Last edited 02 Nov 2018

Calculating fees: architectural practice

Project and Practice Specific Fee Calculation – Impact on time and resource: To be conscious of the main risks and determine the fee to offset them.

Contents

[edit] Scenario: New client

The client is new to the practice and should be investigated and credit checked before undertaking any work. This checks the financial status of the client, that they are capable of paying the fees and how regularly and rapidly. This helps to mitigate the risk of unpaid fees later in the project, helping to maintain a regular cash flow.

If they are a repeat client, are they good at settling invoices on time? If they are likely to pay late the fee forecast should be updated to schedule when the invoice will be settled. Any negative cash flow highlighted may indicate the practice does not have sufficient levels of work to cope with the late payment of fees and should withdraw from the project.

Seek written confirmation if any architects have previously been involved with the project and find out why things may have broken down. This can highlight any warning signs of non payment and clear any conflicts of interest.

[edit] Scenario: Different sector

Assess the project against past projects; is it similar (charge expertise premium) or different (risk, charge reduced fee, additional resources, check the practice can financially support).

If the project is one that the practice is familiar with they can charge a premium due to expertise regarding the benefit of added value. Compare the proposed fee against previous similar jobs to check a sensible outcome has been reached.

If the project is one the practice is unfamiliar with or attempting to undertake new work, they should offer a discounted fee due to lack of experience to get into a new market. The financial management representative should assess whether the practice will be able to cope with such a low fee as more time and resources are likely to be required to get up to speed with the new sector and may require specialist input. Monthly flash reports are recommended to regularly monitor profit/ loss and identify whether the practice is likely to experience problems. You may need additional staff which will need to be input into the fee.

[edit] Scenario: Under-resource

If the project is a major, large-scale development then additional staff are likely to be required especially in the later RIBA work stages. The calculated fee will need to take this into account. Predict the number of hours to be spent at each RIBA work stage along with overheads. For a new project type, unknown timescales and resource costs may be difficult to predict and a time charge fee may be negotiated otherwise the practice may fall into a negative cash flow.

The procurement route should be considered and a project programme outlined for client approval in order to plan resources across the RIBA work stages.

[edit] Scenario: EU law/new jurisdiction/conservation

The project is likely to require specialist consultant advice who have expertise in these sectors. The practice will pay additional costs which will need to be considered as part of the inflow/outflow analysis to monitor the cash flow of the practice. Any negative cash flow will highlight that the practice does not have sufficient working capital to undertake the project.

However, this can be difficult to negotiate with the client as there is no guaranteed maximum price. Tight monitoring of the project costs will be necessary if any other method is taken. The practice should be prepared to withdraw from the project if a negative cash flow can be predicted.

[edit] Scenario: Travel costs/expenses

The project is in a different country which will involve high travel costs. These should be considered in the fee calculation with an estimated number of visits (i.e. monthly). If these additional costs are not accounted for then the profitability, of a competitive fee in this case, will likely result in a loss.

[edit] Benchmarking

The project should also be assessed against benchmarks for inter-firm comparison. This can highlight how competitive the fee calculation may be and how other practices are dealing with this sector of work.

[edit] Professional indemnity insurance

If the project involves a change in scale to the normal workload the practice undertakes, PI insurers should be notified. The level of cover is likely to need increasing. The practice should consider the impact of this additional cost to the cash flow forecast. The practice should negotiate a front loaded fee schedule with the client across the early RIBA work stages in order to lighten the load and mitigate this risk.

[edit] Profit

The practice should gather an estimated project cost including resource time, VAT, PAYE & NI, Office rent, PII, supplier payments, corporation tax, expenses and overheads in order to calculate a target profit cost. Monitor performance against expectations in order to keep track of the level of profit likely to be made on the project.

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