Episode 26:

Hello and Welcome to the Part3 with me podcast, 

The show that helps part 3 students jump start into their careers as qualified architects. I am your host Maria Skoutari and this week, next up on the starting a practice episodes we’ll be talking about Fee Management, this a relatively extensive subject so I will breaking the episode into two parts. Today is Part 1 where I will be talking about what the fee means for the practice, how to calculate the fee and basing the fees on the RIBA Work stages. Next week, Part 2 will be covering how to negotiate the fee, getting paid, what to do in the event of non payment and working at risk - PC2 - Clients, users and delivery of services & PC4 Practice and Management of the Part 3 Criteria.

So we’ve already briefly covered some sections of fees and forecasting in the previous few episodes but today we will looking in more depth on what the fee means for the practice, how to calculate the fee and basing the fees on the RIBA Work stages.

First we’ll looking into putting a realistic price and what the fee means for the business: 

The key thing to consider when establishing the fee is understanding the market and its risks, putting a realistic price on the product and bringing it to the market place and making a profit. 

Then this would need to be monitored within the company through robust management procedures, regular monitoring of professional performance and monitoring of financial performance.  

Now when it comes to deciding the fee it must cover and consist of costs, profit and perceived risks. This will then need to be discussed with the client to reassure them that the services offered and paid for are ‘value for money’ in accordance with their own perception. The fee offer is, therefore, critical to the reputation of the practice and to its financial well-being. 

The fee should therefore be realistic and a true reflection of the services offered. A way to manage job costing is through time sheets, which record the time spent on each project, marketing, management and administration and absences. The question is then of how the cost of non-project time is recovered. There should be an established ratio within your practice of chargeable to non-chargeable time and it should be kept under constant review.  

Fees should be influenced by:

• The extent of the architect’s services and the type of procurement
• The size and complexity of the project and any project specific requirements
• Works to existing buildings that may as a result require additional resources
• Repair and conservation of historic buildings which is more complex and the fee will as a result be higher
• Repetition - meaning the number of houses or apartments that have an identical design meaning less resources will be needed
• If the project is to be repeated on other projects or sites

Now when it comes to the profit, it should be seen as a quantifiable target for the performance of the business overall, as target for each job in its own right and for each fee-earning person employed by the practice. The income expected from each project should be established in the terms of the commission agreed with the client and described in a properly formulated written agreement, any additional services requested by the client must in returned be paid for. Setting a realistic profit margin depends on a good understanding and knowledge of costs which include the costs of running the practice, the costs of running each job and the chargeable and actual costs of each person employed by the practice. The varied and fluctuating nature of projects makes slightly difficult for architects to set a fixed pattern for costing that will assure profitability so managing the workload of the office is key and having management procedures in place to monitor costings regularly. This should include:

• Recording time usage and calculating the cost of that time
• Day to day accounting or book-keeping
• Resource planning
• Resource monitoring
• Calculating fee offers
• Invoicing clients
• Identifying the practice’s workload over time and monitoring progress

Now moving on to the evaluation and fee calculation methods:

There are five methods for evaluating costs for your architectural services. 

The first is to use percentage fees, which is drawing from published data, personal experience and any available historical data to establish a percentage fee that is applicable to the building type for the architectural services. This option is usually more appropriate for straightforward building projects of relatively short duration where normal services are required and the details of the project, cost and programme are defined at the beginning. Most clients, however, have become more demanding with fees which has caused a lot of practices to move away from percentage fees, although they are used extensively as a benchmark by both clients and consultants. If using this method it would be wise to check whether the fee will provide adequate time by dividing the fee, less the margin by the average hourly cost and by checking whether the work stage allocations are appropriate.  The potential benefit of using the percentage fee method means if the construction fee increases then the architects fee increases with it but if for any reason it drops then the same applies to the architects fee, that’s why it’s no longer such a popular approach to fee calculation. 

Moving onto the second method for fee evaluation, which is, Lump Sum fees, is more preferred method by clients as it provides greater certainty. It is advisable that an agreed lump sum fee should be separately agreed for each work stage or you can simply divide a single lump sum fee into appropriate proportions with each section payable on completion of the relevant stage. 

The third method, which is probably the safest, is the Fixed Lump Sum, where the scope of the project, the services required, the programme and cost are clearly defined from the outset and are likely to remain stable. Although it is advisable that there should be a provision of variation within the fee in case any of the parameters for time or cost change by more than say 10%.  

The fourth is based on a Calculated or Variable Lump Sum, whereby if change is likely in terms if the brief, programme, cost to clients aspirations it will be more appropriate to choose a method that can be used to calculate lump sums when the project has been sufficiently developed to remove this uncertainties. This is typically established by applying percentages for each work stage to the relevant cost of construction. There are two ways for the timing of making the calculations. The first would be when the design is ready for submission for detailed planning approval or at the beginning of each work stage based on the estimated cost of construction at the end of the previous stage. If for any reason the client requires changes to the project which occurred after the lump sum was calculated, these would then be treated as additional services. This approach creates a fair balance of the risks, adds transparency to the operation of the percentage fee method and brings and elements of value management into the process. 

Any last but not least we have the Time Charges method. This method is typically used when the resources or time scales cannot be predicted with reasonable accuracy. The time expended on the relevant services by staff members is charged at an agreed rate usually expressed as hourly rates. Provision should be made for revision of the rates for inflation/deflation especially where services will be provided over several years. It is essential under this method that accurate records of all time spent by the relevant staff members is recorded to enable accurate charges to the client. This information can also be used as evidence if a claim is challenged by the client. 

There is also a variation of the Time charge method whereby if the total fee exceeds an agreed percentage it reaches what is known as a ‘percentage ceiling’. This approach does not allow for additional instructions generating extra fees, therefore, there is a risk if the clients brief is inadequate or the consultations during the design process are used to sort out basic problems then the fees will not be adequate to cover the extra time spent. The rates will, therefore, need to be high enough to cover such risks. 

Another potential alternative method for fee calculation is where a project or substantial parts of it are repeated, fees may then be agreed on a unit price, for example on number of hotel rooms or per house type. The unit price is in essence a form of lump sum. It may also be the basis for a royalty payment for the license to copy the design to other sites. So if the design is to be used on another site without the involvement of the original architect then it may be appropriate to agree a license fee for the use of the architect’s work for each house type. The repetitive element which will occur during stages 4 & 5 then the fee may be adjusted to recognise the reduced resources required by the architect. If at the time of agreeing the fee however the extent of repetition is unknown, you may base the fee on the formula of number of units less one x unit cost divided by the cost of construction x the percentage of fee in pounds for work stages 4 & 5. The fee will then either be the percentage fee for those work stages or the proportion of the lump sum relating to the repeated design. The percentage reduction or rebate of the basic fee should take into account that although the design may be standard, it may have to be shown or repeated on location drawings. The formula also accommodates lump sum fees.

A quick example would be:

Say your construction cost is £1m and there are 20 identical units that cost £40,000 each. 

The basic fee is 6% of the cost of construction of which 15% is for Stage 4 lets say and 20% is for Stage 5 and it has been decided to rebate 75% of the fee for the identical units.

The calculation would be (20-1) x 40,000 / 1m x (6% x 1m x 35% x 75%) = 760,000 / 1m (60,000 x 35% x 75%) = 0.76 x 15,750 = 11, 970£

A practice can also calculate the fee from the cost of the estimated resource requirements, this approach would typically include the outputs or tasks of the employees, the time they will take, the staff available and the cost. 

Now whether using any of the methods mentioned or calculating the resources, attention must be given to the difference between:

The direct costs of employment of each fee earner, which includes the direct payroll costs, employer’s National Insurance contributions and benefits such as car allowance, pension contributions, life and health insurance, professional subscriptions, CPD programmes and recruitment and also considering indirect costs which includes overhead costs, and enough profit to be reinvested in the growth and development of the practice. 

Both direct and indirect costs will vary from one commission to the next so some protection can be built in to the fee by choosing the calculated lump sum option to include a contingency provision to allow for inflation. Or alternatively it my be a lower fee because the practice needs the commission or the lead with the client to lead into further future commissions. 

The next step is then to actually define the fee and expenses to be charged to the client taking into account the benefits, risks and costs of the potential commission.

The component parts of such fees will be:

• The basic fee for performing the architect’s normal services as set out in the agreement with the client
• Any fee for other services
• Provision for time charges
• And expenses

The basic fee will usually exclude the fee for any separately identified ‘other services’ and should identify the chosen method of calculation and the percentages or lump sums indicating how the fee will be apportioned for each stage which will prove beneficial if changes are made to the cost or programme. 

If performance of multiple roles is required such as architect as designer, lead consultant, Principal Designer, Contract Administrator and so on you should consider whether the fee for any of these roles should be charged separately.  

A key item to keep in mind when putting your fees together is to appropriately evaluate your work and the value you will bring to the commission, do not underestimate your value and services which is a common mistake a lot of architects tend to make.

In addition to the Basic Fee, there are what are called betterment or incentive fees which may be agreed with a client for rewarding achievement of cost savings, reduction in energy consumption, lower through-life costs for the project or other stated aims such as planning gain. Such rewards should set a baseline from which the benefits would be measured, the nature of the reward  and the timing of the payment. The baseline might be for example:

• Estimates for the targeted capital or revenue costs made as part of the submission of the detailed design proposals for approval 
• Or the value of the site or property before planning permission

In the second scenario for example, the reward should become payable on the grant of permission. Depending on the nature of the target achievement, the additional fee might be a percentage or a sliding scale of lump sums to reflect, say, 50% of the architect’s net contribution to the benefits. Such terms should be carefully outlined within the contract agreement with the client. 

When it comes to expenses, these can be charged through:

• Reimbursement at net cost - maybe with the addition of a handling charge (e.g. paying for a survey on behalf of a client)
• Reimbursement by a percentage addition to the gross fee
• Reimbursement by a fixed lump sum
• Or covered by the basic fee

The first option incurs no risk to the practice unless the client wishes each item to be validated. 

The percentage option is quite straightforward provided its clear which expenses are covered. This option can be calculated annually by expressing the expenses in the practices accounts as a proportion of the fee income. 

The fixed lump sum options is also easy to manage but the risks are carried by the architect.

If expenses are tο be covered by the basic fee the calculations must include an appropriate percentage addition.

Whichever option is chosen, it should be specified which items are included, e.g. printing, travel, etc. 

Now, in this next section we’ll be looking at basing fees on the RIBA Work Stages:

Work stage fees can be the first step in planning your cash flow to benefit both the practice and the client as they provide the progressive development of the cost of the project allowing more transparency of the costs  and allowing for review of briefing or design decisions affecting the cost of construction and the fee as a result.

Where the fee is percentage based, time charged or lump sum, in any case, the work stage fees create a fair balance of the risks, add transparency and bring an elements of value management into the process. 

Typically, for the first few Stages between 1-3 it is common to have a larger part of the overall fee for these stages as they reflect the architect’s intellectual property and conceptual skills on which the success of the projects depends on. Front-end loading is therefore considered as justified as the architect essentially devises a solution to the client’s brief and provides the ‘added value’ of their knowledge and expertise to secure planning permission. 

Then Stage 4 should be in the region of the fee for Stages 1-3 due to the extent of work the architect has to undertake involved in coordination and integrating design information from contractors or specialist sub-contractors, elaborating design details or preparing designs for work in provisional sums or measurements. 

And then for Stages 5 and onwards many architects tend to charge in a time charge basis as progress and quality are governed by the contractors performance. 

If the project is under a Design and Build contract, and the architect may be required to prepare the Employers Requirements or to prepare the Contractors Proposal, the architect should estimate the required level of input and resources and estimate the fee on that basis. And if the architect is novated to the contractor, the fees will be paid by the contractor in that instance.  

Things to remember:

• It is key to keep on top of your practices finances, poor financial control can be the reason your practice goes out of business, profit is therefore essential as it ensures the practice will continue to exist and grow.
• You can use one of 5 methods your charging fees, through percentage fees, Lump Sum fees, Fixed Lump Sum, Calculated or Variable Lump Sum or through Time charges. 
• Your fee should consist of The basic fee for performing the architect’s normal services as set out in the agreement with the client, Any fee for other services, Provision for time charges And expenses.
• You can also set out payment intervals alongside the RIBA Work stages, so you get paid at the end of each stage for the work you have carried out to date, therefore if for any reason the project gets cancelled later down the line, you have been paid for the work you have carried out
• ARB Code Standard 4 requires architects to provide adequate professional, financial and technical competence and resources.
• ARB Code Standard 4 requires that the fee or method of calculating it shall be recorded in writing before any professional work us undertaken. 
• CDM Regulations require the allocation of adequate time and resources by persons with duties under the regulations
• The offer must provide a reasonable commercial return to the architect’s practice
• In accepting an appointment the architect offers to perform services as specialist, the fee should therefore be adequate to meet all the obligations ‘as specialist’ and the risks arising, as well as achieving the desired profit. 
• The more complex the project the more data is required for design development Work Stages.
• If the client or the practice requires additional PI insurance cover for the project, it is essential to determine how ti will be financed.

Join me next week for Part 2 of the Fee Management Subject