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Architectural Professional Practice - Fees
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Architectural Professional Practice - Fees

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Architectural Professional Practice - Fees Architectural Professional Practice - Fees Presentation Transcript

  • Services and Compensation
  • Services and Compensation Part 1
  • Introduction
    • Project planning and pricing identify both the services and the compensation appropriate to the needs of the project.
    • The architect proposes the services to be provided and a compensation for those services.
  • The Fees Proposal
    • EARLY in the selection process
    • To be formulated LATE in the discussion
    • An owner's Request for Proposal (RfP)
    • Series of proposals ……..
    • Verbally (not recommended)
    • Thick " package "
    • Sometimes there is NO proposal ! The client offers terms of what appears to be a " take it or leave it " basis!!!
  • I. The Architect's Services
    • What are the services that the architect proposes to provide ?
    • What services are appropriate to meet the owner's objectives ?
    • What will it take to define the scope of the project ?
  • I.1. Options for defining services
    • I.1.a. Selecting from a " menu ”
    • I.1.b. Using a predefined " package " of services
  • I.1.a. Selecting from a "menu"
    • Owner and architect working from a menu of possible choices .
    • Select a complement of services specifically appropriate to the project at hand.
    • Owner-Architect Agreement for Designated Services.
    • Kuwait Society of Engineers Documents.
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.a. Selecting from a "menu"
  • I.1.b. Using a predefined "package" of services
    • Basic services
    • Additional services
  • I.1.b. Using a predefined "package" of services
    • Basic services are divided into five phases:
      • 1. Schematic design
      • 2. Design development
      • 3. Construction documents
      • 4. Bidding or negotiation
      • 5. Construction contract administration
  • I.1.b. Using a predefined "package" of services
    • Other services packages include:
      • Small projects and projects of abbreviated scope
      • Interiors (furniture, fixtures, and equipment) projects
      • Projects involving construction management services
      • Design/build projects
  • I.2. When services cannot be defined
    • Work with the client to:
      • Define the project
      • Establish project requirements
      • Identify the remaining services necessary to take the project to completion
  • I.2. When services cannot be defined
    • Compensation methods:
      • lump sum
      • hourly cost basis
  • Services and Compensation Part 2
  • II. Project planning and budgeting
    • The Project Plan
    • Carefully constructed and formally drawn
    • Quick calculation based on lots of comparable experience
  • II. Project planning and budgeting
    • Project planning offers important opportunities :
    • It helps the architect and the owner think through the project .
    • It helps both parties identify the professional services that are important to the project's success.
    • It helps the owner understand his role in the project (responsibilities, decisions, approvals, and implications)
  • II. Project planning and budgeting
    • Project planning offers important opportunities :
    • It helps the architect structure the appropriate design team for the project.
    • It helps the architect understand how the project will affect the firm , its people, priorities, and other projects.
    • It helps both owner and architect build a foundation for the owner-architect agreement to follow.
  • II.1.a. Bottom-up planning
    • Starts with the tasks to be performed
    • Identifying who will do them
    • How much time each task will take
    • What each task will cost
    • The total cost is the proposed price ( compensation or fee )
  • II.1.b. Top-down planning
    • Starts with the compensation or fee available to do the project.
    • Backs out the money available for various project tasks .
  • II.2. Tasks and responsibilities
    • Decide if the task is to be provided:
    • By the architecture firm , with its own staff
    • By the architect, subcontracted to a specialist consultant
    • By another consultant to the owner
    • By the owner with its own forces
  • II.2. Tasks and responsibilities
    • Ideas to identify tasks and responsibilities:
    • Review the deliverables being promised to the owner
      • Who is likely to accomplish it (assistance, backup, and supervision)
      • Key project tasks (approvals) even if they are not with the architect's scope of service)
      • Include project management as a task (expertise, time, and resources)
  • II.3. Project schedule
    • Construct a schedule for professional services.
      • How long will it take to accomplish each task?
      • How are the tasks related to each other?
      • What are the milestone dates to be met?
  • II.3. Project schedule
    • Simple Milestone chart indicating major tasks or phases with target completion dates.
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  •  
  • II.3. Project schedule
    • More elaborate Bar Charts .
  •  
  • II.3. Project schedule
    • Critical Path Method (CPM) networks and schedules.
  •  
  •  
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  • II.3. Project schedule
    • Suggestions:
    • Use the task list
    • Include activities that may influence the schedule
    • Discuss contingencies to provide the owner with flexibility for considering options and possibilities.
    • Consider an interactive approach that involves key people, consultants, the owner, and outsiders
  • II.4. Costs of providing services
    • First-cut-budget
    • The expenses that will likely be incurred in performing the services.
  • II.4. Costs of providing services
    • Cost of providing the services
    • " No brainer" Based on recent very similar projects for the same client.
    • " Built up" Based on the cost of providing services .
    • " Start from the other end " A client-nominated amount .
  • II.4. Costs of providing services
    • Ways to cost services
    • Make " cartoon set " of the drawings to be provided
    • Estimate parallel that of a recent similar project
  • II.4. Costs of providing services
    • Step-by-step buildup of the cost of providing services:
      • for each task: who, how many hours
      • totaling the hours X each person's hourly rate =
      • total Direct Salary Expense (DSE) for in house staff
      • + payroll burden
      • OR
      • X DSE multiplier (1.25)
      • = total Direct Personnel Expense (DPE)
      • + non-reimbursable direct expenses =
      • totals for each phase + contingency + profit = total project expenses
  • II.4. Costs of providing services
    • Suggestions:
    • Work at an appropriate level of detail : Project - Phases - Tasks
    • Document the internal budget carefully so you can use this information as a yardstick for measuring progress
    • Don't neglect the costs of project management . Require senior management time and important to project success
    • Course corrections
    • Develop cost estimates in spreadsheet form on the computer. "what if" analysis.
  • II.4. Costs of providing services
    • Suggestions:
    • Involve the people who will be performing the work in the process.
    • Track project expenses by task or phase
    • Build historical database you can use in budgeting future projects
    • Types of projects that the firm does best and that earn satisfactory profits as well as those that require extra expenses, more time, and/or higher profit margin.
  • III. Compensation methods
    • The are two fools in every market; one asks too little , one asks too much .
    • Russian proverb
  • III. Compensation methods
    • From cost to price
    • Compensation (fee) proposal
    • How will the architect be compensated?
      • Lump sum fee
      • Construction cost
      • Unit costs
      • Repetitive units
    • Combination of these approaches
  • III.1. Stipulated sum (Lump sum)
    • Fixed amount of compensation.
    • Tied to specific set of services to be provided.
    • Then some form of cost-plus compensation
  • III.1. Stipulated sum (Lump sum)
    • When project scope and quality are well defined
    • When client and architect have a shared understanding of what is required to provide professional services.
  • III.1. Stipulated sum (Lump sum)
    • Clients like stipulated (lump) sum because they establish price up front .
    • Encourages efficiency in the architect's firm .
    • Unknowns may cause substantial losses
  • III.2. Cost-plus-fee approaches (C+)
    • Compensate architects on basis of actual time and expenses incurred in providing services.
    • Variations include:
    • Multiple of Direct Salary Expense (DSE)
    • Multiple of Direct Personnel Expenses (DPE)
    • Hourly or daily billing rates
    • Percentage of construction cost
    • Unit-cost methods
    • Repetitive projects
    • Evaluating compensation methods
  • III.2.a. Multiple of Direct Salary Expense (DSE)
    • DSE * factor that covers indirect expenses (non-salary expenses) and profit
    • DSE "multiplier" is carefully determined
    • Outside consultant services are typically considered to be reimbursable expenses.
    • " Marked up " to cover the very real costs of coordination, liability, and administration.
  • III.2.b. Multiple of Direct Personnel Expenses (DPE)
    • Includes staff fringe benefits as part of the base and not as part of the multiplier.
  • III.2.c. Hourly or daily billing rates (/h)
    • Cost-plus agreements can be useful when there are many unknowns and when it is difficult or even impossible to establish a stipulated sum at the outset.
  • III.2.c. Hourly or daily billing rates (/h)
    • Unknowns include:
      • variable scope
      • committee decision process
      • complex regulatory approvals
      • stop-and-start progress
      • unfamiliar construction methods
  • III.2.c. Hourly or daily billing rates (/h)
    • From the owner point of view , the advantage of cost-plus approaches when levels of uncertainty is high
    • From the architect's point of view , the advantage of cost-plus approaches help guard against losses .
    • ?… BUT …?
    • Limit profit possibilities and increase paperwork (DES or DPE multipliers) and client reviewing the firm's books.
  • III.2.d. Percentage of construction cost (%)
    • Ties compensation to the construction cost of the project and not to the scope of professional services provided .
    • While appropriate for some projects, has seen declining use because it can produce inequities (unfairness) for both the owner and the architect.
  • III.2.d. Percentage of construction cost (%)
    • This approach:
    • Assumes that the cost of providing service , or the value of those services to the owner, relates to the amount the owner spends on construction .
    • Allows conditions in the construction marketplace to expand - or contract - the owner's costs and the architect compensation without an equivalent change in the services provided.
  • III.2.d. Percentage of construction cost (%)
    • This approach:
    • Penalize architects who invest extra effort in reducing construction cost for the owner .
    • Produces a level of compensation that isn't known until the construction contract is established .
  • III.2.d. Percentage of construction cost
  • III.2.d. Percentage of construction cost (%)
    • Psychological factors that may undermine the owner architect partnership:
    • The owner may perceive that the architect has no incentive to keep construction cost down .
    • The architect may lose substantial sums of money simply because the construction bids come in low .
  • III.2.e. Unit-cost methods
    • Cost per building (residential development, large franchise operation)
    • Repetitive units (per apartment, hotel room, dormitory bed)
    • Floor area (tenant spaces in office buildings, shopping center)
  • III.2.e. Unit-cost methods
    • The assumption is that the initial design work will be repeated and adapted over multiple units and the professional should receive compensation on a kind of "piecework" basis.
    • Earlier units usually require more effort that those that follow.
  • III.2.f. Repetitive projects
    • The initial design may be used in additional projects on the same or different sites .
    • Royalty arrangement or other compensation approaches.
    • Important issues:
    • The first project require substantial research and development investments
    • Fixed costs for developing and drawing successive projects
    • Adaptation for additional sites and climatic and regulatory conditions may be significant
    • Each reuse represents an additional exposure or risk
    • Intellectual property must be carefully considered
  • III.2.g. Evaluating compensation methods
    • Questions:
    • Does the method permit the architect to cover expenses and provide reasonable profit ?
    • Does the method allow changes in compensation during the project as a result of changes in scope of services or events outside the architect's control?
    • Does the method allow the client to estimate or fix (if necessary) the costs of professional services?
    • Does the method encourage the client to cooperate in pursuing the project?
    • Is the method easy to understand and simple to use ?
  •  
  • III.2.g. Evaluating compensation methods
    • There is no best method of compensation; each has advantages and disadvantages, and each may be more or less appropriate in a particular situation.
  •  
  • III.2.g. Evaluating compensation methods
  • III.2.g. Evaluating compensation methods
  • IV. Project Pricing and Proposals
    • IF the owner has fixed the fee to be paid 
    • Evaluate the owner's proposal against what's best for the project and the firm 
    • Propose changes in scope or in compensation.
    • Some clients look only to their immediate bottom line without regard to the architect's costs, needed profit, and value added.
  • IV. Project Pricing and Proposals
    • Adequate compensation for the architect is in the client's best interest because it provides the architecture firm with the wherewithal to deliver the appropriate level of service.
  • The compensation (fee) proposal
    • Proposed compensation method (or methods)
    • The amount
    • Terms and conditions
  • The Pricing equation
    • Rules of thump based on your practice:
    • Hours per sheet of drawings or specs (by project type)
    • Monthly allowances for direct office expenses (by project type)
    • Hours per square foot or meter of building (by project type)
    • Fee as a percent of construction cost (by project type)
    • Cost
    • + Profit
    • It is a business expense!
    • + Marketing cost
    • Negotiations, preparing and signing contracts.
    • + Contingency
    • A factor based on project complexity, client, and scope of project
    The Pricing equation
    • + Added value .
      • The strength and weakness of the market ,
      • Your position within it in the mind of the client,
      • How much competition is there,
      • How important is this project to you, and
      • How much room will you have to negotiate .
    • = Your price proposal
    The Pricing equation
    • Project Cost +
    • Profit +
    • Marketing cost +
    • Contingency +
    • Added value =
    • $Your price proposal$
    The Pricing equation
    • The fees of the architect should be considered as a wise investment and not just an added expense.
    The Pricing equation
  • END