Tag Archives: value based fees

Is regulation the answer to fee MADness?

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Is reintroducing fee scales and further regulation the solution to fee slashing and ‘the race for the bottom’ among architects?  Is this really feasible in a world of increasing globalisation and diversification of service providers?  If not, what other options are there?

Recently I read this article by Shaun Carter, immediate past president of the NSW Chapter of the Institute of Architects and a principal architect at Carter Williamson Architects.  Its really great to see Shaun speaking out on the issues of fees – and what he describes as the ‘existential crisis’ of fee madness – the ‘mutually assured destruction’ of architecture as a profession.

Immediately after reading the article, I felt compelled to join the conversation and comment – and then realised I had the beginning of another article on fees forming in my mind.  Fees are a topic I have frequently written about over the five years I have been writing this blog (from The art(or is that science) of architecture fees to talking about fees and BIMonomics and more recently Architecture and Design Fees: Why Hours), and so Shaun’s article was of great interest to me.  Essentially he proposes that the solution is regulation across three platforms – minimum fees (essentially a return to fee scales), government as a model client and limiting architecture graduates.

Is regulation, restrictive trade practices or collective bargaining the right answer? While I used to think that maybe regulation could be a solution, I wonder how does regulation in NSW (or in any other Australian state) solve a problem which is national, but also potentially global? How can you regulate at the edges of architecture – for example in fields where architects and interior designers compete? Do we really believe we can regulate if your competition is Google or Amazon? (Right now in the USA I think its the other way around…Amazon are practically setting the regulations with the offers that came in from cities determined to win Amazon 2 HQ!)  So personally I don’t think regulation, in particular fee scales is the answer.

However that doesn’t mean there is not a place for advocacy and education – both of architects and of clients. I agree with Shaun that “Clients don’t recognize that their service is cut-priced, but have the same expectations as a good, fee-paying client.”  Fees have dropped so far, that many clients including project managers, would have no idea of the real cost of the work they are bidding, only ‘market rates’.  Many clients have no idea of the amount of hours that go into designing and documenting a building or a fitout – I’ve had more than one project manager assume that my job is done after concept design “don’t you just hand it over to the engineers then?”

I’d love to see both the Board of Architects and the AIA take leading roles on the issue of cut priced fees and client education, alongside of other organisations working in the design of buildings – the ACA, the DIA, Consult Australia, Engineers Australia and more. This isn’t just an issue for architects but for all design professionals.

One of the “frequent offenders”clients guilty of this is our own government – at all levels across a wide variety of agencies and institutions. Cut throat fee bidding in government work where price is the only criteria has been a problem for years. Back in 2014 I published this piece on one architect who tried to take a stand against this practice, after uncovering one government agency who admitted they would have to accept a tender of zero if  pre-qualified firm chose to submit it.  (I also commented on this as ‘madness but without the great acronym!)

Maybe if you don’t work in the government sector, you believe that the fact these firms have been in business for long enough, with enough of a reputation and standing to be pre-qualified for government work, that they wouldn’t engage in such foolish business tactics. But when the work is low (or even often when it’s not), it’s such common practice as to be the norm. And then it’s paid for by the staff (even by the principals and directors) working long hours for free or by compromising the quality of documentation – thereby driving up construction costs and waste.  As mentioned in Shaun’s article, there is no way that low fees don’t equate to lowered quality of service. Even if a company is spending the same hours on the project – if many of those hours are unpaid overtime the quality of the work is lower. (There is so much evidence that working 50 or more hours a week compromises the quality of your work).

Shaun’s call for Government to lead the way as a model client is a fantastic idea (and while we are at it, perhaps some model client contracts from Government where risk is fairly distributed and copyright ownership retained?) I agree that if our government at all levels takes the lead in demonstrating the value of good design and the better outcomes that could be achieved, it is more likely more private companies would follow. Whilst I’ll admit, initially this is regulation, I’d perceive it more as leadership by Government, rather than purely a regulative measure.

Leadership needs education.  Everyone who designs needs to be part of educating our clients, but advocacy by the AIA or the boards around Australia could help make a difference. Not just for today’s clients, but by educating tomorrows clients to appreciate design. In Scandinavia, design education starts in primary school and an appreciation of design is a part of the culture. More recently, Australians too are coming to appreciate design, you see this in the quality of our newer cafes, restaurants and shopping centres and in our obsession with home renovation reality TV. But “clients need to understand that design excellence costs money” (and takes time). This is where the home renovation shows do professionals no favours.  Where are the shows about architects or interior designers? Other than Grand Designs, notably absent.

For too long design has been undervalued in Australia, and this is because we need real evidence to back up and underpin this education.  Evidence that will prove to everyone – clients, project managers, even builders and the architects/designers themselves that design really does add value.  To do this we need more research, research like the new RASP project, that sets out to prove the value of design through the question “Do architect designed renovations improve capital gains in the Melbourne residential property market?” Whilst this research relates purely to architects and residential design, there are so many possibilities for commercial, institutional and other sectors to benefit from similar projects. The retail sector already knows it, and has long invested in research to understand how design drives consumer behavior, and the payoff is clear and direct. In other sectors the questions and the payoff is not so straightforward. The problem is that individual clients or practices can’t afford to fund this research. At the University of Sydney around 100 workplaces have participated in the BOSSA project for post occupancy evaluations – how much more extensive would this dataset be if we have if every government workplace had a post occupancy evaluation? Again,this is another area where the Government could play a leading part. Why isn’t the CSIRO involved in this kind of research?  Improving the design of our workplaces could be a key means of improving our national productivity.

While good design does cost money, our professions need to also take responsibility for productivity and efficiency. While we might have BIM capable software, there is so much wasted human capital and time in most architecture practices. Our actual fees might be a lot lower if we invested more in technology and training. The whole of the construction industry is guilty of not investing in software, training or automation. Is this because of a lack of education at leadership level, a lack of understanding of how technology can benefit us or is it fear of change, a distrust of technology and of individually being left behind? Or are we now in a vicious cycle of low fees, with nothing to invest? Whatever the root cause, our industry will be left behind if we don’t invest in technology. I’ve written in the past about the coming wave of automation, (Will a Robot take my Job? and Is Disruptive Innovation Possible in the Construction Industry and more recently, I’m a designer and I job share with an AI) – if you didn’t know, it’s already here.  If you have not started to think about how you can automate routine parts of your practice you will be left behind. When our fees are so low already, how can we afford not to automate where practical? Why should we be calculating the space for fire stairs or toilets when a computer can do this so much more efficiently that we can.

We don’t just need to educate clients, but we also need to train young architects and designers more in business – and even more so, in innovation and entrepreneurship. Architects might not feel that traditional business and accounting is their thing – but innovative ways to develop new business could be more appealing.  Especially if we continue to train architects in such numbers – we need to train them to expect to be other things than a traditional architect, because there will not be nearly enough jobs.  Maybe we don’t need to limit the number of graduates, but to value architectural training as the background to many other avenues of design thinking.  If the next generation are nimble and accept change, and learn how to keep learning throughout their careers – maybe they will take their valuable design thinking into broader roles. I am constantly surprised at how architecture and interior design are creative professions but so many practitioners are so resistant to change (how many architecture practices do you know who have implemented activity based working…)

We can’t just expect the universities to teach business awareness though. For too long in too many practices, fees and charge out rates have been too secret – something that graduates are not expected or even often allowed to know about. Everyone at all levels should understand the fee budget and how their work contributes – just like when a client doesn’t tell us their budget, how can you expect someone to understand how their time contributes to the job cost if you never shares any information with them?

Finally, we need to think about how we charge. The world has moved on from dollars per hour. The ability to make money is no longer linked to human capital. This is the major lesson for all professions where we have historically charged by the hour. So I think we need to be thinking about value based fees, and about not fee scales. I’ve never worked in a time of fee scales, but I can’t see how fee scales in a time of globalisation and diversification are going to protect our jobs and fees. Fee scales won’t stop Amazon or WeWork from taking over the traditional roles of architects.

So what is a value based fee? The value of your work, the value of your ideas.  I’ve written in a lot more detail previously on this topic in the article Architecture and Design Fees: Why Hours.  If we start to think and talk about fees in terms of our value, and the value of our work – can we continue to justify cut throat fees in our own minds?  Aren’t we devaluing our own work that way?  Of course when clients don’t value our work and our profession doesn’t value our work – we have a problem. So thats why proving our value to others is also a key part of the solution.

I agree with Shaun – three things need to change – although my three are different:

  1. We need to value ourselves;
  2. We need to invest in the future; and
  3. Our clients and those who occupy our buildings & spaces need to value us
 Maybe I’ll add number four – we need to envision a future where being an architect or an interior  designer doesn’t always mean working in a traditional practice alongside only other architects and design professionals. Whilst Bjarke Ingels is a talented designer, BIG is a successful mutlinational firm because the CEO, Sheela Maini Søgaard comes from business not architecture. A lot of architects I know would be quite scared by that notion.

Ceilidh Higgins

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Photo by rawpixel on Unsplash

Architecture and Design Fees: Why hours?

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money by fedee P, on FlickrWhy is it, that in an age where the value of a company is no longer based on assets or staff numbers, but on ideas – that architects still charge by the hour?

Once upon a time, the value of a company and the number of staff it employed had some correlation, but today this is no longer the case. In 1979, GM employed 853,000 people and had a turnover of $66 billion, today Google turns over a similar amount but with only 60,000 people.  The stories for Microsoft, Apple, Facebook and many other companies are the same.  Making money is no longer tethered to staff and hours.

In architecture, interior design and engineering however, hourly rates are still the norm. “When they choose to strike out on their own, architects tend to follow the outdated model of trading hours for dollars. One of the consequences of this mindset is the fact that clients continue to perceive architectural services as a cost rather than a value.” (Quote from Architizer) Even if, as is commonly the case, a lump sum fee is being generated, this is usually based upon hourly charge out rates of staff multiplied by a guess (educated or otherwise) as to how many hours a task will take. (I’ve written about traditional fee methods previously here) Clients commonly expect a detailed breakdown of the number of hours allocated to each staff member across different project phases. Why are we charging this way when it both limits our ability to increase profit as well as our flexibility in how we deliver services? If I can reduce my hours either by the selection of staff or by automating part of the process, shouldn’t I as the business owner be able to chose if I pass this saving onto my customers (clients) or if I achieve a higher margin? Why is is that clients seem to think that architects and designers are trying to rip them off with higher margins.  Architectural margins are  very low, and in some sectors fees have effectively shrunk over the last 15 years.  We need to make money where we can in order to stay in business.

Obviously at some point there is a minimum fee a company with employees has to charge in order to pay costs, overheads and salaries – although perhaps salaries also need not reflect hours. If architects don’t charge by the hour, what could the alternatives be?

Charging by  the deliverable

In some senses we already charge by deliverable – the lump sum fee essentially considers the building to be the deliverable. While it’s important we don’t lose sight of this fact, the truth is that not every building requires the same amount of work. A great article on this topic is the story of 3 bike sheds by Dimase Architects  which clearly explains that architectural services are not just about building types or construction budgets but about desired outcomes.

Outside if the residential sector, it is also very common for client organisations to dictate deliverables, meeting schedules, required reviews and documentation standards. Frequently these requirements have very little to do with delivery of the building, but are to meet the client’s managers or user group expectations. Sometimes they come with extensive time and cost impacts. How do we charge for a video walk through? The hours in producing the video itself might be very low, but should the cost of software licenses necessarily be considered an office overhead if only used on some projects? Maybe only 1 or 2 people in the office are capable of this work. Should the fee structure for this work take these factors into account?  This leads to the idea of value based fees.

Value based fees

How valuable is your service to your client?  This is a concept I find really interesting, the idea that you change a client based upon the value they place on your services or even the value you create for them. A residential complex is the most obvious example, if you can design to fit in an extra apartment, the developer client makes additional profit, so why should the architect not benefit from this via some kind of bonus? Some would suggest that the architect might compromise design quality at the expense of profit, but I’d say if you are working for a developer – you probably already feel like you are doing this but not getting paid anything for it. In some ways this would be align the architects and the developers interests better.  Most architects would still value good design and their own names and developers would realise that at the point when the architect said no more apartments would fit, they really had reached the sensible limit.

I can see how this kind of fee structure could apply to many kinds of development – car parks, childcare centres or nett lettable area of office buildings. The challenge would be how to apply value to the more difficult to measure or immeasurables like productivity in an office or the positives such as mental wellbeing coming out of good quality design.

I can also see the potential that this fee structure could perhaps backfire – some clients would only want to pay based upon achieving targets or would impose fee penalties for not meeting targets.  But possibly they are the types of clients who already try to get free work or push fees down that we would all rather not work for anyway!

Architect as developer

If you search the Internet for blogs about architect entrepreneurs, the architect as developer is the most common model. Instead of working for the developers, why not become one yourself? So far, the examples I have seen generally relate to small to medium scale residential developments or small commercial premises (you can find lots of examples at Archipreneur). It’s certainly true that the profit margins are higher in development than architecture, although the risks are obviously greater too. However, this model will only ever work for certain project types.

A similar model that has recently emerged is architect as one investor rather than as developer.  This model seems to be emerging in non-traditional development sectors such as The Commons in Melbourne or SWARM in the UK. What both these two initiatives have in common, is the idea of quality development for the good of the community.  Again, this is a potentially higher risk model than traditional architectural practice, but could allow architects interested in working on projects with a social conscience a lot more scope for both work and potential income.  Again, this model won’t apply to projects where there is no development to invest in (eg an educational facility or a client workspace).

Creating proprietary products

Architects often create designs as part of their commissions, they may work with suppliers for one off custom elements to be incorporated into the project.  Very few architects get paid for this.  Apparently Renzo Piano does.  He was involved in developing a new glass louvre system developed for Aurora Place in Sydney and now he gets paid when the product is used on other projects.

So what about our salaries?

One of the things that any model of fees has to take into account is how we pay ourselves and our staff. If our project fees are no longer based upon hourly rates, should the way architects are employed and paid also change? The idea of the gig based economy, where freelancers sign up for a set fee to a specific project (similar to a movie production) is often mentioned in the context of architecture and the economy of the future more generally. Whilst I can see that this could work for larger projects where architects may be involved for 2 years or more, would it be as well suited to smaller projects which may only run for a few months and frequently don’t require full time involvement? Perhaps this is only my current bias or perception, as the idea of piecemeal freelance work continues to grow more common for projects and tasks both large and small, and as technology and co-working allow different options for working together maybe this will be feasible. If we do move towards this model, payment structures would need change, likely increasing to assume that people don’t always have a forty hour work week. An industry structured this way could be a good or bad thing – potentially better work-life balance through time off between projects but potentially more stress about where the next job is coming from.

Maybe our employment structures don’t need to change all that much.  The idea of bonuses or profit sharing isn’t a common one in architecture and interior design but there is no reason this couldn’t be change very easily.

There are a lot of other ways that architects and designers are making money through non-traditional structures, but many of these are quite limited in their applications or potential to earn – for example internet competitions, although the guy who runs the site probably does quite well from it.  But this takes us into non-traditional services, offering services for other architects and designers, which is becoming relatively common on the web (examples include ArchSmarter and EntreArchitect).

I’d like to think there will be a viable model for fees for designing buildings and interiors for other people and organisations, which recognises and pays for the value of design.  We have to remember that“Concept design is not a loss leader. It is our most precious commodity.”  Design is what our clients value us for, and its not something that can be calculated by the hour.

I’d love to hear from anyone working with non-traditional fee structures, or with other ideas about how architects and designers can structure their fees.  Has anyone worked on a value based fee project?  Or even a project which included a bonus for the architect?

Ceilidh Higgins

Image Credits: “money” (CC BY-NC-ND 2.0) by fedee P