Fee calculation, negotiation and management for architects. 1. Calculating the fee (resource-based) 3. Managing fee collection (cash flow)

Transcription

1 Fee calculation, negotiation and management for architects A three part approach: 1. Calculating the fee (resource-based) 2. Negotiating the agreement (adding value) 3. Managing fee collection (cash flow) THE ROLE OF BENCHMARKING

2 Fee calculation, negotiation and management for architects The value of the product is not what it costs to provide or produce, it is the value the customer puts on it. Owen Luder: Cash is king! If you run out of money - you go bust! You are more likely to become involved in a legal dispute over your fees than any other issue in your practice. Paul Nicholson: The profession itself should treat architecture as a profession and as a business, not just an exciting and a liberating profession. Andrew Sobell When it comes to improving profits and cash flow, the golden rule is: what you can measure, you can manage.

3 Value The value of the product is not what it costs to provide or produce, it is the value the customer puts on it. Mark Twain: You can tell German wine from vinegar by the label. Oscar Wilde: Anyone who lives within their means suffers from a lack of imagination. Dr Scholl Early to bed. Early to rise. Work like hell and advertise. Victoria Beckham: I want to be as famous as Persil Automatic.

4 Defining Value After Prof. Hennes de Ridder

5 Making a profit put a realistic price on the product (accurately assess the time and resources required) understand the market and its risks assess the value you place on your work establish robust management procedures regularly monitor professional performance issue timely invoices regularly monitor financial performance and cash flow 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. (Architect s Handbook of Practice Management)

6 Fee calculation Calculating a Fee offer: Assess the risks and uncertainties: the client (resources, reputation, knowledge) project definition scope of services programme/timescales resources requirements Assess the benefits and opportunities: enhanced profits employment for existing staff business expansion new market sectors quality of work

7 Fee calculation Key influences on resource requirements: Type of procurement and scope of services Size of project Complexity of project and specific project requirements Extent of works to existing buildings Repair and conservation of historic buildings Degree of design repetition Practice size and overheads Key influences on brand value: Practice reputation Practice location Practice culture Specialist skills

8 Fee calculation Traditional fee calculations: Table 1: New Works Image courtesy of Ernest von Rosen ( Total construction cost Minimum per cent rate Miniumum charge for completed work stages C to H Up to 2, ,500-8, ,000-14, ,000-25, ,050 25, , , ,000-1,750, ,000 1,750,000 and over ,625 Source: RIBA Conditions of Engagement 1971 (mandatory fee scale)

9 Fee calculation Traditional fee calculations: New work 25K 50K 75K 150K 500K 1M Private housing 10.7% 9.9% 9.5% 8.7% 7.3% 6.5% Image courtesy of Ernest von Rosen ( Leisure 9.5% 9.1% 8.8% 8.3% 7.5% 7.1% Offices 8.8% 8.4% 8.1% 7.6% 6.9% 6.4% Industrial 6.3% 6.0% 5.5% 5.5% 5.0% 4.7% Retail 7.1% 6.8% 6.6% 6.2% 5.6% 5.2% Public housing 8.5% 7.9% 7.5% 6.9% 5.9% 5.2% Health 10.5% 9.6% 9.1% 8.3% 6.8% 6.0% Education 7.2% 7.0% 6.9% 6.6% 6.2% 6.0% Illustrative table showing approximate values for average fees based on the results of the independent annual fee survey carried out by the Fees Bureau, 2007

10 Resources Fee calculation 2D CAD BIM A B C D E F G H J K L Work stages

11 Fee calculation Fee options: (There is no standard or recommended fee scale and no standard method of calculation. The fee is a matter for negotiation between the client and the architect.) emperical calculations (traditional) v resource allocations + profit margin and added value partial services fixed lump sums (higher risk than percentage fees, must have provision for adjustment for client changes) calculated lump sums, based for example on estimated construction cost at the start of each work stage time charges value-added or betterment fees

12 Fee calculation Work stage fees Work Stage Optimum Alternative (A and B Time charges) C Concept 20% D Design Development 20% 35% E Technical Design 15% F Production Information G Tender Documentation 25% 35% H Tender Action J Mobilisation K Construction to hand-over 20% 30%* L Rectification period *includes F2 100% 100%

13 Fee negotiation Presenting the fee offer: Is the fee offer in writing only, or to be part of an interview/selection process? Is the fee offer made in competition? How much do you know about your client? Who will influence the decision? What will add value to the project? What type of fee arrangement is likely to be acceptable? Is the offer clear? What is the product that you are selling?

14 Fee negotiation Closing the deal: recognise the client s values and aspirations, both explicit and implicit establish rapport explain the benefits of the offer remove any uncertainty and address objections a resource allocation approach is very helpful when a client is seeking a fee reduction; monthly invoicing regimes ensure cashflow nothing is agreed until everything is agreed always confirm what has been agreed the client will probably desire certainty and a fixed fee, but the architect has to balance this against the actual degree of uncertainty and associated risk working without an appointment agreement and agreed fee schedule is work at risk

15 Fee management GOLDEN RULES for a healthy fee regime have a comprehensive appointment agreement in writing check the name of the client in the agreement is the same as you anticipated? state clearly the client s requirements and the scope of the services to be provided ensure the client understands the payment provisions don t undertake work which is beyond the resources of the practice. identify separate work stages and get each stage signed off establish rigorous procedures for managing fee accounts, invoicing and chasing debts and maintaining cash flow resist pressure to start any work until the agreement is signed

16 Fee management Relationship between turnover and working capital Working capital = fixed assets + cash + debtors + accrued income (work in progress) - creditors Faster turnover = less working capital required Architects require more working capital than many other business because of the extended time period of construction projects Prompt and regular invoicing and collection of fees is the main lever to accelerate the speed at which money circulates through the business and reduce the need for working capital The Tesco model money-in quick, money-out slow

17 Fee management Relationship between project and practice finances Management of project finances and practice finances simultaneously Businesses fail mainly because they run out of cash, not because they are intrinsically unprofitable Monthly management accounts are essential to monitor monthly and year-to-date variances Monitor key performance indicators (turnover by director, turnover per fee earner, profit as percentage of turnover, profit per director, profit per fee earner, liquidity) Have effective project resource plans and monitor project performance

18 Fee management Fee forecasting Future captive fees (fees that are agreed, documented, contractually binding and scheduled for invoicing) Possible fees prospects (50%+ chance of conversion, 3x turnover) and suspects (50% - chance of conversion, 2x turnover) Resource forecasting is the hardest forecasting element Cashflow forecast of particular interest to the bank! Have effective project resource plans and monitor project performance

19 Fee management Fee forecasting Use a Standard Form of Appointment Agreement (key for risk management) Invoice on a regular basis (monthly fee invoicing assists cashflow and reduces risk) Collect money owed (within 60 days) Charge additional fees when the brief is changed Charge additional fees when extra work is added to the scope of service (avoid commission creep) Monitor project costs Target fee bids on winnable work Relate fee bids to resource analysis

20 Fee management Options in the event of non-payment of fees: Enquiry and negotiations Interest charges and debt collection costs Adjudication, arbitration or court action Suspension/termination Revocation of licence

21 Fee management Fee adjustment: RIBA Standard Agreement, clause 5.8 The Basic Fee shall be adjusted: (5.8.1) including due allowance for any loss and/or expense if: (a) material changes are made to the Brief and/or the Construction Cost and/or the Timetable.and/or (b) the Services are varied by agreement.

22 Fee management Additional fees: RIBA Standard Agreement, clause 5.9 Where the Architect for reasons beyond the Architect s reasonable control incurs extra work or loss and expense the Architect shall be entitled to additional fees calculated on a time basis Matters in relation to which the Architect shall be entitled to additional fees include: (5.9.1) the Architect is required to vary any item of work commenced or completed.or to provide a new design after the Client has authorised the Architect to develop an approved design; (5.9.2) the nature of the Project requires that substantial parts of the design cannot be completed or must be specified provisionally.before construction commences; (5.9.3) performance of the Services is delayed, disrupted or prolonged; and (5.9.4) the cost of any work, installation or equipment for which the Architect performs Services is omitted from or not included in the Construction Cost The Architect shall inform the Client on becoming aware that this clause will apply.

23 Fee management Evidence needed to claim additional fees: In order to establish that you have been involved in extra work and have incurred extra expense, for reasons beyond your control; i.e. not as a result of lack of skill, care or diligence on your part, you need: Evidence of the work you would have been involved in and the expense you would have incurred in performing the contractually agreed scope of services. Evidence that the reasons for the need for the changes in the scope of services were beyond your control. Evidence of how the work and expense is affected by the material changes that have occurred.

24 Fee management Records (contemporaneous) required to support a claim: Project budget, demonstrating the costing of the original scope of services. Statement of net fee, after contributions to profit and overheads (excluding those included in the hourly rates). The number of hours (costed at the appropriate hourly rates) available at each work stage to complete the Services. (Check that the hours are realistic for the scope of services required). Records of monitoring against budget at each work stage using coded time management records. Record of material changes and variations and their consequence for the Services and their delivery, with accurate time records for the extra work involved. Correspondence with Client to inform them of the material changes and their impact.

25 Out now RIBA Fee Calculator: Guide to using the RIBA Fee Calculator Resource calculator Fee calculator Model answers to client FAQs Good practice guidance notes on fee management

26 RIBA Fee Calculator As I have a very limited budget, why should I pay you so much? The fee we charge relates to the amount of work we will have to do. By reducing the scope of our services we may be able to reduce the fee but this could increase the risk to you. In our experience clients save on project cost by getting the design right before starting construction and not changing things during the build. Very often it turns out that this saving is greater than the amount clients spend on architects fees. When can I have cost certainty on the project? Absolute certainty on the overall cost of a project is very difficult to achieve. We can put mechanisms in place to help you manage your cost such as early estimates and well planned designs. Minimising changes keeps cost controlled and putting aside a contingency sum helps to cope with unplanned occurrences. Can I have this all finished by Christmas? Which Christmas?

27 RIBA Business Benchmarking RIBA Business Benchmarking Service available to all RIBA Chartered Practices (obligatory for RIBA Chartered Practices) a business enhancement, planning and development tool business benchmarking is widely used by the legal profession analysis focuses on four key areas: financial performance day-to-day management business development human resources

28 RIBA Business Benchmarking Key Benchmarks

29 RIBA Business Benchmarking Service

30 RIBA Business Benchmarking Over 60% of practices meet the Colander Benchmark, achieving 15% profit as a percentage of turnover. 45% of all fees come from the residential market. 60% of practices do not have a business plan: only 16% plan beyond one year. Practices in this survey average 15.3k profit per fee earner. Average turnover per fee earner has fallen to less than 60k.

31 RIBA Business Benchmarking Charge-out rates:

32 RIBA Business Benchmarking Client types by number of clients (%) Micro practices: headcount 1 4; Large practices: headcount 50+

33 RIBA Business Benchmarking Client sectors by percentage of income (%) Micro practices: headcount 1 4; Large practices: headcount 50+

34 RIBA Business Benchmarking Interesting benchmarking facts: D and B can be more profitable than traditional procurement for architects Large projects generally equal higher profits but project size needs to related to practice resource Partners/directors need to spend 20 30% of their time on nonchargeable activities The ratio of support staff to fee earners typically varies from 1:3 to 1:5 Education sector is moderately profitable but profit levels are consistent Commercial sector is very cyclical but can be highly profitable Historically over the economic cycle housing has seen low profit levels RIBA Benchmark suggests that no more than 40% of practice workload should be in a single sector

35 RIBA Future Trends Survey RIBA Future Trends Survey launched in January 2009 RIBA Future Trends Workload index for Sep 2012 is -3 RIBA Future Trends Staffing index for Sep 2012 is -6 Private housing sector workloads forecast to be stable over the next quarter Practices in London and the South East are currently most optimistic about future workload and staffing levels; some growth anticipated here in the commercial and private housing sectors Current workloads are approx. at 60% of those at the peak of the boom (i.e. just over a one third fall in workload) Current staffing (architects and support staff) at approx. 75% of its peak level (i.e. about a one quarter reduction in total workforce) Student (Parts 1 and 2) employment levels down by approx. 40%

36 Future Trends three month workload forecast

37 Future Trends three month staffing forecast

38 Future Trends three month sector forecast

39 Fees and Fee Negotiations Good Practice Guide: Fee management by Roland Phillips RIBA Publications Ltd ISBN

40 Getting Paid and Maximising Profit RIBA Good Practice Guide Painless Financial Management By Brian Pinder-Ayres RIBA Publishing Ltd ISBN AIA Best Practice Guide Financial Management: 10 Key Performance Indicators mbers/documents/pdf/aiap pdf