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Fixed lump-sum fee.

mtdew

A developer requested a proposal for a building renovation job in NYC. We described the scope and sent them back a proposal with a percentage fee. They responded back saying " who works with percentages these days! We want a fixed fee".

We had a GC review the scope and advised that the construction budget can be anywhere from $650 to $900 per sq.ft. This leaves us with a difficult decision  as we don't want to sell ourselves short nor price ourselves out. 

I know that some firms take on a project at an hourly basis then would commit to a fixed fee. That would be the safe route but there are other architects bidding on this job. And if one is charging X and if we are an undetermined amount; we might be out of the game. 

Let me know your thoughts. Thanks!

 
Apr 17, 17 11:10 am

2 Featured Comments

All 15 Comments

Hourly. Key word being "developer".

Apr 17, 17 11:33 am
gwharton

You could explain to them that the total fee will likely be the same, regardless of whether or not you do percentage of construction cost or lump sum. If you write a lump sum contract, you'll have to define the scope very carefully, which means if you have to do work out of scope, you'll be charging them extra every time it happens. With percentage of construction cost, you won't be constantly haggling over that stuff. Their choice.

I've done both, and each has its advantages. Developers think they're getting more predictability and less risk with fixed fee vs. percentage, but that's really not true when you look at it in practice.

I actually prefer fixed-fee contracts simply because my scope IS more carefully defined. And I can also charge value premiums beyond what might normally be possible otherwise. But a percentage contract can protect you against a vague or changing project scope.

Contra David, above: I strongly recommend against ever doing hourly contracts except for very small projects (fees less than $50,000). They are a giant hassle which increases your overhead while sharply limiting your profit. You are not selling and your clients are not buying your time, which is very limited anyway.

Apr 17, 17 11:48 am
senjohnblutarsky

Either do hourly, or very clearly define your scope and provide a fixed fee.  Leave provision for additional services in your contract. When the scope changes, request compensation for additional services.  

Apr 17, 17 11:48 am
jungle

Would recommend going lump-sum with well defined and stated scope (written AND verbally) and charge hourly for additional services, especially if other architects are bidding. Just an hourly rate will leave the developer guessing, and if you 'estimate' the number of hours you're likely to be quite off, unless these sorts of projects are your bread and butter and you know the client well.

Apr 17, 17 12:03 pm

I've gotten burned on this in the past. A 600$/ft job is very different from a 900$/ft. If the client doesn't understand that then I'd be very cautious with them. 

You could structure the contract so the fee is fixed as long as they keep the scope of the project the same. Then they will have to decide whether changing their mind is worth the extra cost. You could say that the fee will be reassessed at the end of DD and CD's, and as long as the estimated construction cost is the same the design fee will remain unchanged. Something along those lines. 

Hourly during SD/DD is still better, but if you're looking for another option and don't want to walk away...

Apr 17, 17 12:29 pm
gwharton

If you go hourly, the developer will probably insist on a GMP too, which is the worst of both worlds for you. Don't go there.

If they want a fixed fee proposal, give them one with a very carefully defined scope and clause which excludes everything else as an additional service to be negotiated at the time it's proposed before any work starts.

Or they could just go with your percentage fee.

And...

If they try to beat you up too hard on all this, walk away. Life is too short to deal with people who are trying to cheat you all the time.

Apr 17, 17 12:37 pm
JonathanLivingston

Yep fixed fee. but include phases as hourly for venting extra time, VE, Permitting / Design review, Owner initiated changes come to mind.

Gwharton speaks the truth here. Especially right now. If your doing hourly work the amount you can make is directly linked to the hours you and your employees work. In the current situation the market supports much more and the only way to realize that is to either jack up everyone's rate or charge a large fixed fee you can beat. Demand is high supply is low but that will change in the future.  Hourly = layoffs down the road.  

Apr 17, 17 1:13 pm
citizen

I just ordered fixed lump sum fee at a Chinese place last night.  Delicious.

Apr 17, 17 1:20 pm
gwharton

Was it served by Sum Yung Gai?

citizen

How'd you know?

Featured Comment
jcarch

As an architect in NYC doing work with developers, there's zero chance of you getting hired by a developer with a percentage based or hourly fee.

But doing lump sum doesn't mean losing your shirt.  We do it all the time.  You need to put limitations on what's included in the lump sum, and you get paid hourly for anything outside of that scope of work.

First you have understand what the actual scope of work is in order to set the fee at the right amount.  On the one hand, if the developer chooses counter tops that are $150 a foot, v. $50 a foot, why should we make 3 times as much for the same amount of work.  On the other, if you think you just need a kitchen floor plan and interior elevations, and the developer is expecting exhaustively detailed custom millwork detailing, you better know that going in.

Then you have to limit how many design options are included in SD...how many hours of our time are included in CA...how many meetings with the DOB are included in our fee...and any changes to previously approved work (and we're very careful to do meeting notes saying that "x was approved," to avoid the a**holes who claim after CD's are at 100% that they never officially "approved" the plans or facade design, so we have to make changes for free) is billed hourly, regardless of whether or not it results in a change in construction cost, etc., etc.

Lastly, during design/construction, be very clear with your client that something will mean additional fees.  Often a client will want a 4th design option...until I tell them that it's extra $, then they're suddenly ok with one of the options we've already done.  Or they agree to pay extra, yay!  But what doesn't happen is that we do extra work, then go to them later saying "oh, we need an extra $5K for that work we did this month"...best case scenario is we get 1/2 that money, and we may get none of it, with the client saying "if I'd known it was extra, I never would have asked for that work."

Like other humans I've met, some developers are just dicks.  They're looking to pay as little as they can for an architect, period.  Other are reasonable, but need to know their costs going in.  Both types are going to want a lump sum fee, but avoid the former, and work with the latter if you can.

Sorry for the long post, but I deal with this stuff all the time :)

Apr 17, 17 2:36 pm
mtdew

Thanks for all the feedback. 

The developers I'm dealing with are seasoned as they own over a 100 buildings in NYC. They love to put a squeeze on consultants and love to negotiate. they have been stingy about providing information so I don't want to assume something and be locked into it. 

I basically want the fixed fee to more or less equal what would be the percentage fee. I believe that would be idea and "fair" for both parties. 

The best solution for us would be to start the project at an hourly basis with a GMP until the exact scope and construction budget is figured out. Then negotiate a fixed fee. There are so many unknowns right now. For example "will it be easier to core the building and install new structure". (landmarked building) Or to salvage the existing floor slabs. (That would save a lot of $ and work for us.) On our proposal we can state the estimated fixed fee for the expected scope & budget. 

Apr 17, 17 2:44 pm
Bench

On the one hand, if the developer chooses counter tops that are $150 a foot, v. $50 a foot, why should we make 3 times as much for the same amount of work.  On the other, if you think you just need a kitchen floor plan and interior elevations, and the developer is expecting exhaustively detailed custom millwork detailing, you better know that going in.

Hey Jcarch - for a graduate (still somewhat fresh) with little experience in contract negotiation, how exactly do you figure that out? It seems like a very non-explicit type of thing.

Apr 17, 17 2:45 pm
mtdew

The thing is that it's not the same amount of work... A custom kitchen with expensive stone would mean that there will be additional time needed to design & detail the cabinets. And time spent to visit a stone yard to select and then to get approval for the stone. Plus reviewing millwork shop drawings. Selecting & obtaining approval for finish, hardware approvals. A modular cabinet from a "builder's" cabinet shop with a quartz countertop can be designed and specified in an afternoon.

jcarch

My point on the stone was...you can take the exact same kitchen, and put in very expensive counters, and very expensive appliances, and it would be no more work for the architect.

You're right that usually those high end items also come with a kitchen that's highly custom and detailed by the arch., which would be more work.

Bench...I think the only way to gain the needed experience is to....gain experience.  Pay attention to how long things - like designing a custom kitchen - actually take, how much they cost, etc.  When they're young, everyone underestimates how long everything takes.  And as you're more experienced, you can usually do those things more and more quickly as you get really good at them.  The one shortcut to this is being sure to develop a really good network of suppliers/vendors/colleagues - like the OP did in asking one of his contractors for pricing guidance.  The more people you have who you can ask "how long to design a custom kitchen" before you know the answer yourself, the better your odds of getting it right.  Even so, you'll screw it up a few times as you start to be responsible for this sort of stuff.  Hopefully just not a serious enough mistakes to be fatal...

Apr 17, 17 3:26 pm
gwharton

"My point on the stone was...you can take the exact same kitchen, and put in very expensive counters, and very expensive appliances, and it would be no more work for the architect."

gwharton

^^^^^^This is not really true.

jcarch

gwharton...how dare you question me in such a manner! It's been a while since I've had a client do this, but I have had clients: Decide at the stone yard that they have to have a slab of "x", because it's so beautiful (and 2x the budget for stone). Decide at the last minute that they want the reclaimed quarter sawn American Chestnut, not the plain sawn oak flooring. Need the 36" Wolf range and hood rather than the 36" Kitchen-Aid. gwharton...how dare you question me in such a manner! It's been a while since I've had a client do this, but I have had clients: Decide at the stone yard that the y have to have a slab of "x", because it's so beautiful (and 2x the budget for stone). Decide at the last minute that they want the reclaimed quarter sawn American Chestnut, not the plain sawn oak flooring. Need the 36" Wolf range and hood rather than the 36" Kitchen-Aid.None of these changes meant more work for my office. But they did add significantly to the project budget (the flooring was a $70K increase). Back when our fees were percentage based, most of my clients would object that I should not get an extra $9K because of that flooring choice. And it was hard to argue from a spirit of the law viewpoint how it was. It can go the other way too. In our percentage fee days, we had a project with a $800K budget, where the client found a contractor...an old family friend, etc...who could do it for $400K....which by the letter of the law meant that my fees would be halved too. Yes, these are outliers, but they exist.

Chris_Teeter

as you noted they are seasoned, they know what things cost. if you are seasoned you know what is required with regard to scope and you know what is unknown (sounds like you have some major unknowns). thats all they want to see. scope as you define it - you are the professional.

Apr 17, 17 4:39 pm
jcarch

This is a really, really good point. The notion that a developer with that sort of experience doesn't know exactly what they're going to spend on construction is not possibly true. And that pricing will almost certainly be less than what a contractor would quote the OP...assuming that the developer does regular work with their contractors, they could be getting 10-20% off what the project would be bid on if it was a one-off.

file

"The developers I'm dealing with ... own over a 100 buildings in NYC. They love to put a squeeze on consultants and love to negotiate."

Oh My God -- he's dealing with the Trump organization. Run, my friend ... run like the wind!

But seriously, mtdew, you indicate that "there are other architects bidding on this job" then you go on to say that "I basically want the fixed fee to more or less equal what would be the percentage fee".

In a competitive situation what you "want" basically is irrelevant -- to secure the project you will need to quote a fee that is competitive with, if not below, what the other firms are quoting, unless you are able to clearly delineate superior value at a higher fee level. But, it doesn't sound to me like these particular developers care about much other than the lowest price.

Apr 17, 17 5:30 pm
Featured Comment
mightyaa

The way I did it.  I quote a fixed fee based on a assumed construction cost.  If the construction cost varied up or down by more than 5%, the fee would be equitably adjusted to reflect the increased or decreased scope based on a percent of construction cost.

Extra trick with developers.  Quote 'architect only' fee.  List consultants as an additional service to be brought on under your contract with a 20% coordination/markup fee; 15% if they bring them in under their contract.  Scoping services and entitlement (permit services) are set up as an hourly; because every developer 'knows what they want' and how the government red tape can be a pain sometimes.  That way, you can give a tiny number which is what they'll skip to in the proposal anyway.  

It's all in the "presentation" and I normally got what amounted to a 15-20% overall fee when all is said and done.

Apr 18, 17 10:45 am
mtdew

What you have described is pretty much how we've decided to present the fixed fee proposal. We already have a very detailed construction budget estimate so we plan to submit that budget to show how we came up with our fixed fee. We also plan to spell out the scope of work, service, and the building program. That's a great idea to give an increment of 5% for construction budget for opportunity to renegotiate our fee. 

Chris_Teeter

"presentation" is everything

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