By my count there are four basic types of architectural fees. Variations on two of these basic types adds another four fee types.
Of course you can use more than one type on a project, and I will explain later why you might want to do that.
First I will describe each basic type and when to use it.
Hourly Rates Fee Type
An Hourly Rate Fee is simply getting paid a specific amount for every hour that you spend on the work.
This is the safest fee type because you will be compensated for all the effort that you expend. However the open-ended nature of this fee type does not appeal to clients.
Nevertheless, when a project is very small, has a poorly defined scope of work, or has a variable nature, this is the most appropriate fee type.
Normally the hourly rate is based on the person doing the work and a multiple of their labor rate.(1) Two of the variations that are used with this fee type are to charge based on the individual’s role or based on the type of work being performed. Both of these variations are rare and create an additional layer of complexity. Charging by role or work allows lesser or greater paid individuals to be charged out based on something else besides their labor rate. I recommend that you avoid these variations.
The third variation to the Hourly Rate Fee Type is to add a maximum (or limit) to the total fee that may be charged. This reduces the client’s risk while increasing the Architect's risk. The reason for using this variation is to mollify your client’s concern about the prospect of an excessive fee. Like the other variations to the Hourly Rate Fee Type, a maximum creates additional complexity that has to be addressed.
Percent of Construction Cost Fee Type
A fee based on a percentage of the Cost of Construction is the most traditional fee type. You simply take a percentage of the Cost of Construction and that is the fee.
After first arriving at the fee quite simply, things get more complicated. The overall fee is divided into a percentage of the overall fee per phase, and inevitably the Cost of Construction changes.
Here, here and here are some additional background on how this fee type works.
The advantage of this fee type is that the project can get started based on this arrangement before an exact scope and fee are known. Some clients are put off by this lack of certainty about the fee. Clients also are concerned that the architect has a disincentive to control construction costs.
Architects find that changes in scope aren’t automatically covered by using this fee type. Changes may be covered, but vigilance is required to avoid providing more work than expected for the fee that you ultimately receive.
Lump Sum Fee Type
A fee that is a simple lump sum is an attractive concept. Both client and architect know exactly what to expect. The smaller and simpler the project, the better the fit for this fee type.
For a standard “Basic Services” project, a variation on the Lump Sum fee is often used - Lump Sum with Phases. In the case of Lump Sum with Phases fees, everything is very similar to a Percent of Construction Cost fee, except that the fee is independent of the construction cost and is fixed, at least initially. Changes are not covered, so vigilance is still required to avoid providing more work than expected for the fee.
The Lump Sum with Phases fee type also lends itself to projects that are non-standard. For instance, a project that is intended to determine the suitability of a building for adaptive reuse would need non-standard phases to reach a determination.
The Lump Sum fee type with or without Phases is used more and more.
Unit Costs Fee Type
The Unit Cost fee type is similar to an Hourly Rates fee type except that something else is counted instead of hours. A Unit Cost fee type is useful where you have a niche project type where the amount of work required is related to the number of square feet, sheets of drawings, details provided, etc.
An example is a firm that produces house plans for builders based on a cost per square foot.
Multiple Fee Types
The project that fits the standard “Basic Services” model is becoming the minority condition. Projects often have an additional service or a phase whose scope is indeterminate. These are the cases where a different fee type usually makes sense.
The Construction Administration phase is a perfect example. You may want to closely define what services are included in a Lump Sum fee for the CA Phase, and include another phase called “Additional Construction Administration” that uses an Hourly Rate for the Construction Administration services that you have no control over. A similar case can be made for Schematic Design to accommodate an indecisive client.
(1) Labor Rate is the amount per hour that the individual receives as their wages.