What are the factors that affect while calculating Architect’s fee?
The scope of services for architects in a project has changed widely in last few decades. It still continues to change due to the globalization and technological advancements. As design continuously evolves during the project lifecycle, it heavily impacts the overall project cost and schedule. This is one of the reasons why most clients are also unsure of how much a designer is going to cost them at the end. Thus, clients like to make a safe choice by selecting more experienced designers in comparison to the new start-up companies. This may sound like a bad news for young firms but I consider this as an opportunity.
Young companies are more flexible and have a chance to offer more innovative work-packages and pricing structures that can indeed benefit the client. And it is up to your marketing campaign to get this message heard. You can read some more how pricing can be an effective tool for your marketing - here.
Pricing structures are subjective and there is no right or wrong method to choose from. But, at the same time, it is important to consider the factors that affect your fee calculations and impact your profitability. Following are some key factors that I have laid down from my experience, and I believe that they will be helpful to you next time you calculate your fees while bidding on a project:
Scope of work: the scope of work is the basis of any fee calculation. The architect can carry out many different services which clients are often not aware of. In a start-up stage, you may be more concerned with small private projects where the client may have unlimited expectations, if you have not clearly defined your fees at an early stage. On the other hand, bigger projects most often come through RFP (i.e. request for proposal), in which scope of work is well defined. The fees should be carefully calculated in the proportion to the services you may be offering and make sure you define them clearly in the agreement
Overheads: This is an indirect cost arising while your business is under operation. These are costs such as the administrative cost, marketing cost, rent, utilities etc. These are supporting expenses which arises in order to keep the business going. When the ratio between total indirect expenses/direct expenses is about 1.5 to 1.75, it is considered ideal for an architectural business. The higher number indicates a poor financial health of your firm. When this ratio increases, one of the common mistakes startup companies make is to extensively reduce the cost rather than smartly managing it. Keeping an eye on your expenses and learning the financial management skills will let you manage the cost without affecting your profit.
Expected profit: The profit is important for the survival and growth of the firm. How much profit is enough? There is no ground rule to this question. The profit margins depend on what services, how, where and to whom are you offering. Over the period you will know your capacity to earn and grow. This will allow setting more accurate profit calculations while preparing a financial plan or profit plan.
Risk factor: Getting offer for the project is not enough. There are specific risks involved if you ignore analyzing the risk factors. For example, what is the assurance of full and final payment of fees in the end of the project? Is client expecting more services than you can give in the agreed fees? If the scope of work increases during the project, will there be any compensation? The corporate/ government clients may take more time in decision making due to their administrative system which may delay the project considerably. What will be your position then? A project with a tight deadline may require an extra burden to your existing setup. Are you prepared for it? The client may not have necessary financial arrangement for the proposed project which may cause delay of the project. What will be your stand if the project is stopped half-way? The delays, uncertainties and pitfalls can disrupt smooth operation of the firm. Before committing for a project, check the background of the client, objectives and intentions of the client, his/her financial capabilities, time limit of the project etc. to calculate the realistic fees of the project.