LMNOP - 2016 FIRST QUARTER EVENTS
Project Fee Structures For Architects, Designers, and other Professional Service Providers
Contribution from Colette Taber
“You have to understand your project fee structure within the context of all project costs. Whether you are an architect, designer—any kind of professional service provider—your fees are an integral part of overall costs,” said Jennifer Graham, President and Founder of LMNOP NYC, Inc. Ms. Graham served as moderator for the spirited, two-hour event, which featured much audience participation. Craig Thomas of VVA Project Managers & Consultants led the discussion. He focused on defining the relationship between consultancy fees and hard costs, like construction, as well as related expenses, such as FF&E, permits, moving, and building charges. “You should charge fees differently for different project types,” explained Thomas, “but it’s on you to communicate the value of what your service is bringing to the process.”
LMNOP would like to thank Krug and Levine Calvano Furniture Group for hosting the January 19th evening event at their New York City showroom. The generous support of our sponsors enables LMNOP to provide members of the architectural and design (A&D) community with professional development mentoring, training, and networking activities and resources. Thank you Krug and Levine Calvano! For information about sponsoring similar events please visit the support tab on our website.
Defining Project Costs for Commercial Building Construction
Thomas began the discussion by describing the various entities that are part of a typical commercial building construction project and, therefore, affect the percentage of funds devoted to professional service fees. He was careful to differentiate between construction costs, which typically represent the greatest output of funds at 50% to 80% of the budget, and additional considerations, such as furniture, fixtures, and IT/AV/security equipment (20%-25%) and miscellaneous expenditures that are often overlooked. For example, moving expenses, including disconnecting and reconnecting technology, and DOB fees and permits can increase a project budget further.
Depending on the project type, size, and market sector, the remainder of the budget (10% to 30% of the total project cost) is typically allocated to “soft” costs, or consultant fees. Why the range? Because determining who is doing what and when, e.g., the identifying of team member roles and responsibilities, can have a significant impact on overall project costs. “It’s the unexpected that you want to avoid when budgeting,” said Thomas, who recommended being as upfront and clear as possible with a client about expectations and accountability for individual team members. Some projects can do very well with a pared down team, but other projects necessitate the expertise of multiple individuals and companies. Similarly, the prime consultant or even an employee of the client may assume additional responsibilities for certain aspects of the project scope. When this is the case, the hours need to be clearly accounted for (preferably as line items) in the budget.
Being aware of and budgeting for these kinds of overlaps in team responsibilities can mean the difference between a well-considered and successfully executed project budget and misunderstandings that could ultimately cost you.
Communicating Value for Professional Service Provider Fees
The first step toward communicating the value of a particular professional service is breaking down and clarifying individual contributions. “Transparency is about helping a client to understand the value they are getting out of a consultant,” explained Thomas.
Different fee structures have different advantages and disadvantages. Incorporating fees into the basic services (per phase) is dependent on identifying and resolving the gray areas in a proposed scope of services. (The RFI's during the RFP process is the ideal time to clarify project parameters.) Team member hourly rates should be clearly delineated. Often, the best way to communicate value is to adopt a balanced approach to fees based on both hard and soft costs and/or a budget range. It is acceptable to offer a client a combination of fee structures—maybe an hourly rate upfront, and follow with lump sum fees for specific phases later in the process. The most important guiding principle is to outline your fees in a a manner that aligns with the project scope.
One audience member remarked in response to this discourse about effective proposal writing, the more quantifiable the better. She said that “in her experience” for example, clients respond more positively to a set number of hours per phase or a specific number of renderings. Because construction costs can vary widely between projects—for instance, multi-phased efforts involving occupied floors can involve a delicate orchestration of people and resources—it is critical to quantify what is required at each step. From a value engineering standpoint, decisions about where to cut and why are most successful when a complete and comprehensive picture is available for analysis. It is preferable for a client to focus on a particular category of cost savings in a budget opposed to questioning an individual team member's contribution.
Project Fee Structures: Being Upfront about Costs—is the Best Policy
“It’s next to impossible to ‘go back’ and request more funding,” said one audience member. When the inevitable occurs and a project hits a bump in the road or a design “evolves” due to unforeseen circumstances, Thomas’s advice is to “pull off the band-aid as quickly as possible with the client and go back to the contract.” The original contract will define what is part of the scope of work and what is not. Referencing specifics, e.g., exactly what was budgeted for and what was spent, provides you with a starting point for negotiating additional service fees.
Graham summarized the challenges faced by professional service providers best when she said, “You want the entire team on board with how fees impact overall project costs. You never want to hear, ‘I didn’t know’.” She added, “Regardless of your role, part of being a trusted advisor to your client is understanding that all fees are to be respected throughout the project.”
Did you know…? Hidden Impacts Unveiled
- Architecture and finishes typically represent less than 50% of the total construction budget and sometimes as little as 30%. An argument can be made that chipping away at the design may only diminish the final outcome and not deliver the desired returns.
- Soft costs (consultant costs) can comprise anywhere from 10% to 30% of the project costs and are highly susceptible to building and market conditions. Typical variables include remediation, customization, and phasing requirements. Too often a client’s operational needs trump gains from economy of scale.
- IT/AV/security equipment and cabling are probably the most difficult category of expenditure to nail down. Multiple layers of approval will likely be required, from the client’s in-house IT team to facilities management to plain management.
- If only moving were that simple. Building owners and suppliers charge fees for non-business hour freight elevator use, early lease termination and move-in, space remediation, and the disconnection and connection of equipment.
- Professionals should be paid for all of your time, not just some of your time. For example, a 10% mark-up is common to cover administrative fees associated with hiring (and vetting) consultants on the owner’s behalf.