The two most common fee structures between an Architect and Owner are a lump sum agreement and an hourly agreement.
Lump Sum Fee
A lump sum agreement is the most common form of fee structure between architect and owner. Lump sum also called a ‘fixed fee’ agreement because the owner and architect have agreed to a set amount. Most agreements will outline the scope, the schedule and divide the fee into phases.
For example: John Q. Architect and Betsy W. Client agree to a lump sum fee of $120,000 for Betsy’s new home. The fee is 12% of the construction cost for Betsy’s 1 million dollar home. Nice house Betsy!
John divides the fee evenly into four phases:
1. Schematic Design (25% of Fee)
2. Design Development (25% of Fee)
3. Construction Documents (25% of Fee)
4. Construction Administration (25% of Fee)
At the end of each month, John bills Betsy for a percentage of work complete. For example after month one, John has completed 50% of schematic design, therefore he bills Betsy $15,000. (($120,000/4)/2)
Pros of a Lump Sum Fee
The benefit of lump sum is that both the owner and architect know the total contract amount at the beginning. This allows both parties to properly manage their time and budget.
Betsy will be happy to know the exact amount of money she will need so that she can plan her finances accordingly. This is no different than someone who buys a car. You will want to know what the final cost will be.
The lump sum allows John to make accurate billing projections and helps with the management of staff.
Potential for Higher Profits
In addition, if John and his design team are efficient and finish quickly then they have the ability to make a greater profit.
Cons of a Lump Sum Agreement
What happens if Betsy decides to add a garage during design development? This will require additional design work and will push the construction cost to $1.1 million.
What if Betsy decides that she wants solar power added to the house while John’s team is almost complete with construction documents?
What if the project is priced by a contractor at $1.4 million? As a result, Betsy asks John to value engineer the design and revise the drawings. This change will take John’s team an additional two weeks to complete. This time was not in the original lump sum agreement.
These three examples are very common, and each will trigger additional service requests by the architect. If the architect can get additional services for the work, then all is good.
However, additional services negotiations often become an issue of content for both owner and architect.
“I am already paying you $120,000,” Betsy says. “Isn’t that enough!”
Likewise, the architect wonders why they should have to donate their time for things that were out of their control.
“It will take my design team 2 weeks to value engineer and revise the drawings. These changes will save you $400,000. All I am asking for is an additional $15,000 to make these changes.” John says.
It is easy to see the frustration from both sides. Additional service requests are not fun. A good lump sum agreement will be precise in scope and outline items that are not included in the basic services, such as scope creep or excessive value engineering.
When there are a lot of unknowns about a project then it may be beneficial for the owner and architect to use an:
An hourly fee is similar to a tapas restaurant or a restaurant that lists the surf and turf as ‘market price.’ The total price is……..well it depends. How much do you want?
Common examples of when an hourly fee is appropriate:
• A small scope: “Design us a shed.”
• A loosely defined scope: “We think we want a shed but maybe it is a pool and a pool house.”
• A scope that is intended to grow: “That pool house may need a guest suite above and we are also thinking of renting that guest suite on Airbnb and…..we should probably see how many guest suites we could fit. Short term rentals like Airbnb are very profitable you know?”
Most owners will ask the hourly fee contract to have a not-to-exceed limit (NTE). The NTE helps the architect manage their time and safeguards the owner from excessive costs. The architect will notify the owner when the service is approaching the NTE amount.
For example: Betsy W. Client loves the new house that John Q. Architect designed. Betsy is rolling in the dough and would like to begin work on her beachside vacation home. There you go Betsy!
There is only one problem.
Betsy needs to first pick a site for her beach abode.
Betsy would like John’s assistance in selecting a site. This search will involve multiple trips to and from various sites with no end in site. For that reason, it seems most appropriate for Betsy to pay John an hourly fee.
They may find the perfect patch of sand on the very first trip and or it may be a yearlong journey.
John quotes Betsy an hourly fee of $150/hour. At the end of each month, John bills Betsy for the exact time spent.
Pros of the Hourly Fee
You get what you pay for.
By definition, the hourly fee represents the safest agreement for both parties. The architect gets paid the exact amount for their service and the owner gets exactly what they paid for. Sounds like a win-win!
The hourly fee forces both parties to be cognizant of the architect’s time and the owner’s design budget. For example: if it will cost Betsy $300 every time John visits one site, then Betsy might cull her list of ten sites down to six and only save John for the top choices.
In addition, John does not want to overbill Betsy so he will also be cognizant of his time.
Cons of the Hourly Fee
The hourly fee makes it hard for the owner and architect to predict cost. If an architect were to only have hourly fee agreements, how can they know what their income will be in two months?
The same goes for owners. How will they know how much the final design will cost? Owners are weary of the hourly fee because they see it as a never-ending tab. Imagine a slot machine with those spinning wheels. Where will it stop? That can be scary. The NTE is a good way to protect the design budget.
It Pays to be Slow
With an hourly fee, being efficient could result in less money for the architect whereas being slow could result in more money. That doesn’t seem fair.
Consider this example:
Randolph P. Client hires two architects to propose conceptual designs for a guest cottage. Architect #1 is our pal John Q. Architect. John Q. is now a mature 55-year-old architect who has gained fame from his collection of award winning beach home designs. He has gotten so good he can practically design a gem in his sleep.
Architect #2 is Pete M. Architect. Pete is a talented up-and-coming architect. He is gaining notoriety but is still a young guy at age 31.
Randolph P. Client has agreed to pay each architect an hourly fee of $180/hour to develop conceptual floor plans.
John being the badass he is quickly develops an award-winning plan in two days at a total of 16 hours of billable work.
Pete has also cooked up a gem. The difference is that Pete’s plan takes the entire week. Thirty-eight billable hours to be exact.
The following week both Pete and John present their plans to Randolph. Randolph is ecstatic and declares, “I will build them both! Because I am a baller and that is how I roll!”
Pete and John rejoice. They both win! At the end of the month Pete sends Randolph a bill for $6,840 (38*180) and John sends Randolph a bill for $2,880 (16*180).
Do you see the problem with an hourly fee?
The better you are at architecture the quicker you are at finding the right solution. With an hourly fee, this translates into less pay. And if you are a bum, you will spend more time and get paid more.
This is not ideal for the architect or the owner.
An hourly fee has profit and overhead built in, however your profit is capped. You can only achieve that set percentage of profit. With the lump sum agreement, you can achieve greater profits by expending less labor.
Closing thoughts on Lump Sum vs Hourly Fee
Both a lump sum agreement and an hourly fee can be fair and profitable fee structures when managed appropriately.
You may not have had any input in the contract but as a responsible team member, you should inquire about the details of the agreement. Better yet, read the contract. Being knowledgeable about the details of the contract will help the project prosper and help propel you in your career.
In either scenario time = money. Whether you are paid per hour or receive a fixed sum you should always endeavor to work fast. I am not advocating for you to be reckless or to propose half-baked designs. I am suggesting that you always keep your tools sharp and value your time.
Mark LePage is right.
You need profit to make art.
And you need art to make a profit.
You need both.
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