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Fixed fee, percentage or hourly?

Wood Guy

I thought I'd find a similar thread but don't see any in the last ten years. I design homes and renovations--8 years at a firm and 6 years on my own (after a first career in construction). My clients are typically upper middle class but not filthy rich. I have always charged hourly, both at the firm and on my own, but provide detailed estimates and almost always come in at or under the estimates. I'm overdue to raise my rates and I'm thinking it might be time to go to a fixed fee model for a specific scope of work, billing hourly for additional services, but trying to get most of the project under the fixed fee.

I would rather not charge as a percentage of construction because I'm concerned that clients will think I'm pushing up construction costs, and I don't get too involved in the contractors' billing. That could change if necessary but I don't think my competitors review contractors' billing either, and I would rather not get involved. 

Why change? I'm slammed with work, and recently realized that my billing rate has only followed inflation for the last ten years, but I am at least twice as fast and twice as knowledgeable as I was ten years ago. So I am leaving money on the table. If I double my billing rate, or even increase it by 50%, I'm afraid I will lose too many jobs. I don't mind losing some if it means better, more profitable projects. 

How are others billing? What are pitfalls of a fixed fee? How do I get around them? 

 
Sep 25, 20 12:48 pm
proto

we are hourly too for similar clientele (wealthy enough for an architect, but not in carte blanche territory). We also provide a critical path of proposed tasks to demonstrate the expectations of our estimated proposed fee. We will also discuss our historical range of fee % based on construction, just as a early marker of expected professional fees.

i see no benefit in fixed fee for what is custom work. There are no repeat projects that create any kind of certainty for the process. Certainly there are  exceptions occasionally, but they are just that: exceptions

we raise rates regularly and hold rates for each client. So new rates get published with proposals going out, but old clients get to retain rates until we return the retainers. Some of these have gone on for years...

Sep 25, 20 12:55 pm  · 
1  · 
mightyaa

I primarily did hourly on single family. The reason was each clientele was so vastly different where some micromanaged design and expectations like millwork while others just wanted a builder type set.  That’s very hard to establish with the initial meetings for the proposal.  You could do what I did on light commercial; hourly through DD (estimated fees), then fixed fee for CD and CA.  Basically, I’d give them a CD and CA estimate of the fixed fee, but the initial contract only went through DD; Then a second contract once I knew what I was really getting into and could be accurate with the fees.  I could usually sell this by going through the process and talking about their design and the variations for delivery with a GC down the line basically suggesting we bring in a GC at the end of DD to provide budget and estimates to refine the design to accommodate budgets and expectations.

Sep 25, 20 1:06 pm  · 
3  · 
mightyaa

Oh, the downside (or upside depending) to that method is at the end of DD, the project could end. Some would take the design and secure a structural engineer / builder to finalize the permit set. No matter if you are busy since you got to do the fun part without the liability.

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proto

i've done this too with small commercial -- but i keep coming back to hourly, because it's just me, no drafting staff...it's easier to bury the ups/downs when you have staff (overhead profit buffer) to smooth out the lumps

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Wood Guy

That's interesting, two separate contracts. My process is a bit unique in that I do a lot of typical CD stuff as part of DD, and I try to bring in builders at the end of SD, both largely due to the requirements of high performance building. But not that different from your approach. I have had a lot of jobs leave at the end of DD but I'm trying to hold onto those now. But I definitely enjoy the early stages more than the later stages, and don't mind letting go of some liability.

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mightyaa

Yes, with residential, you could theoretically transition at the end of SD's once it is known in much greater detail the scope of the project and those discussions to manage expectations of the deliverables. The hard part is educating the client to our process so they understand the design and details process and all the possible options; like kitchen or millwork designers, interior designers, MEP, traditional versus negotiated with GC's, etc. that can seriously affect our fee structure and coordination.

1  · 
Jay1122

Just my random two cents. Don't have experience on those. Fixed fee is definitely high risk high reward depending on how fast you finish the project. For project types you are familiar with. What about fixed fee with not to exceed hourly billed? Of course, a detailed proposal of what basic service covers is still critical. Jack the fixed fee amount higher than your estimate to test if client is comfortable. Then when billing, stretch some hours if there are a lot of $$ left to bill for extra profit. Well most people still view NTE as fixed fee. Did your client ever worry about your hourly fee structure makes you stretch the process to build up the fee?

Sep 25, 20 1:37 pm  · 
1  · 
Wood Guy

Yes, having a crystal clear scope of work would be critically important. I'm a bit lazy about that now, though it usually works out. I establish early in the process that I am 100% honest and trustworthy, usually by saying something true but mildly insulting and blaming it on my inability to lie effectively. Very few clients (out of 400+, not a huge number but not insignificant either) have not trusted me. It probably helps that my rates are on the low side, though not extremely low. I don't see the upside (to me) of hourly NTE.

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Jay1122

We are exploring ways to make you richer. Fixed fee with crystal clear basic service indicating number of design scheme limits is probably my preference of approach. Maybe you also want to use multiple billing methods depending on clients. Like some clients that you are reluctant to work with, hit them with higher than average fixed fee. If you lose them, no big deal. Also, I like to consider overall project profit. Like across all the projects using fixed fee, maybe a few went overboard because the client is annoy, but most of other projects took in huge profit in fixed fee. It ends up a win compare to all hourly billed with expected 15% profit. That is how my office is, small projects fixed fee bring in a lot of profit, while Big ground up projects barely break even in profit sometimes. 

1  · 
Wood Guy

Sounds good, and I appreciate your advice.

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thisisnotmyname

The pitfalls of fixed fee for us are: a) poor performing employees burning up the fee by taking too long to do the work and b) client burning up the fee by requesting lots of design changes and/or asking for multiple design options to choose from after they reject your initial ideas.

We had one client who agreed to go hourly for a luxury home renovation and about two weeks into it he freaked out and accused us of stretching out the process to run up the fee.

Sep 25, 20 1:46 pm  · 
1  · 
Wood Guy

That's an excellent point. I am currently solo and may stay that way, but would also consider taking on an employee if my workload remains high. I'm not licensed so interns looking for AXP hours don't want to work for me, but I'm gaining enough recognition in my niches that I might be able to find someone. But I've managed a lot of people in the past and trying to predict their production levels is difficult at best.

1  · 
thisisnotmyname

I don't think a noob archichild trying to do AXP is a good fit for you. Sounds like you would be better off with an architectural drafter and/or a CA person with a construction background.

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Wood Guy

LOL, "archichild." You're probably right. I have trained a few fresh grads, including M-Archs, at previous jobs and although in some ways having a blank slate is nice, having to start from scratch is time-consuming.

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thisisnotmyname

Training a recent grad is exponentially easier in a setting with several experienced people office versus a solo practitioner.  It's a tough task when the entire training burden is placed on one person who also has to run the business and lead the design work.

1  · 
awaiting_deletion

B.arch with a few summer internships are best. anything else, is a loss for 6 months

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willard whyte speakin

comprehensively, i see 2 approaches, w/ grey in between:

1. vertical. fewer projects, but higher fees. i call it the "find that sucker born everyday" model. or, "pointy shoes" architects as my structural would say.

2. horizontal. many projects at a lower rate. aka, the "gene hackman" model, because he's always wondering "is this my  last movie"? if you're in europe, you can insert max von snydow. the key is volume, so you spread your arch. seed as it were. an old mentor told me to design as many buildings as you can get your hands on. trivia interlude: snydow was in film for 6 decades.  

i like #2 because it gives one a lot of practice chewing through the process. by getting better, faster, and more efficient, the money seems less relevant. you can actually start to ramp it down. if i start to become delinquent in terms of timing, i sometimes shave the fee as a concession. 

personally, i never do %. oscillate between hourly and fixed based on reading the client, phase, scope, and intangibles. a given proposal may have both fixed and hourly components. i rely on the invoicing "thread" to keep track. i'm the most average joe arch. you'll ever meet, but my accounting rocks. yes, i rock accounting.

Sep 25, 20 4:37 pm  · 
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Wood Guy

I use the term "fancy" instead of "pointy-toed" but I get your point. Although I would not turn down a higher-fee job, I'm not good at selling to that crowd, or even getting leads. I'm currently a bit too horizontal. I guess I'm looking for a boxy shape--not too wide, not too tall. A truncated pyramid.

Do you think one or the other is a better fit for fixed fees? I would guess that my upper-end clients might appreciate the peace of mind of a fixed fee, and wouldn't worry too much about the actual cost. I'm jealous of your accounting skills. Not my bailiwick.


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willard whyte speakin

yes. i get out the abacus and beans to count. i actually envision the horizontal / vertical more like a seismograph. needle jumping

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willard whyte speakin

on the y axis (money) an time (x axis). if that makes sense. sorry this got truncated.

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awaiting_deletion

what about z axis?

1  · 
willard whyte speakin

well played...dawg. well played.

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awaiting_deletion

Wood Guy, in my residential market it depends on type of work and type of clients, but I always do fixed fees.  only the wealthy or almost wealthy do I switch over to hourly after I tell them we've maxed our fixed fee (which is always the case of course).

1. In-out Residential - client needs something for permitting or they pretty much designed it already.  Do a fixed fee and tell them the steps, when they should make decisions.  As you note twice as smart and fast, most these jobs, like say deck jobs or a small additions, unless I make this a learning project for staff we perform above billable.  Rarely, I totally don't give a shit and just let staff carry on until I find something else for them to do.

2. Spec House kind of Residential - set fee as well.  by spec house I mean, something you normally see in the burbs, customizable in plan but not in detail.  we charge heavy up front and during schematics.  make sure they understand once they approve schematics any change thereafter is hourly.  Usually works out and make money.  If I think I'm loosing money I lower quality of the details and dump most of it off on the contractor.  Usually 85% in fee by the time they find a contractor, so if the contractor wants to start shit, I don't care anymore.

3. Custom nearly rich or rich clients - these clients tend to just be looking for an upfront low number as like an ego check thing.  they often say things like "well we inherited this property and are just working to pay taxes" or "we've come on hard times and need to redo for financing.  you give them a decent low number, let it drag a bit when they start to micromanage (literally like a drug dealer to a junkie), then explain based on initial presentation you really thought this was a #1 - In-out residential and switch to hourly.  I find the wealthy think they can do anything, so let them learn....years later, you're making $500 to $1,000 a month on essentially educational consulting.  often the wealthy clients have literally nothing to do and want to manage everything themselves.  they learn that the Architect does indeed know something.  I have a handful of these, in general the hourly fees to date are literally 4x-6x the initial set fee.  They don't care at that point, because we're practically friends. 


Usually when meeting a residential client the fixed fee is in my head starts bouncing around as they talk, if they ask how much and I'm not sure yet, I bring up a few questions, etc... and when I think the number in my head is correct I give them quote.  Qualify later in fee proposal, which most never read, besides lawyers and OCD types.  OCD types, usually get increased rates, I've made the mistake to treat them fairly, but they just suck your time man.



Sep 25, 20 7:16 pm  · 
4  · 
rcz1001

Never forget the PITA tax. :-) 

This amount varies on the level of PITA you are sensing. Actually, its more of a modifier in the estimates because PITA clients impact the hours almost always with more hours so you may modify the additional hours, an increased rates for change orders, and stuff like that. In other words, I'll do the work but it's not going to be a bunch of freebies. If you want come in at the 11th hour and we're just about the print out the set for submission for permits and you decide you want to make drastic changes, it's going to cost you. Yes, the PITA tax..... never forget to charge it with PITA clients!!!!

2  · 
apscoradiales

Fixed fee - based on your best estimate how long it will take you to do the job, including all follow-up like inspections, permit applications, tendering, etc..

After that, all changes based on a hourly rate.

Sep 26, 20 6:33 pm  · 
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gwharton

Hourly (or T&M...Time and Materials) limits your risk, but at the cost of limiting your profit. It also makes it extremely difficult to do any kind of strategic business planning. I generally will only do T&M contracts for very specific, high-risk work or project phases (CA being the most common), and nothing else. It's a terrible fee model in general. Avoid.

Percentage of Construction Cost is a good method for smaller projects with poorly-defined scope and high potential for extensive design iteration. Works well for custom single-family residential work....and not much else. Be careful how you define whose fee comes out of that percentage, for what, and at whose direction. If you are responsible for all subconsultant fees at owner discretion, a 15% fee can start bleeding red quickly.

Fixed Fee (AKA stipulated sum contracts) are by the far the best fee model for business predictability and profit. But they do entail a bit more risk if you are not particularly careful about defining scope and deliverables in your contract. The solution to that is simply to be more careful and explicit about what's included, what's not, and what you are going to be delivering, when. It's not that hard to do. Don't be afraid of it. Your bottom line will be much healthier. Preferred.

Sep 28, 20 2:23 pm  · 
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x-jla

Fixed fee is the best because it removes uncertainty, being rushed by client, questioning everything you spend time on, etc.  like gw said, just need a very tight contract to define scope, deliverables, etc...I have a provision in my contract that defines an hourly rate for any services that fall outside of the defined scope.  

Sep 28, 20 2:48 pm  · 
2  · 
gwharton

I think ultimately, whatever fee model you choose should closely align with your value proposition as an architect. What business are you in? What are you selling? I do not sell my time. I sell ideas and delivered quality design and buildings.

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proto

re: "I do not sell my time." There is a difference between billing hourly and being on call. We are still selling our experience and ideas, not access to our drafting software or "blueprints" or on-call advice.

There is, however, a legitimate critique to the notion that the business strategy is your time. Meaning you don't get paid unless you work. It's not a profit driven model. Profits are built in, to be sure, but it doesn't stack cash when you are not on the clock.

We've made a decision to work this way because it is flexible for both us and our clients.

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atelier nobody

I prefer a fixed fee, but I like it to be based on the typical percentages of construction cost from various sources (since it would apparently be price fixing to use the old AIA standard percentages).

Sep 28, 20 5:26 pm  · 
3  · 
gwharton

Good point. When I write up fee proposals, I always calculate it three different ways just to check my approach. Percentage of construction cost (or sometimes fee per unit or fee per square foot) is one of them even though I never actually use that as a contractual billing method.

2  · 
Wood Guy

That's what I do with hourly estimating, checking my total against percentage of construction budget. When the budget isn't known, which is common on my jobs, I put in a reasonable range.

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x-jla

I usually estimate how much time it’s going to take me, considering not only the project’s complexity, but also the needy-ness of the client. In landscape A large expensive project may be very simple...and a small project may be more time consuming...

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shellarchitect

I have always had a hard time selling myself on a per hour basis, potential clients always think $50 per hour is way too high.  Of course I think it's way too low.  When I propose a fixed fee based loosely on my estimated effort and construction cost, the conversations go much better.

Sep 29, 20 3:20 pm  · 
2  · 
thisisnotmyname

Me too. Hourly is very rare in the markets I serve. $50hr is pretty low if you are operating a full setup with office space, computers, employee benefits etc.

1  · 
proto

Even if you propose fixed fees, you still have to publish your hourly fee schedule as a basis for additional services etc. So, you're going to have to legitimize it either way. [I really hope $50/hr is just for commentary purposes cuz that isn't professional rate territory imho]

1  · 
gwharton

Yeah. $50/hr is less than $35,000/yr salary at a 2.9 multiplier. No bueno.

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shellarchitect

So I’ve tried to do a couple moonlighting jobs at the $50 rate and the comments are always that it’s way to expensive

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shellarchitect

When I propose a fixed fee, I figure around 100 per hour and $100 for extra services, no complaints with this method. I’m moonlighting and only going after small and easy work. It’s all gravy for me

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gwharton

I use a blended rate of around $135/hr for doing back-of-the-envelope estimating. Admittedly, as part of a larger firm, my overhead, salary structure, and multiplier is probably a bit higher than a single-shingle. But still. Don't cheat yourself.

1  · 
whistler

Residential Projects;

Hourly rate for Schematic Design, fixed fee for DD and CD, Hourly for Contract Administration and additional services / major revisions

minimum charge out rate is $145.00/hr up to $190.00/hr

Commercial Projects

Fixed Fee for the whole thing, hourly rate for additional services/ major revisions

minimum charge out rate is $155.00/hr up to $190.00/hr

Sep 29, 20 6:44 pm  · 
2  · 
Non Sequitur

We use a very similar breakdown but often do a hourly rate up to an upset limit for SD and some small projects with repeat clients. Spread ranges $90 to $120/hr for intern/tech/int designer to 150 to 200/hr for arch and senior management.

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Bench

$90 seems high as a base for an intern, no ... ? (Genuinely curious)

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Non Sequitur

Bench, that's 90 loonies an no, not that high. It's 4x to 5x their hourly take home wage.

I think we also offer something called blended-rate so it's not specific to one staff, but an average of all hourly fees divided by expected hours of work.  Something in the the 120 to 145 range.  This strategy is more for easy things like commercial fit-ups or basebuilding only projects.

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Bench

Ah. Your multipliers are much bigger than what I've heard elsewhere. Well done.

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gwharton

Most architecture firms shoot for a 3.0 direct labor multiplier but have a break-even somewhere less than that depending on their overhead.

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whistler

Just to clarify my $/hr quote is Canadian Dollars and reflects approx 3x multiplier. We are a small firm and don't have any junior staff so we have to select projects that we can be efficient and effective in delivery and don't put too much time and effort into excessive busy work that often falls to junior staffers. We are very conscious of our efforts and scope of work and focus on having a high % of our time billing, including my time.

2  · 

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