05
Fee Proposals – Setting a Realistic Fee
When Peter Shepheard, Gabi Epstein and Peter Hunter set up the practice where I work (SEH) just after World War II, the whole process of setting fees was much simpler than it is today. The RIBA published recommended fee scales which simply had to be applied, as appropriate, to the project in hand. That approach changed with the outlawing of recommended fee scales under competition law and EU regulations. So the setting of fees is now an area that each practice has to navigate for itself and on a project by project basis.
Getting the fee right and getting paid for all the work done can only be achieved if the practice knows what its services will cost and understands the business risks of the client and the project. Equally important is the value that the practice puts on its own work and the client’s perception of the value that is being added by the architect.
Added value is not constant: each project will generate its own benefits and these may be cash returns for a developer, or more abstract benefits such as better facilities for a hospital or school.
Some clients may not want an ‘artistic’ solution, just cost-effective delivery. Other clients will appreciate the advantages of having both.
Architect’s fees have become an emotive as well as a practical issue since the end of the recommended fee scales. There is no entitlement to a particular level of fee. In addition to costs and profit, the fee has to account for the perceived risks of the project.
Empirical Data
Practice records are the best source of data when putting together a new fee proposal. Records will hopefully show the details of each commission by building type, and the time spent by each individual with their grade or salary together with an analysis of the resulting profit or loss. The usefulness of this data is enhanced when records are kept on a ‘by work stage’ basis. All modern project recording and monitoring software will take care of this process automatically.
At the end of the project the client’s opinion of the architect will be influenced by the perceived fairness of the fee. Even the most affluent client will expect value for money, in accordance with their own perceptions, and the fee offer is therefore critical to the reputation and the financial well-being of the practice.
As discussed in Chapter 4, 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 – salaries have to be paid, the costs of running the business have to be met. The crucial management tool in job costing is the timesheet which records the time spent on project work, marketing, management and administration as well as absences for holidays and sickness.
There are several ways to approach the setting of the fee. One would be to use just empirical data gathered from the experience of previous projects. Another approach would be to try to calculate the resource and consequent cost requirements of the project on a stage by stage basis. The ideal solution for most practices is some combination of both of these processes which acts as a form of cross-check.
This chapter describes the various options for calculating fees and making adjustments at various stages of a project.
RIBA Fees Calculator
The RIBA Fees Calculator tool was launched on the RIBA website in April 2015. It has been designed by RIBA Practice Committee members and staff to assist the smaller practice in preparing fee proposals for clients. To use this tool you need to be an existing RIBA member, you can then access it under Member Login/Chartered Practice Services/Resources/Fees calculator. If you would like to find out more about accessing this tool or RIBA Membership, please call 0207 307 3686.
The calculator is in the form of a spreadsheet that allows users to build up data on costs per person or grade and then to apply those costs to the amount of time the user has estimated that it will take to undertake the project. This results in a figure for the total project cost. To this can be added a profit margin and thus a total proposed fee figure is generated.
The RIBA Fees Calculator has very helpful worked examples and some suggested responses to clients’ frequently asked questions about fees.
Traditional Approaches to Setting Fees
Percentage Fees
The ‘percentage fees’ option – which expresses the fee as a percentage of the final cost of construction – is most appropriate for straightforward building projects of relatively short duration, where normal services are required. The details of the project and its cost programme are defined at the beginning. Surveys, feasibility studies, developing the initial brief, and so on would normally involve additional time cost charges.
It is one of the most convenient and easily understood methods of charging, although somewhat rough and ready. This approach also has the problem of appearing to reward the architect for finding ways of increasing the overall construction cost. There is also the opposite risk: that the final construction cost may be lower than was originally anticipated and therefore the resulting architect’s fee is less than was planned.
Lump Sum Fees
Some clients may prefer to agree to a lump sum for the architect’s services in advance. It is always desirable to agree such lump sums separately for each work stage, although a single overall lump sum may be divided into appropriate proportions with each section payable on completion of the relevant stage.
The fixed lump sum can work well when the scope of the project, the services required, the programme and cost are clearly defined from the outset, and are likely to remain reasonably stable. However, it would be unwise to agree a fixed sum with no provision for variations except in the case of a highly focused service to be undertaken over a very short period. At the very least, provision should be made for lump sums to be varied if the time or cost parameters changed by more than, say, 10 per cent.
Time Charges
When the resources or the timescale necessary for performance of the architect’s services cannot be predicted with reasonable accuracy, time charges will be the best and fairest basis for remuneration. This is particularly relevant to the early stages of the project. The time spent on the relevant services by the various grades of architectural staff is charged at agreed rates usually expressed as £ per hour.
The annual inter-firm comparison report published by the RIBA is a useful source of benchmark hourly rates from other practices in your area (undertaking similar types of work). Other reports on fees are also available from the Fees Bureau.
Whether or not this option is used for the basic fee, always agree rates for appropriate categories of staff and/or named individuals, as it may be necessary to have agreed rates in place should additional services for extra work become necessary. Provision should be made for revision of the hourly charge rates to take into account inflation at 12-monthly intervals, particularly with services which will be provided over a number of years.
‘Percentage Ceiling’ Fees
In this method the project proceeds on the basis of a pre-agreed time charge but, if the total fee would exceed an agreed percentage, the latter is applied. The system gives a sort of ‘maximum price’ relating to the ultimate construction cost. If the hourly rate applies, the client gains but the architect has not lost out, provided that the time charge rates agreed to begin with are realistic and included an allowance for a contribution margin.
Unit Price Fees and Fees for Repetition
When the project is, or substantial parts of it are, plainly repetitive, fees may be agreed on a unit price basis (e.g. related to the number of hotel rooms, or per house type). The unit price is effectively a form of lump sum.
This approach may also be the basis of a royalty payment for the licence to copy the design on other sites. When a design is to be used on another site or is to be repeated without the involvement of the original architect, for example if a house type is to be repeated by a contractor on various sites, it might be appropriate to agree a licence fee for the use of the architect’s work for each house type (see below).
Where the repetition will occur on the original site (e.g. a number of houses or factory units to an identical design), it may be appropriate to adjust the basic fee. The repetitive elements, which will usually occur in the later stages of the project should be acknowledged in setting the fee for those stages at a level that recognises the reduced resources required from the architect.
Licence Fees
Whether or not the agreement explicitly says so, the client will have a right to use the architect’s work for its intended purpose, for example to construct a building on the identified site, provided that the work has been paid for.
However, if the commission is in any way speculative or at risk from external influences (e.g. in respect of financing or planning), or if it is possible that the client, having obtained the benefit of planning approval, may decide to sell the site or to use the design-and-build approach, the fee offer for the first stages might include an additional premium payment or licence fee for using the work. This fee will become payable if the architect is not appointed to perform further services.
Where it is known that the work will be used for other projects (e.g. producing designs for a house builder), a licence fee or royalty fee for each use should be considered. The amount of that fee will not usually be very significant, although it should include an ‘added-value’ element.
Expenses
Expenses incurred on the project may be:
- Reimbursed at net cost, perhaps with the addition of an administrative handling charge
- Reimbursed by a percentage addition to the overall fee
- Reimbursed by a fixed lump sum
- Covered by the basic fee.
Option one is simple, but does involve considerable administrative time in collecting the figures and supporting documentation. Option two is simple to operate provided that it is clear to both sides which expenses are intended to be covered by the arrangement. The fixed lump sum (option three) is also easy to operate but does mean that the architect is taking the risk of an expenses overrun. The final option, which in my experience seems to be the most common at the time of writing, means that provision for expenses must be made in the initial calculation of the overall fee agreement. Unrecovered project expenses could make a serious dent in the overall profitability of the project.
The agreement between the practice and the client should make it clear that reimbursement will be due for any expenses not covered by the specified categories if the client’s prior approval has been obtained, and for any disbursements made on the client’s behalf.
In any event, the architect should record the net cost of all expenses incurred on a project as a part of the project accounting process, because these amounts will need to be taken into account when doing a final project profitability analysis.
Fee Adjustments and Changes
The fee may need to be adjusted for any number of reasons, in which case the provisions of the agreement with the client for fee adjustments will be particularly important.
Forms of appointment, such as those published by the RIBA, will provide for remunerating an architect (or practice) involved in extra work or expense. Beware bespoke contracts which limit payment strictly to additional services only if they arise from the client’s instruction. Wise architects will always notify the client as soon as they become aware that additional services are going to be required.
An agreed procedure to record changes to the service or completed design information will provide a proper basis for claims for additional or adjusted fees to be made. On a small project this may be achieved by the use of a different form of coding on timesheet records. For larger projects it may be appropriate to establish a procedure of ‘change control’ requiring all proposed changes affecting other parties to be notified, approved and recorded together with the cost consequences including fees, the source of the change, the relevant date and an identifying reference number.
The following examples explain when adjustments might be justifiably claimed in addition to the basic fee.
Revision to Brief or Client’s Instructions
If a client for a planned new office building decides to move their accounts department to another building and replace it with a design studio, additional fees would be due on a time basis (or, if appropriate, an agreed lump sum), until the revised requirements are incorporated into the design. At this point the basic fee arrangement will apply based on the updated cost of construction. In the case of fixed lump sums, there may be a case to argue that the subsequent sums should be adjusted, if the original agreement allows.
Acceleration
If the client decides to modify the timetable to achieve earlier occupation, the practice may need to review budgets and time charges, or might opt to agree a fixed lump sum for each work stage affected. These adjustments should be based on best estimates taking into account that:
- Additional resources may be required, perhaps including overtime working
- Some works might be covered by provisional measurement or sums requiring design information to be prepared or modified during the construction period
- The contract administration period will be reduced, although the volume of construction work would remain the same.
The biggest difficulty may be in agreeing the exact starting point from which additional resources would become chargeable.
Omission of Work in the Original Brief or Cost of Construction
The initial fee calculation will be based on the whole project and, inevitably, some parts of the service will be subsidised by other parts requiring fewer resources. Omission of a substantial element could upset the balance of the fee. For instance, it may be decided at the end of work stage D that the production equipment, previously included in the cost of construction, should become a direct contract, without the involvement of the architect.
Where either the percentage fee or the calculated lump sum applies, the basic fee would be adjusted downwards although the architect had provided the necessary services.
Worked Example: Omission of Work in the Original Brief
Say the original cost of construction was £2.5 million, of which the equipment installation was £0.5 million, and an overall 6 per cent fee applied; the architect might claim a fee as follows:
Fee = 6% of x 40%* x £0.5 million + time charges for removing references from the design information.
* where 40 per cent is used as a multiplying factor to reflect the project percentage completion achieved
Client Variations During the Construction Period
When the client requires changes to be made during the construction period, the provisions of the agreement for extra work will apply. Note that where the basic fee is calculated as a percentage fee and inclusion of the variations reduces the cost of construction, the basic fee will be reduced also. However, if the variations increase the cost of construction, in addition to any other fees claimable, the basic fee covering the design and construction stages will also increase.
Research into Additional Facilities
If the client asks the architect to investigate the provision of an additional facility, for example an additional floor, the research and consequent report will be chargeable under the provisions of the agreement for extra work, whether or not the facilities are included in the final project. If included, the basic fee would be adjusted for the next work stages as noted under ‘Revision to brief or client’s instructions’ above.
Summary
- Fees can be set with reference to empirical data (i.e. from the cost and profit records of similar projects undertaken in the past) or with reference to the time and resources needed to deliver the project. An appropriate profit or contribution margin would then need to be added. A combination of both of these methods is probably the best solution for most architects.
- The RIBA Fees Calculator can be used to build up a fee proposal that will cover costs and give small practices a margin of profit.
- Percentage fees are easy to understand and calculate but may produce a distorted result if there is a significant cost overrun or underspend.
- Lump sum fees have the advantage of giving both parties clarity. However, some room for fee flexibility needs to be built in to the agreement when significant project variations arise.
- Time charge fees are ideal for ad hoc pieces of work where the amount of architect input required is hard to predict at the outset. However, some clients dislike the open cheque-book aspect of this approach.
- Unit price fees may be appropriate where there is a substantial repetition in the work.
- Licences are appropriate if the design work is to be used elsewhere on other projects in which the architect has no further involvement.
- Expenses may be reimbursed in a variety of ways or be included in the overall fee. The architect needs to be aware of the potential erosion of profit that can arise from project expenses.
- Changes inevitably occur on construction projects and the fee agreement should provide a mechanism for dealing with the implications of these changes.