Lump-Sum, Percentage, or Hourly Rates – Which fee structure is best for Architects and Design Professionals?
To answer that question let’s start with a quick look at the history of architectural fees.
A Brief History of Architectural Fee Structures:
It’s hard to imagine a time when Architects didn’t have to negotiate fees for design services, but believe it or not, back in the 1800s, organizations like the American Institute of Architects and the Royal Institute of British Architects (to name a few) all published minimum fee scale charts.
Indicative Fee Scales:
It wasn’t until the late 1900s that these charts were changed to indicative fee scales, and then more recently, due to pressures from government organizations like the office of Fair Trading, abolished altogether.
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Have all Countries Abolished Fee Scales?
This is not to say that all countries have abolished the use of indicative fee scale charts.
For example, Germany, Canada, and South Africa all still publish some form of fee guidelines based around the type of project and/or the estimated cost of construction.
Unfortunately, however, many Architects from these countries have reported that, despite their publication, the fee guidelines can rarely be relied upon to win work and secure a commission.
So, as we all continue to play a more active role in estimating and negotiating fees for design services, it’s crucial that we all understand the pros and cons associated with each type of fee structure.
Which Fee Structure Should Architects, and Designers adopt?
Percentage Fees:
Percentage fees were traditionally defined as a percentage of the final cost of construction, including the cost of any approved but aborted work.
However more recently the definition has changed, and in some parts of the world, the percentage fee is now linked to the agreed Client budget, not the final cost of construction!
This very subtle (but significant) change can have far-reaching consequences for any Design Professional who unknowingly enters into this type of Agreement.
So always make sure you read all your Agreements carefully and consult with the required professional Legal Counsel before entering into any contractual Agreement.
So, what are the pros and cons of a Percentage Fee Agreement?
Pros:
- A percentage fee will be a (small) one- or two-digit number and therefore (in theory) easier to sell than its five, six, or even seven-digit, lump sum counterpart.
- When tied to the out-turn construction cost (not estimated construction cost), it reduces the Design Professionals risk because (in theory) it automatically adjusts for scope of work changes. It also addresses any inflation concerns that may exist on longer/larger projects.
Cons:
- A percentage fee offers the Client less financial certainty and is therefore less desirable from a Client’s perspective.
- When tied to the out-turn construction cost (not estimated construction cost) there is an incentive to design a more expensive project, which can make for a more challenging Client relationship.
Lump Sum Fees:
A lump sum fee, sometimes called a stipulated sum fee, is a fixed sum of money for a defined scope of work. So, what are the pros and cons of a lump sum fee Agreement?
Pros:
- Lump sum fees provide the Client with a concise design budget offering them more financial control than the percentage fee Agreement.
- May be derived from a percentage fee or time charge fee.
- Work well with clearly defined project briefs and financially driven projects.
Cons:
- Require a more bespoke proposal that may take additional time to prepare.
- Does not automatically adjust with the construction budget. Instead, the fee must be linked to project size and building type and all scope changes need to be carefully recorded and addressed with the Client.
Time Charge Fees:
A time charge fee is charged on a predetermined hourly, daily or weekly rate. So, what are the pros and cons of a time charge fee?
Pros:
- Quick and easy to implement because the scope doesn’t have to be clearly defined.
- Reduces the opportunity for unpaid work and therefore offers less risk to the Design Professional than other fee structures.
- Reduces the financial commitment required by the Client to start the project.
- Works well with undefined scopes and/or less experienced, risk-averse, Design Professionals.
Cons:
- Demands a high level of administration because all invoices will need to be substantiated by providing time sheets and receipts.
- Reduces the Design Professionals opportunity to be rewarded financially for the skill, expertise and experience they bring to the project – the more efficient the service, the less hours invoiced.
- Can be difficult to get paid for work that doesn’t provide a clear deliverable (i.e. research time).
- Many Clients will require a not-to-exceed limit which effectively turn the fee into a lump sum proposal.
Conclusion:
There isn’t one type of fee structure that is suitable for every client and every project.
As Architects, Interior Designers, and Design Professionals we need to understand the pros and cons associated with each approach so that we can propose the most suitable structure, at each step in the process, given our client’s requirements and the situation at hand.
This can result in adopting different fee structures at different stages within the same project.
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