Given the tremendous interest in this topic generated from a recent LinkedIn post. I thought I’d double-down on the transparency track and tell you exactly how Synchronis and most well-run architecture practices calculate their fees. Here it is…
1. Overhead: 26% to 45%
Generally speaking, a firm needs to have a handle on its fixed overhead costs: Rents, leases, taxes, utilities, insurance, computer hardware and software, dues, service fees, accounting, legal, training, and administrative staff time, marketing staff time, and so on. Any cost overruns on projects will wind up as an overhead expense as well, which makes it all the more important that projects are efficiently run. The overhead is amortized into a portion of the hourly cost for each “billable” staff member, i.e. professionally trained staff who are active on architecture projects. The overhead component of Synchronis’ rates are calibrated to be at the bottom end of this spectrum due to its leaner structure and holistic approach to producing the work. Large firms tend to departmentalize and be “un-lean,” often carrying a large marketing infrastructure cost as well. Not covered under this discussion, a single practitioner operating from a home office will carry the lowest overhead of all, potentially as low as 0%, but possibly without the full benefit of professional liability insurance, staffing firepower, and/or the advanced design and production technologies used by firms which are investing in overhead.
2. Professional Staff Salaries + Benefits and/or 1099 Consultants: 40% to 49%
The staff cost is their direct salary along with an additional fraction (for Synchronis about 36% of the direct salary) to cover benefits like holidays, vacations, health insurance and so on. That same total cost of salary and benefits is what Synchronis will typically pay to 1099 consultants as a hourly rate. When a firm’s overhead costs are lower, the percentage allocated to salaries automatically becomes higher.
3. Goal Profit: 15% to 35%
These are the funds that in some fraction stay with the firm as retained earnings for cash flow or are distributed to employees and the owners of the firm as bonuses. The indicated range is not all-encompassing. Boutique design firms with strong international brands can command considerably higher profits, while larger firms with weak reputations can easily run between 0-5% profit as they are working backwards from a commoditized market perception where fees are generally capped and may also suffer inefficiencies stemming from the bureaucracy of large firm structures. At the end of the day, because the actual overhead expenditures will vary quite a bit from month to month as business slows-down or speeds-up, the actual profit will be the result of the difference between the fees the firm can command (based on the perceived market value), and the actual costs of running it. If firms want to up their profits, they need to maximize their efficiency while also increasing their perceived market value.
4. Contingency Budget
When Synchronis is not placed in a completely cost-driven competition to win a project, we try to include in our fee a nominal contingency of up to 12% to cover project cost overruns due to any errors in the original scope assumptions, minor client changes, and minor client-driven schedule overruns. We find this really works well to build long-term trust in the client-architect relationship as this avoids the unfortunate “nickel and diming” that is endemic with some of our competitors. When forced to operate without a contingency, what we do instead is invest in the client relationship and lose money, if need be. This is clearly not a good long-term strategy for business success, hence our reticence, gained from experience, of engaging in purely fee-based competitions to procure work.
5. Project Staffing Plan
This is where a good deal of professional experience helps as it requires creating a week by week mapping of the duration of specific service phases (Schematic Design, Design Development, Construction Documents, and so on) as well as the number of team members required to execute the project during each phase. Using the hourly rates and contingency described in items 1 through 4 described above, an overall lump sum fee per phase is generated. We manage the project against these lump sums and try our best to maintain the scheduled delivery milestones. Delays in the schedule are the enemy of financial success as they run the allocated staff members for a longer period which will immediately cut into the contingency and eventually the profit.
6. Percentage of Construction Cost
To avoid any issues of conspiring with my professional colleagues to set fees, I will not offer any specific percentages of architecture fees in relation to the overall cost of construction as no percentages are set, or allowed to be set, within our industry. We are completely free to be free, if you will. Synchronis does, however, look at the results of its cost model based on the project staffing plan and will compare it against the anticipated cost of construction. Where our initial fee calculation appears qualitatively low or high, we will take a second pass to calibrate our competitiveness weighed against our perceived value.
An Investment in Value Creation and Risk Mitigation
Hopefully in a good way (but potentially in a bad way), the work architects produce is leveraged into the expenditure of potentially millions of dollars to construct a valuable capital investment. It’s a no-brainer that a quality design makes everyone’s built environment more productive and pleasant. For commercial buildings, the enhanced perceived value of a well-designed building will arguably translate to higher market values, higher rents, and lower vacancy rates. When your architect further produces a quality set of construction documents, these will reduce the incidence of post-award “change orders,” potentially many times more costly than the firm’s entire fee, generated by builders who know how to profit from presenting low initial prices on documents that are scanty, ambiguous, or sloppily-produced. This is the profession’s seedy underbelly: Other than the savings created through a lean and efficient operational structure, lower fees inevitably equate to less staff time invested on your project, often compounded with the generous application of underqualified, inequitably-paid, unenthusiastic staff. Saving pennies here may cost dollars down the road.