The
scope of services for architects in a project has changed widely in the last
few decades. It still continues to change due to the globalization and
technological advancements. As design continuously evolves during the project Lifecycle,
it heavily impacts the overall project cost and schedule. This is one of the
reasons why most clients are also unsure of how much a designer is going to
cost them at the end. Therefore, clients like to make a safe choice by
selecting more experienced designers in comparison to the new start-up
companies. This may sound like a bad news for young firms, but I consider this
as an opportunity.
Young companies are more flexible
and have a chance to offer more innovative work-packages and pricing structures that can indeed benefit the client. And it is
up to your marketing campaign to take this message heard. You can read some
more about marketing for architectural business: here
Pricing structures are subjective
and there is no right or wrong method to choose from. But, at the same time, it
is important to consider the factors that affect your fee calculations and
impact your profitability.
Following are some key factors
that I have laid down from my experience, and I think they will be helpful to
you next time you calculate your fees while bidding on a project:
1. Scope of work:
the scope of work is the basis of any fee calculation. The architect can carry
out 100
+ services which clients are
often not aware of. In a startup phase, you may be more concerned with small
private projects where the client may have unlimited expectations, if you have
not clearly defined your fees at an early stage.
On the other hand, bigger
projects most often come through an RFP (i.e. Request for proposal), in which
scope of work is well defined. The fees should be carefully calculated in the
proportion to the services you may be offering and make sure you define them
clearly in the agreement.
2. Overheads: This is an indirect cost arising while your
business is under operation. These are costs such as the administrative cost,
marketing cost, rent, utilities, etc. These are supporting expenses which
arise in order to keep the business going. When the ratio between total
indirect expenses/direct expenses is about 1.5 to 1.75, it is considered ideal
for an architectural business. The higher number indicates a poor financial
health of your firm. When this ratio increases, one of the common mistakes
startup companies make is to extensively reduce the cost rather than smartly
managing it. Watching over your expenses and learning the financial management
skills will let you manage the cost without affecting your profit.
3. Expected profit: the profit is important
for the survival and growth of the firm. How much profit is enough? There is no
ground rule to this question. The profit margins depend on what services, how,
where and to whom are you offering. Over the period you will know your
capability to earn and grow. This will allow setting more accurate profit
calculations while preparing a financial plan or profit program. (We will
discuss about this in detail in my upcoming blogs soon).
4. Risk factor:
Getting offer for the project is not enough. There are specific risks involved
if you ignore analyzing the risk factors. Take for example the following,
- What is the
assurance of full and final payment of fees at the end of the project?
- Is client
expecting more services than you can give in the agreed fees?
- If the scope of
work increases during the project, will there be any compensation?
- The corporate/
government clients may need more time in decision making due to their
administrative organization which may delay the task considerably. What
will be your position then?
- A project with a
tight deadline may require an additional burden to your existing setup. Are
you really prepared for it?
The client may not have a
necessary financial arrangement for the proposed project, which may cause delay
of the project. What will be your stand if the project is stopped half-way?
The delays, uncertainties and
pitfalls can disrupt the smooth functioning of the firm. Before committing to a
project, check the background of the client, objectives and intentions of the
client, his/her financial capabilities, time limit of the project etc. to
calculate the realistic fees of the project.
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