For those of you who deal with contracts, I'm curious if you've ever tried to incorporate a clause that ties fees to inflation. My average project takes 3 to 5 years to close out, so I'm paying costs in devalued money, and I would like to not do that.
Chad Miller
May 30, 23 11:22 am
I've never done that. However we have done fees that take into account inflation. We basically add in the inflated cost of the work and the associated additional fee to our overall fee.
IE: using some really simple numbers and a 4% inflation per year
Year 1 $10 million cost - 7% fee - $700,0000
Year 2 $10.4 million cost - 7% - $728,000 (+$28,000)
Year 3 $10.8 million cost - 7% fee - $757,120 (+$29,120)
Total fee: $757,120 or 7.57%
We'll typically try to use the actual amount and cost of work being done in each of the years if they differ by a great deal. AKA - year one may only be site improvements and the building construction won't start until year two. The key to this is having a contractor with a good estimating team that understands what inflation is actually doing to our part of the market.
Wood Guy
May 30, 23 11:34 am
I only do residential work but several of my projects started 3-5 years ago and my rates have gone up substantially in the meantime. I don't have a formal process for dealing with it but I might change to an annual increase so I don't have a 60% discrepancy between fees on different jobs like I do now.
proto
May 30, 23 1:37 pm
We have similar. Given that our projects rarely go beyond 16mos, we hold a contracted hourly for each client. The projects are usually short enough that rate changes work out as the projects sunset. If they finish a project (or let it sit a significant time) & come back to us in the future, the rate resets at the new rate whenever that is. But I do have a client who started in 2017 who is getting a screaming deal because the project dragged through both design & construction; it just finaled a week ago. Now he wants to do an ADU conversion. (But we love him [AND he always pays promptly].)
x-jla
May 30, 23 12:09 pm
Charge by ounces of gold.
Chad Miller
May 30, 23 12:11 pm
I don't think that would help - even gold is not keeping up with inflation.
x-jla
May 30, 23 12:28 pm
It would be hard to calibrate a fee to adjust for inflation, but you could theoretically charge fee + inflation rate increase from date of contract execution. So if you charge 100$ per hour today, and the current inflation rate is 8%, and next month it goes up to 10%, you can calibrate by adding the 2% increase. So rate would be 102$ Per hour. The problem with this is getting an accurate inflation rate, because the numbers out there are not consistent. And inflation is not smoothly applied. Some foods have inflated 100%. Gas has inflated a lot more that 8%. So, your costs/overhead are not necessarily going to be consistent with the general average inflation rate.
x-jla
May 30, 23 12:33 pm
In other words, the general inflation rate as a metric probably will be more of a hassle than it’s worth. My costs have increased far beyond whatever bs general rate the govt is saying. I’ve had some materials double in cost. My office mortgage and bills have gone up way more than the inflation rate because we have a adjustable rate. A couple percentage points won’t help much. It most likely will just annoy clients and make it more complicated to close contracts. You are better off worrying
about what to do with dollars that you have earned to prevent devaluation. Gold is a pretty safe bet.
Chad Miller
May 30, 23 12:49 pm
I think the best place for your money is hard liquor and good drugs. ;)
Non Sequitur
May 30, 23 12:59 pm
^harder to each/drink precious metals.
x-jla
May 30, 23 1:18 pm
Or just buy goldschlagers
Chad Miller
May 30, 23 1:20 pm
I like the way you're thinking outside of the bottle x-jla.
Non Sequitur
May 30, 23 4:02 pm
I 3 bottles of that stuff at home. Retirement is within reach!
Non Sequitur
May 30, 23 12:32 pm
We've made a few requests to revise long-term contracts mid-covid and now we have a fineprint on multi-year corporate projects says something like "blended inflation rate of 7% added to total fee". This way client pays the same every year (their accountants are happy) of the project and we're made whole as the market fluctuates. Other projects just get padded fees.
bowling_ball
May 30, 23 6:04 pm
This is kind of in the realm of what I've been thinking. Obviously my fear is that since nobody else is going to do it, and it'll look like our fees will be higher (because they will be)
Non Sequitur
May 30, 23 6:29 pm
BB, I think everyone is raising fees but just not making it so obvious as to how. We do it for certain clients who we know we have multiple phased projects, mostly gov fit-ups and the like. Other clients just get a larger $ sum with no context. My P.eng actually doubled their hourly rates for extra services and are not shy about it. Send me a email if you want and I can give you the text I used for % inflation in my last proposal.
Non Sequitur
May 30, 23 6:32 pm
Side note but we’ve also made market adjustment fee requests to a bunch of clients who put projects on hold in early COVID days. Oh, we’ll be happy to dust this off, but here’s also a revised proposal with a market adjustment for you. Private single project ponies might not get it but larger corporate types understand.
pandahut
May 30, 23 2:15 pm
I thought we are all in unison trying to lower fees to secure work? /s
Chad Miller
May 30, 23 5:04 pm
I think it's just you doing that. ;)
luvu
May 30, 23 8:00 pm
Fee structure is another way of tackle inflation imo. But this depends on the duration of each phase of the project which again varies from one project to another. I know our firm decreased percentage on CA and charge more on DD now.
bowling_ball
May 31, 23 1:14 am
The more likely reason they did so, is to lower their risk. Lots of projects die before they go into construction, so this is a way to take the edge off, so to speak
For those of you who deal with contracts, I'm curious if you've ever tried to incorporate a clause that ties fees to inflation. My average project takes 3 to 5 years to close out, so I'm paying costs in devalued money, and I would like to not do that.
I've never done that. However we have done fees that take into account inflation. We basically add in the inflated cost of the work and the associated additional fee to our overall fee.
IE: using some really simple numbers and a 4% inflation per year
Year 1 $10 million cost - 7% fee - $700,0000
Year 2 $10.4 million cost - 7% - $728,000 (+$28,000)
Year 3 $10.8 million cost - 7% fee - $757,120 (+$29,120)
Total fee: $757,120 or 7.57%
We'll typically try to use the actual amount and cost of work being done in each of the years if they differ by a great deal. AKA - year one may only be site improvements and the building construction won't start until year two. The key to this is having a contractor with a good estimating team that understands what inflation is actually doing to our part of the market.
I only do residential work but several of my projects started 3-5 years ago and my rates have gone up substantially in the meantime. I don't have a formal process for dealing with it but I might change to an annual increase so I don't have a 60% discrepancy between fees on different jobs like I do now.
We have similar. Given that our projects rarely go beyond 16mos, we hold a contracted hourly for each client. The projects are usually short enough that rate changes work out as the projects sunset. If they finish a project (or let it sit a significant time) & come back to us in the future, the rate resets at the new rate whenever that is. But I do have a client who started in 2017 who is getting a screaming deal because the project dragged through both design & construction; it just finaled a week ago. Now he wants to do an ADU conversion. (But we love him [AND he always pays promptly].)
Charge by ounces of gold.
I don't think that would help - even gold is not keeping up with inflation.
It would be hard to calibrate a fee to adjust for inflation, but you could theoretically charge fee + inflation rate increase from date of contract execution. So if you charge 100$ per hour today, and the current inflation rate is 8%, and next month it goes up to 10%, you can calibrate by adding the 2% increase. So rate would be 102$ Per hour. The problem with this is getting an accurate inflation rate, because the numbers out there are not consistent. And inflation is not smoothly applied. Some foods have inflated 100%. Gas has inflated a lot more that 8%. So, your costs/overhead are not necessarily going to be consistent with the general average inflation rate.
In other words, the general inflation rate as a metric probably will be more of a hassle than it’s worth. My costs have increased far beyond whatever bs general rate the govt is saying. I’ve had some materials double in cost. My office mortgage and bills have gone up way more than the inflation rate because we have a adjustable rate. A couple percentage points won’t help much. It most likely will just annoy clients and make it more complicated to close contracts. You are better off worrying
about what to do with dollars that you have earned to prevent devaluation. Gold is a pretty safe bet.
I think the best place for your money is hard liquor and good drugs. ;)
^harder to each/drink precious metals.
Or just buy goldschlagers
I like the way you're thinking outside of the bottle x-jla.
I 3 bottles of that stuff at home. Retirement is within reach!
We've made a few requests to revise long-term contracts mid-covid and now we have a fineprint on multi-year corporate projects says something like "blended inflation rate of 7% added to total fee". This way client pays the same every year (their accountants are happy) of the project and we're made whole as the market fluctuates. Other projects just get padded fees.
This is kind of in the realm of what I've been thinking. Obviously my fear is that since nobody else is going to do it, and it'll look like our fees will be higher (because they will be)
BB, I think everyone is raising fees but just not making it so obvious as to how. We do it for certain clients who we know we have multiple phased projects, mostly gov fit-ups and the like. Other clients just get a larger $ sum with no context. My P.eng actually doubled their hourly rates for extra services and are not shy about it. Send me a email if you want and I can give you the text I used for % inflation in my last proposal.
Side note but we’ve also made market adjustment fee requests to a bunch of clients who put projects on hold in early COVID days. Oh, we’ll be happy to dust this off, but here’s also a revised proposal with a market adjustment for you. Private single project ponies might not get it but larger corporate types understand.
I thought we are all in unison trying to lower fees to secure work? /s
I think it's just you doing that. ;)
Fee structure is another way of tackle inflation imo. But this depends on the duration of each phase of the project which again varies from one project to another. I know our firm decreased percentage on CA and charge more on DD now.
The more likely reason they did so, is to lower their risk. Lots of projects die before they go into construction, so this is a way to take the edge off, so to speak