work they have never had to price before, and because the answer will affect everything that follows: how many people can work on the project, how much time they can spend, whether the firm makes money and whether the client feels fairly treated.

Defining the services before the fee

A fee is the price of a scope of services, and the first rule of fee setting is to define the scope before calculating the price. The standard contracts describe a basic set of services in phases. Before design begins there may be predesign services: programming, site analysis, feasibility studies, building condition assessments and, on a project like the Stanfield, heritage research. Schematic design establishes the concept, massing, plans and outline specifications. Design development fixes the design and the building systems with enough detail for a reliable cost estimate. Construction documents produce the drawings and specifications from which the building will be priced and built. The tender phase helps the client obtain prices and select a contractor. Contract administration covers the architect's work during construction, from site visits and shop drawing review to change orders, payment certificates and the final inspection.

Beyond these basic services lie additional or supplemental services that some projects need and others do not: measured drawings of an existing building, heritage applications, rezoning, community consultation, energy modelling beyond code compliance, furniture selection, signage, life-cycle costing, commissioning, a full-time site representative, post-occupancy evaluation. Each must be listed and priced, or explicitly excluded. Eberle says that the most common source of unpaid work in his firm's history is a service that nobody listed, which the client assumed was included and the firm did not. A clear list of inclusions and exclusions is worth more than a clever fee calculation.

Ways of charging

There are four common ways to set an architect's fee. The first is a percentage of the construction cost, long the traditional method for full services on new buildings. It is simple, it scales with the size of the project, and it is supported by published guides that show typical percentages for different kinds of buildings. Its weakness is that it ties the architect's income to the cost of construction, which can look like an incentive to make buildings more expensive, and it does not reflect the effort of projects whose complexity is out of proportion to their cost, such as renovations and heritage work.

The second is a stipulated or fixed sum, an agreed amount for a defined scope. Clients like it because they know the cost in advance. Architects like it if they have estimated carefully, because good management turns into profit; they suffer if the scope grows without a corresponding increase in the fee. The third is time-based billing, at hourly or daily rates for each category of staff, usually with an estimate or an upper limit. It suits work whose scope cannot be defined in advance, such as feasibility studies, expert advice and many additional services. The fourth combines these: a fixed fee for basic services, hourly rates for additional services, and reimbursable expenses at cost or with a small markup.

In Canada the RAIC publishes a guide to determining appropriate fees, which describes these methods, classifies buildings by complexity and gives ranges of percentage fees by category and construction cost, together with a typical distribution of the fee among the phases. Several provincial associations publish their own guidance, and some public owners have their own fee scales. Document Six allows percentage, time-based and other methods, and calculates a percentage fee on the construction budget, the construction cost estimate or the final construction cost depending on the stage of the project; fees are not adjusted retroactively if the cost changes.

Calculating a fee from the effort required

Eberle teaches the students to calculate every fee two ways and to compare the results. The first is a top-down check: what does a typical percentage for this kind of project produce? The second is a bottom-up estimate: how many hours will each kind of staff spend on each phase, and what does that cost? If the two answers are close, the fee is probably reasonable. If the bottom-up estimate is much higher, the firm will lose money at the typical fee unless it can find a more efficient way to do the work, and it must either negotiate a higher fee, reduce the scope or decline. If the bottom-up estimate is much lower, the firm may be underestimating the work.

# Fee proposal for the Stanfield conversion, calculated two ways (Canadian dollars).
cost = 22_500_000                       # construction budget
pct = 0.075                             # renovation and heritage work: higher than new buildings
top_down = cost * pct
rates = {"principal": 210, "project architect": 150, "architect": 125, "intern": 95, "technologist": 105}
hours = {   # phase: hours by staff category
    "predesign and heritage": {"principal": 60, "project architect": 180, "intern": 220},
    "schematic design":       {"principal": 90, "project architect": 300, "architect": 300, "intern": 300},
    "design development":     {"principal": 80, "project architect": 420, "architect": 500, "intern": 450, "technologist": 200},
    "construction documents": {"principal": 70, "project architect": 600, "architect": 900, "intern": 700, "technologist": 900},
    "tender":                 {"principal": 20, "project architect": 80, "architect": 60},
    "contract administration":{"principal": 90, "project architect": 700, "architect": 500, "technologist": 200},
}
consultants = 640_000                   # engineers, heritage, cost consultant (quoted)
staff = {ph: sum(rates[s] * h for s, h in row.items()) for ph, row in hours.items()}
architect = sum(staff.values())
bottom_up = architect + consultants
for ph, v in staff.items():
    print(f"{ph:<26}{v:>12,.0f}")
print(f"{'architect total':<26}{architect:>12,.0f}")
print(f"{'consultants':<26}{consultants:>12,.0f}")
print(f"{'bottom-up fee':<26}{bottom_up:>12,.0f}")
print(f"{'top-down at 7.5%':<26}{top_down:>12,.0f}")
print(f"difference {100 * (bottom_up - top_down) / top_down:+.1f}% of the top-down fee")

predesign and heritage          60,500
schematic design               129,900
design development             206,050
construction documents         378,200
tender                          23,700
contract administration        207,400
architect total              1,005,750
consultants                    640,000
bottom-up fee                1,645,750
top-down at 7.5%             1,687,500
difference -2.5% of the top-down fee

On the Canadian figures the two methods agree within about 3%: the bottom-up estimate of about 1.65 million dollars is slightly below the 1.69 million dollars that a 7.5% fee would produce. That tells Eberle that the firm can propose a fee in this range with confidence, and that any saving from careful management becomes profit. The estimate also shows where the work lies. Construction documents take more than a third of the architect's own effort, contract administration and design development about a fifth each, and the consultants' quoted fees are about two fifths of the total. A firm that discounts its fee to win the project is really discounting the hours available for the documents and the site.

Distributing the fee by phase

Clients are invoiced as the work progresses, usually monthly, in proportion to the work completed in each phase. The contract normally sets out the share of the fee for each phase, and the standard guides suggest typical shares: roughly 15% for schematic design, 20% for design development, 40% for construction documents, 5% for tender and 20% for contract administration. The shares differ for renovation and heritage projects, which need more effort before design begins, and for projects with long construction periods, which need more during construction.

The distribution matters for cash flow as well as fairness. If construction documents are underpriced, the firm will run out of fee before the drawings are finished and will have to finish them at a loss, which is when quality suffers. If contract administration is underpriced, the firm will be tempted to visit the site less, which is when mistakes go unnoticed. Eberle's firm tracks the fee spent against the fee earned on every project every month, and a project manager whose spending runs ahead of progress is expected to explain why before the end of the month.

Reimbursable expenses and additional services

Most contracts allow the architect to charge for certain expenses in addition to the fee: travel outside the city, printing, courier charges, permit and application fees paid on the client's behalf, specialist reports and the cost of consultants hired for additional services. The contract lists which expenses are reimbursable and whether a markup applies. Additional services are charged at hourly rates or for agreed sums, but only with the client's written approval in advance. Eberle's rule is that no one in the firm begins an additional service until the project manager has a signed authorization, however small the task and however friendly the client.

Negotiating and presenting the fee

A fee proposal is a document a client will read carefully, and Eberle says it should explain as well as price. It describes the firm's understanding of the project, the services included and excluded, the team, the schedule, the fee and how it will be invoiced, the hourly rates for additional services, the reimbursable expenses and the assumptions on which the fee depends, such as the construction budget, the number of meetings and the length of construction. When a client asks for a lower fee, the architect should ask what services the client would like to reduce, rather than simply cutting the price. A lower fee for the same services usually means fewer hours, and fewer hours usually means a weaker building or a loss for the firm.

Delgado, who is reading the students' proposals with Eberle, adds the client's view. She is not looking for the lowest fee but for the most convincing one. She wants to see that the firm understands the building, that the hours are where the work is, and that the exclusions are honest. A proposal that is much lower than the others makes her nervous, because she has learned that the low firm either misunderstood the work or plans to recover the difference through additional service requests. A proposal that is clear about what is included lets her compare firms fairly and budget for anything excluded.

Exercise 7: a fee proposal

• Prepare a bottom-up fee estimate for a small library renovation, with hours by phase and staff category.
• Compare it with a percentage fee and explain the difference.
• List the services included and excluded, and the assumptions on which your fee depends.
• Write a one-page covering letter that explains the fee to the client.

Self-check

• Can I describe the phases of basic services and the additional services a project may need?
• Can I explain the strengths and weaknesses of each fee method?
• Do I calculate fees both top-down and bottom-up?
• Will I respond to a fee reduction by adjusting scope rather than hours?