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Front-Loading Fees on Project?

gmpa

I'm trying to get my Principal to front-load fees on fixed-fee full-service contracts so that the firm collects more in the Concept / Schematic Design Phase where we almost always spend more than what is budgeted. We do have a provision that Schematic Design revisions and changes are to be an additional service (but we only bring that up when the Client wants to basically redo the design pretty drastically.)

His concern is that he has enough dollars for the construction services phase, but my feeling is that if the Client pays me, let's say, 99% at the Schematic Design phase and 1% at the CD phase, its good deal for us because the Client might go bankrupt, the project may not make it through entitlements etc. It's my job to put the 40% I need for CD's in the bank but at least we have it.

Can anyone explain to me the reasoning behind not trying to get more money upfront? I totally understand doing concept / schematic design at a loss is one way to get foothold with a Client and make it up later, but if they are already signing a full-service contract from the get-go, why not collect as much upfront?  

 
Aug 16, 17 4:56 pm
Non Sequitur

Because what client will pay 99% of the fees when 10% of the work is being done? No client will agree to that.


Aug 16, 17 5:04 pm

Why not just stop spending so much time doing concept/schematic design? Then you're happy because you don't spend more in that phase than what is budgeted, your principal is happy because you don't blow the budget at the beginning and run out of fee at the end, and the client is happy because they aren't paying for services that haven't been rendered. Win-win-win

Aug 16, 17 5:45 pm
spiketwig

You're right that you should front load the fees as much as you can get the client to agree to - it does reduce your risk. 

The problem is getting the client to agree to it, since it's pretty obviously dis-advantageous for them. One way you could achieve this is by using milestone billing with a lot of milestones early in the project and fewer as you go on. 

Aug 16, 17 6:07 pm
gmpa

Non-sequitur, I was just using an extreme example. I'm thinking realistically 20% of the fee for SD instead of the 15% (which includes a required exhibits for a usually considerable entitlement process and is more in line with the actual cost expended).

I should also note that I am looking at it not from an project manager perspective but as a business operations guy coming from the perspective that it is always better to have cash in hand rather than having to chase after it from a slow paying Client. I think all of us have stories about unpaid billings from the last recession. If we had simply been paid for what we were owed we would have avoided at least some of the painful cuts to staff and salary/benefits.

Is it so hard to give a project manager 40% of the fee to work with for CDs with the understanding that the 5% has basically already been paid upfront at Schematic? 

Not to mention that Revit requires a lot more be spent upfront.

Aug 16, 17 6:09 pm

"Is it so hard to give a project manager 40% of the fee to work with for CDs with the understanding that the 5% has basically already been paid upfront at Schematic?"

But that's not what you're describing. You're saying that the 5% is really spent in SD, not banked for CD work ...

"I'm thinking realistically 20% of the fee for SD instead of the 15% (which includes a required exhibits for a usually considerable entitlement process and is more in line with the actual cost expended)." (Emphasis mine)

Hypothetically, you get the extra 5% at SD, and then the client cancels the project after SD work is done. Are you going to give them back the 5% because that was supposed to be spent doing CD work?

Aug 16, 17 7:22 pm
whistler

Because for most developers they actually only want to outlay as few dollars as possible at the front end if they can due to ( approvals / rezoning / agreed upon price to purchase subject property / coming up with a design that they can sell, etc ) then once they have approvals etc they can roll the remainder of your design fees ( and likely a few of the CD fees too ) into the construction mortgage and really not pay too much out of their own pocket.

The mantra in the developers world....."use other people's money"

Aug 16, 17 7:51 pm
mightyaa

Deposit can also do this.  

I did often front load contracts with dubious clients though who I got that feeling that they weren't well funded and in over their heads.  It wasn't to cover design costs though, it was more to cover my costs of that lull in work while I brought in another project.  Basically, it's not like you have a project just sitting there to shift onto when you'd planned on your team working on the cancelled project for a few more months.  I also was never successful in collecting anticipated profit the contract calls for if the owner cancels the contract... So, I loaded the billings at the front, and required a deposit that would be credited to the final invoice to cover these things.

Aug 16, 17 8:15 pm
archinine
If you're in architecture to turn a profit, especially at the SD level, you're in the wrong business. Most clients are paying you for the CDs and permits etc not the design. They of course will ask for as many iterations early on as you're willing to give.

The trick is managing client expectations. A good way to do this is having a very specific contract in regards to SD, and simply not performing any additional services within that phase, as it's almost always the one that gets out of hand, until the client has at the very least signed on and agreed to pay those additional service fees at the next scheduled payment date. Too many firms, even large ones, have vague descriptions of what is or isn't included in SD. Hammer this out early on and learn to say no until you've got the signature/agreement to pay in hand. If they fall behind on payments stop work. Have a clause which states any schedule delays due to unreceived payments are fully the responsibility of client.

This is of course much harder to do in a smaller operation with less projects to fill employee time sheets, but this exact problem - unpaid additional services - is what has driven down rates for decades. It is in the client's financial best interest to keep to the schedule and limit additional services as opposed to transferring everything to another firm as the latter is generally far most expensive than a few add ons. Architects seem to be unaware of this and just keep doing work that isn't being paid for, something they're ingrained to do starting with freshman studio. No other business field lifts a finger when their clients haven't paid or agreed to pay, but for some reason architects always fall for this trap.

Too much front loading will generally scare off clients in favor of cheaper similar companies. The add ons won't, if anything they won't anticipate adding anything as they never seem to think they will - because they all know everything (sarcasm) - and by the time they do it'll be too late for them to jump ship.
Aug 16, 17 9:18 pm
randomised

You should just bill more realistically and not try to cover losses in one phase with something you might make up for later in the project, then you just act as the bank for the client but take all the risk which is nonsense. If you lose money on the concept / schematic design part you're just doing it wrong because too many projects often don't make it past that stage.

Aug 17, 17 4:00 am
Nats

No client will pay that and you wont get any work. Far better asking for a percentage upfront. Many firms in the UK do initial work at risk with the hope of getting the full job later

Aug 17, 17 4:09 am
randomised

And yet we wonder why architects are underpaid and exploit their staff and interns, unpaid overtime etc....if only we wouldn't do work for free or at a loss.

Chuck71

I've worked in offices where the developers have given that line, time and again.

Do us a deal on this one (i.e. take a stonking loss) and on the next project you might get paid enough to break even.

Often enough it is paired with comments like, the Architect on my projects always does x [for no additional fee, even when it is specifically excluded].

Or, but you have a very good fee already [that doesn't cover even wages for all the changes in a project]

Except, developers never do give you that dream project that makes a profit. They are in the business to make money: if some fool architect believes promises made, then more fool them, and the developer can put the saving towards a new Merc.

mightyaa

The other way I've done this is to go hourly during scoping, preliminary design, and schematic design.  A fixed fee contract would be established after that.  It is not an easy sell to the client.  

Aug 17, 17 2:04 pm
home_alone

drastically reduce overall fee and charge reasonable hourly rate for CA. Saves me every time in residential but developers won't do it.

Aug 19, 17 6:23 pm

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