Some of the more senior architects working today might recall learning about the percentage fee. Long ago, in a time before CAD and BIM and Skype, architectural fees often were based on a simple percentage of the project’s overall design and construction costs. Now, however, fees are a more complex arrangement based on a broad set of criteria, concerns, and benchmarks, plus the shifting structures of product delivery, as well as the economy. Indeed, architects surveyed for an ARCHITECT series on fees—the second and third parts will cover fee cutting and the ever-growing costs of competing for new business, respectively—say they base fees on a variety of models: fixed costs, hourly costs, per-square-foot calculations, or some combination of all of these. “Fees are all over the map,” says Thomas Kerwin, managing principal at Brininstool, Kerwin and Lynch, a 12-person firm in Chicago that works across several design sectors.
One reason for the change has been the expansion of specialized services within the profession. The days of one firm taking a job entirely from beginning to end are pretty much over. In addition to design work, nonarchitectural services—including landscaping, engineering, and interiors—are being packaged by architecture firms and then carved up between the architects and the sub-contractors. “Every project has so many different players, and there’s more collaboration than ever,” Kerwin explains.
Even with these variables, the fixed or flat fee for full design services has emerged as the most popular model, except for high-end house projects that tend to be based on an hourly rate (because of the difficulty in defining the final scope) and commercial projects that are by square footage. Owners are demanding fixed fees “because they want to know what costs are going to be, to compare apples to apples,” says consultant Michael Strogoff, a member of the AIA’s Practice Management Knowledge Community Advisory Group.
That works for architects, too. “We use our best guess about how long a project might take and how much profit is reasonable, and to me that’s the fairest way to do it,” says Andrew Bernheimer, co-principal at Della Valle Bernheimer, in Brooklyn, N.Y.
Still, the concept of a percentage—even if it’s a vague number, often market- and location-dependent—hasn’t entirely disappeared when architects are mulling fees.
“There is a prevailing understanding of what is appropriate on a percentage basis,” notes Bob Miklos, a partner in Boston’s DesignLAB. “We use a percentage … to establish the fee that becomes a fixed fee, to see if we’re in the ballpark.” This can range from 9 to 10 percent for new construction and basic services and consulting to 10 to 12 percent for renovations “in a good year,” Miklos says, while commercial projects ratchet down to 5 to 7 percent. (Renovation projects get higher fees because architects must investigate and document existing conditions that will be preserved, worked around, modified, or added on to.)
Yet all of these calculations can be upended by client demands or competitive pressures. And the same holds true for profit margins if costs soar. Figuring out profit, too, often amounts to architects “sticking their finger in the air … and hopefully adding some number to their actual costs,” says Ray Kogan, a strategic planning and management consultant for AEC firms.
The upper end of fiscal-year firmwide profit margins for recession-hit practices is in the range of 8 to 10 percent, down from a high of between 15 and 20 percent a few years ago, says Kogan. Cost overruns and unexpected expenses, however, usually on the construction end, can eat into fees. The ultimate profit, Kogan notes, is “almost always less than the anticipated budget at the beginning.”
The AIA does not recommend fees, discuss the basis of fees, or offer fee guidelines for its members. This is the result of a 1990 consent decree with the U.S. Justice Department settling an antitrust suit alleging that the association tried to discourage price competition for architects’ services by suggesting a uniform, sliding-scale fee structure. According to the decree, the institute agreed not to adopt policies dictating pricing practices.
For most firms, then, calculating fees is a bit of a guessing game whose factors include the project, the client relationship, the competition, the firm’s overhead, and the economy. This can be tempered by knowledge of the building type, its value to the prospective client, and the firm’s ability to deliver quality goods on time.
“What we do is … try to understand the unique requirements and character of the project, and then we build a fee based on the hours we think it will take to do the project,” says Dennis King, corporate chairman of Detroit-based Harley Ellis Devereaux. And then they leave room for some haggling. “In the end,” King adds, “we prefer a meeting of the minds to establish a fixed fee.”