Charles Thanhauser, principal of TEK Architects in New York, knew the economy was on the skids by last year, when he started hearing stories about firms slashing fees and clients driving harder bargains. But he came face-to-face with the downturn for the first time in November: A client threatened to go with its No. 2 choice unless Thanhauser dropped his fee on a small project to $195,000 from $250,000. He agreed, although at that price it wasn't clear he would turn a profit. "We needed the work, and we'll take on any work that keeps everyone employed," Thanhauser says of his 18-person firm. In the current climate, he notes, clients have a take-it-or-leave-it attitude, because "they're hip to the fact that there's desperation out there."
As architects grapple with the economic slump, opinion is divided over whether to lower fees to secure business. Some strongly believe that lowering fees sets a risky precedent: In the long run, it could hurt a practice and the profession in general, because even when business picks up, clients will still expect a discount. The problem, says Hugh Hochberg, a partner in the Coxe Group, consultants to design professionals, is that "markets remember lower fees for decades," a position that can be difficult to recover from. Instead of lowering a fee, Hochberg suggests reducing the scope of work involved or offering higher-value services.
Michael Strogoff, a management consultant to designers, agrees that taking projects at any cost can be a recipe for disaster. Clients who ask for reductions, he observes, "tend to be the most difficult clients to work with and have the highest expectations that cannot be met." However, Strogoff believes there are times when lowering a fee should be deployed as a last resort. That would be when there are no other alternatives to keep the firm's best staff occupied and pay overhead.
One way around a lower fee, Strogoff says, is for the firm to negotiate a deal to reap some of the potential returns of a project?as an investor?or to agree to an incentive plan based on results, such as a percentage of the revenues from condominium units sold. Structuring fee payments over a longer period of time is another way to placate client concerns about paying a large portion up front.
Firms small and large are fielding demands for discounts from clients. One New York architect, who runs a small firm, was working with a wealthy client on a residence. After the financial crisis hit, the client said he wanted to renegotiate the agreed-upon fee because construction costs had gone down. Although this was a dispute between the client and the contractor, the architect, who asked to remain anonymous to preserve the client's privacy, might lose out with a lower fee (calculated as a percentage of overall construction costs). "The question is, to what legal and moral extent can clients simply renegotiate a contract post-agreement?" the architect asks.
Large firms like Perkins Eastman are hearing similar requests. So far, the firm hasn't lowered its fees, because "lowering fees is a fool's game," according to firm chairman Brad Perkins. "It brings on [more reductions], and you end up in an unsustainable situation." Yet bowing to the economic downturn, Perkins won't rule out such a move. "I wouldn't say no in certain circumstances," he allows. Perkins says his firm is more conscious now of what level of fee is salable to clients, and how to package fees in palatable ways. He suggests making a portion of the fee contingent on the client securing financing, or helping the client put together marketing materials as part of a preliminary design study. By doing so, Perkins notes, "clients feel they are getting more for their money, and we are helping them with part of their job."
Jack Reigle, an analyst at SPARKS: The Center for Strategic Planning, says lowering fees should be considered by firms if they can, at the same time, root out operational inefficiencies. That way, they may bring down fees by 3 percent to 5 percent without eroding their profit margin. "This is the opportunity wrapped in the recession," Reigle explains. "It offers short-term benefits to clients but long-term benefits for the firm." At the same time, he suggests raising rates for leading-edge services such as energy modeling and sustainability studies.
Not all firms are feeling pressure to cut prices. Bob Miklos, principal of designLAB in Boston, says he hasn't been asked to discount; if he were, he might question the client's commitment to the project. Instead of lowering prices for clients on a tighter budget, he says, he would try to provide more value for money with services including more meetings and research and stricter oversight of construction costs. After all, Miklos adds, "our fees have long been a bargain in our profession."