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Setting the RIGHT Fee!
NSAA Continuing Education April 26, 2012
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Setting the Right Fee – Game Plan • Setting the context • Who cares? • Factors that affect your fee • Principles that drive your fee • Calculating and arriving at your fee • Negotiation • Your contract • Post mortem on the project
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Context • Fees and Services ‘challenge’ • Professional fees generally
– Current vs. Historically – Anecdotally – “Succeeding by Design”
• Historical reliance on “Fee schedules” – Dream of “good old days” – % age of construction cost – Hourly rates c.f. other professions – Varying scope project to project – Clients, Colleagues and the Marketplace – Commoditization
1960
2005 20%
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Context • Why the pressure on professional fees?
– Cyclical economy impact on design/construction sector – Increased competition – Client needs/demands changing – Complexity of practice – red tape world – Lack knowledge of “business basics” – lack training
• How P/L relate to fees charged/cost of delivering services • Practice management • ‘Supply and demand’ • Profit margins … “starving artist”
– Managing Risk and Reward – SMALL BUSINESSes!!!!!!
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Challenges to Creating a Fee Schedule
• $ Ranges, Variations in Construction Cost • Building Type • Project Delivery Model • Construction Delivery Model • Scope of Services • Complexity • Approvals • Client • Risk (and reward??)
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Suncor to pay $500,000 fine
for fixing gasoline prices
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Although …
• Not enforce (but … ) • Fact-based, data based on market research • No collusion • OGCA “qualified bids”
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Why YOU Need the Right Fee • Deliver the professional services • Maintain high quality • Meet standards of the profession • Architecture is a business
– Compete – Solvent – Revenue v. expenses
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Why YOU Need the Right Fee • Deliver the professional services • Maintain high quality • Meet standards of the profession • Architecture is a business
– Compete – Solvent – Revenue v. expenses
• Human resources – staff, contractors • Consultants • IT – hardware and software, internet, cloud • Insurances • Promotion and Business Development • Premises, FF and E • Advisors
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Why … • Profit is not a “dirty word”
– Sustain • Taxes • ROI • “slow times” • Change management
– Business Development
– Invest and reinvest • Recruit and retain HR; training and continuing education • IT – capital and implementation • R and D
– Grow and expand – Reward – Retirement
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Why?
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Why?
Support your profession!
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Factors that Affect YOUR Fee
• Scope of professional services • Building type • Complexity … New? Reno? Systems? • The team • The client • Competition • Construction procurement model • Schedule
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Factors that Affect YOUR Fee
• Special requirements e.g. BIM • Approvals • LCC, Operations and Maintenance, LEED, and third party certification
• Phasing • Prototype? • Patents • RISK (and reward?)
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Factors that Affect YOUR Fee
• Location • Pursuit costs • Project delivery model • Expectations of profit, ROI • Business strategies • Repeat work • Client rep, their authority, involvement • Client expectations
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Principles that may drive YOUR fee • Value • Reputation • Quality • Innovation • Philosophy … sustainability, CSR, altruism, professionalism, “Architecture Matters”
• Interests, practice focus • Objectives • Strategic Plan
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Brian’s Recommendation
Professional Fees
v. Expenses
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Brian’s Recommendation
Go/No Go
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Calculating, Then Arriving at YOUR Fee
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Calculating …
• RAIC Guide – lagniappe
• Hourly • Work Breakdown Structure • Output • Unit • Market fees
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In Principle
• Fee = %age of construction cost – Net of engineering fees, includes coordination only
– Incl S, M and E – Can translate to a fixed fee
• Building Type – 7 • Construction Cost ranges • Simple, Average, Complex • Adjustment Factors – 16 – (plus)
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Building Categories
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Building Categories
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Adjustment Factors
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Adjustment Factors
1. Scope of Services 2. Project Delivery Method and Construction
Procurement DBB Sequential DB P3 Other
3. Schedule and Fast-Track
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Adjustment Factors
4. Project Documentation & Computer Modeling
5. Specialist Consultants – coordination (plus?) 6. Approvals and Authorities Having
Jurisdiction 7. Submittals 8. New Technologies 9. Construction Administration
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Adjustment Factors
10.Project Location and Site Conditions 11. Renovations v. New 12.Repeat Work 13.Architect’s Personnel Expertise, overtime, project office
14.Demobilization/Remobilization 15.Phased Occupancies 16.Full-time On-site Review
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Scope of Services
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Scope of Services
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Scope of Services
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Putting It All Together
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Putting It All Together
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Putting It All Together
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Lagniappe
Use Other Adjustment Factors RISK Reward Client Reputation, expectations, representative, etc.
LEED design LEED certification LCC Innovation
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Billing Rate
Hourly labour rate x benefits $25 x 35% = 8.75
+ Hourly rate x overhead $25 x 120% = 30.00
+ Hourly rate = 25.00
Break even cost = 63.75
+ Profit (20%) divide by 80% = 79.68
(Brian’s recommendation: rationalize - either $79 or $80)
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Billable Hours
Total available 40 hrs x 52 weeks =2,080
Vacation (3 weeks) - 120 hours =1,960
Stat Holidays (8 days) - 64 hours =1,896
Sick leave (assume 6 days) - 48 hours =1,848
Net Work Hours =1,848
Utilization factor (assume 60%) 1848 x 60% =1,109
So, total estimated Billable Hours =1,109
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Blended Rates
Expectation $ 75,000
Annual Overhead $ 45,000
Break-even $120,000
Profit $ 18,000
Total Fee Billings need to be $138,000
Blended Hourly Billing Rate
$138,000 divide by 1109 hours $124.44
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• Work Breakdown Structure – 5,540,000 – 1960’s NASA – Very common PM tool – “translated” to architecture
Work Breakdown Structure
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Work Breakdown Structure
• Complex projects – need to scope – price – manage
• Break it down – phase-based – function-based - discipline-related categories
• working in all disciplines at once • none finished until all finished
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WBS
Task 1Task 2Task 3
Subtask 1
Work package 1
Individual Effort 1Individual Effort 2
Work package 2
Work package 3Work package 4
Subtask 2
Subtask 3Subtask 4
Task 4
Task 5Task 6Task 7
SubProject A SubProject B SubProject C
Overall Project
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1st - Detailed Task Breakdown
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Guidelines for WBS • start fresh • start with master list - BUT … • list every task • maximum 7 to 10 at any level • don’t forget Project Management as task • differentiate tasks vs. deliverables • document all assumptions
• don’t over-detail -- $$$$$
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“Nailing” the Scope
• what is INcluded • what is EXcluded • what is “optional” • ‘by others’ • Deliverables, benchmarks
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Relate to your historical data • But … danger in historical data … project variables, e.g. – Site and Context – Function and Program – Equipment and Content – Envelope and Systems – Design Process, Innovation, Unique – Procurement method – Construction – Additions and Alterations
– People!
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Back to WBS - Task Duration
• Which staff? – capability – hourly rate – competing assignments, availability
• Historical records – Who? How much?
• Estimates by PM, staff – ‘buy-in’
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2nd - Task Duration
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‘Bottom-up’ the Fee
• Use the labour cost only to extend against each task, then:
• Add Overhead • Add Other Direct Costs (e.g. consultants) • Add Contingency • Then, add Profit to that subtotal for your total ‘bottom up’ fee
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3rd - Extending the $
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The 1st Cut Bottom – Up
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So … what to do? • WBS disadvantage is tendency “too cautious”
– Remember, investment in WBS pays off in PM
• Reality check … – Public record, e.g. municipalities, Boards – Surveys done by private sector – Ask the client – in negotiation, debriefing – Ask the market – Does client have a budget? – Historical data in the practice, or previous … – Hit ratio – Business performance indicators, e.g. profit
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Other Alternatives
• Per drawing • Per sf/sm • Per unit • Staff level budgeting
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Value-Based Fees
• Your favourite developer … • Fees are dependent on 2 things … perceived value for services AND the parties acting ethically
• Perceived value … in the client’s terms … over the long term
• Time spent, deliverables created, materials invested do not translate to value – “Time & materials”
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Value-Based Fees
• Selling expert knowledge and specialist advice … not your time
• Time billing caps your income • Value proposition = BENEFIT to client, NOT what you are able to do
• “Value for Money” – Know Client’s Objectives • Benefits to Client ÷ Fixed Client Cost = Value to Client – E.g. faster project = additional business revenue – E.g. track record of fewer RFIs and COs – E.g. home value – E.g. productivity
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Value-Based Fees
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Value-Based Fees
5%
95%Design/Construction
OperationsO and M
Service Delivery
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Value-Based Fees
• USP • Price life cycle
• Not customer-led
$
Life Cycle of Service
Breakeven
R and D High Profit Competition Commodity
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Value-Based Fees • Fees – not ‘necessary evil’ … fair exchange for value you’ve given client
• Win-win – shared success, Risk and Reward • Other examples of VB fees
– The developer – Success fee (P3,D/B) c.f. contingency – % age of savings “efficiency experts” or tax consultants or value-engineering
– “Good design = good business” – Investment based – bring equity
• Changes in industry/services/needs create opportunities to shift to value-based
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Establishing YOUR Value
• YOU need to establish your value • Rental Income
– 3,000 sf retail, sales $37/sf/month – Competitor’s fee is $18,000 (6% constr’n cost) – YOU can save 2 months – 3,000 x $37 x 2 months = $22,200 – So your fee is … ????
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Establish YOUR Value
• Productivity • Home Value • Life Cycle Cost • better track record re COs • Developer … able to bid higher
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Applying Value-Based Principles
• RAIC Guide – Many of the Adjustment Factors – Many of the lagniappe – And more!
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Now What?
• Yo-Yo – Disadvantage of WBS and pricing – too cautious – Market Price (how?) aka “Top Down”
• Public record • Surveys • Ask the client how you compare
– Your own historical data
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Now What?
• “Adjust” the Fee – save ‘profit’- DON’T just give it up!!! – watch the contingency – be realistic!! – Unless it’s a conscious decision to under-price
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But ...
• Commodification • Loose scope • Recommended hourly rates • Disconnect %age of construction cost vs. Reality
• Add scope in negotiations, no change to fee
• Colleagues
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The Fine Art of Negotiating
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Negotiating
• Deal vs. Relationship Negotiating – “win-win”
• Juggle • Prepare • Know your bottom line • NOT just about fees and clients …
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A Good Negotiator
• desire • understands the skills • understands both sides under pressure • desires ‘win win’ • knows her/his contract • researches client and project
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Prepare
Things • you want from the client • things you will not give up • things you are prepared to trade • things you can ‘throw in’ • things client can ‘throw in’ When you’ll walk!
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Keep juggling!!
• scope - define it • schedule - speed costs • team - client wants best people • risk – business - $ and liability • Chev or Lexus? • terms - payment • price – “the last to drop”
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Common Errors
• concession not always a loss • failing to acquire and apply negotiating skills
• “conceding” on fees • treating negotiation as secondary to “getting the job”
• lack of preparation • fear/discomfort
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Common Errors
• yielding to market pressures • the ‘schedule’ crutch • too honest • cutting the scope to make the fee work • telephone or e-mail negotiation • “it’s all about the fee”
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Tactics
• Nibble • Hot Potato • Red Herring • Higher Authority • The ‘Set Aside’ • Good Cop/Bad Cop • Flinch
• Off the table • Split the Difference • “You’ll have to do better than that …”
• Funny Money • Emotion
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Closing
• Don’t close until all the ‘balls’ are resolved – keep options, eg. higher authority
• Sign on the spot • if necessary, be ready to make one last concession from your list – “in your back pocket”
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10 Top Sources of Leverage
• Money – need it?
• Time – anxious?
• Competition – specialty?
• Experience – have it?
• Knowledge – client? project?
• Workload – backlog?
• Facts – evidence to support?
• Preparation – have you prepared?
• Courage – to walk?
• Appearance – fit?
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Contracts
• Written contract • Standard form, minimize changes
– Legal and insurance review • Clearly define scope … have it ready • Clear payment terms • Review it in detail • Client deliverables and responsibilities • Schedule
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Change Management • Scope creep • Standard contracts have no provisions
– Hourly rates or ?
• Process – If asked to do more, flag additional fees – Define scope clearly, get agreement on scope – Calculate fee based on scope – Negotiate – Confirm in writing – Change Directive
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Post Mortem
• Every project! • Ask your client • Ask others on the team • What went well? • How can we improve?
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Risk Management …
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Risk Management … NOT!
“I’m sure things will work out just fine!”
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What Risks?
• Professional – Standard of care – Personally liable
• Business • Emerging New Risks
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Risk Management Principle 1.
• We make decisions every day and in every way – ramifications – subconscious …. “blink” by Malcolm Gladwell – “playing the odds” – what if?
• Business • Project decisions
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Risk Management Principle 2.
• Pareto Principle – 80% of the effects come from 20% of the causes
– the 80/20 rule – QM
• Apply in assessing probability and impact
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Risk Management Principle 3.
• Balancing Risk and Reward … • Risk is not always proportional to reward
– which project to pursue? – implement QM – sell additional services to current clients – billing practices – History – early adopters of CAD – balance of risk and reward
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Risk Management Principle 4. = Strategy 1. Identify risks 2. Assess and evaluate risks – What if?
– Likelihood – Impact – Responsibility/accountability
3. Determine response - Decide – Prioritize – based on the 3-point assessment – Reduce – Reject – Transfer – Retain and mitigate (reduce likelihood, reduce impact, insure)
4. Risk Management Plan – Implement – Monitor
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©2008
Risk Assessment Matrix
LOW
HIGH
HIGH
Impact
Prob
ability
Highest Overall Risk
Lowest Overall Risk
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©2008
Risk Register
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Other Resources - RAIC
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Other Resources - AIA
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© 2009
Other Resources
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Other Resources
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©2008
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© 2009
Differentiate!
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Why YOU Need the Right Fee • Deliver the professional services • Maintain high quality • Meet standards of the profession • Architecture is a business
– Compete – Solvent – Revenue v. expenses
• Human resources – staff, contractors • Consultants • IT – hardware and software, internet • Insurances • Promotion and Business Development • Premises, FF and E • Advisors
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Why … • Profit is not a “dirty word”
– Sustain • Taxes • ROI • “slow times” • Change management
– Business Development
– Invest and reinvest • Recruit and retain HR; training and continuing education • IT – capital and implementation • R and D
– Grow and expand – Reward – Retirement
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Why …
Support your profession!
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www.strategies4impact.com
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