It Is All About Money
One of the ways in which we attempted to distinguish ourselves from other firms was by taking care of our client’s money questions. In my opinion, and in my experience, too, money is usually the main thing that will undermine a project.
I don’t want to have the money conversations after it has become an explosive topic. So right from the beginning we attempted to help our clients set up a sound budget.
I have always found that one of the key parts of getting a grip on the firm's finances is to have a good idea where the money goes. You might not need all the line items in the budget template here, we didn't; but it is helpful to start with all the possibilities and narrow things down from there.
Whether you have arrived at a fee by a wild guess or a fee schedule you want some kind of corroboration.
One option, if you keep good records, is to compare this project to a similar project. Was the fee adequate on that other one? Usually the two projects are dissimilar in some way.
Another way of checking the 'rightness' of an architectural fee is to evaluate its 'rightness' when viewed as a design budget.
This option involves doing an evaluation. It is fairly easy to 'spread out' the fee over the design phases to see how adequate the fee actually is.
The economics of design do not allow for the time it takes to write a specification and assemble a project manual.
You have to be extraordinarily well-organized to spend less than one hour on each spec section. There are usually about 50-70 architectural spec sections. Say 60 hours to produce the spec. If the specification represents 5% of the architect's fee (which I think is about right), then the math tells us that at somewhere above a $3,000,000 project, it might be feasible. This quickly rises to $4,000.000 or more if you aren't as efficient as my example. Or if your spec writer is better compensated. See my math below. You can quarrel with my numbers, but the point is that bound specs aren't affordable on a lot of projects, even public ones.
Architecture is not known, at least to those involved, as the most profitable of businesses. Salaries aren't commensurate with responsibility. We all need to work on this. Here's my first shot.
#1 ’PLANNED’ LOSES
The number one way to lose money, or at least limit your profitability, is to inadvertently plan for that outcome. (See Architectural Economics.) Many firms ignore the facts of their own operation and use industry rules of thumb instead. Know your costs and ratios; and run your firm based on facts.
The first time we had a profit, we didn't find out until March when our accountant finished our tax return. We paid (modest) bonuses at Christmas based on feel and available cash on hand. An ’informed’ decision would have been a ’different’ decision.
Of course our accountant offered to review our books in early December so we could be more accurate and better informed. That's actually a good idea, but we only took advantage of the offer (and paid the cost) when we were pretty sure there was profit that needed planning. If we thought we we going to have a loss it wasn't because we were trying to have a loss, and no amount of planning would turn things around in 30 days - we would have already done what we could.
orig post date OCT 2012
The economics of an architect's office are fairly simple. Like every other business you need more money coming in than going out. Here's how you can tell if that is going to happen.
Add up the money you are paying per month to actually produce the work that you are getting paid for. This will be primarily salaries, but more particularly the portion of the salary paying for productive work as opposed to office tasks.
Now add up all the money you are spending per month to run the office, everything, project-related expences included.
Divide the total expense by the project expense. You want the resulting number to be about 3. The lower the number the more profitable you will be. The higher the number the less profitable.
What this is telling you is how much you have to charge for each hour you work on a project to cover all your expenses. The higher the number you got, the more you have to charge. At some point no one will pay what you need to charge.
This is simple math and there is no way around it.
Let's say you want to make $100,000 a year (about $50 an hour). If the number you calculated is 4, then you have to bill out at $200/hr. If you calculated a 2, then you have to bill at $100 an hour.
If market rates in your area are $150/hr, there is a real problem with having calculated a 4. On the other hand if you calculated a 2, you can charge less than your colleagues and get more work. Or you can charge the market rate and put some money away for a rainy day, replacing equipment, or bonuses.
How do you reduce the number you calculated? Here are the things you can do:
Keep in mind that this discussion about profitability depends upon keeping the pipeline full of work and being effective in the execution of your work. Rework and poor procedures will undermine the economics of any organization.
The Article How Much Are You Worth An Hour? takes this description of finances a little farther.
Well, what your fee includes is mostly up to you. But I will share my experience with fees.
The only benchmark I know of is ’Basic Services’. This is the architect’s level of involvement in the project that the standard national agreements assume, especially those developed by the American Institute of Architects [AIA]. Basic Services usually include five phases of work - Schematic Design [SD], Design Development [DD], Construction Documents [CD], Bidding [B], and Construction Administration [CA]. The only one of these five that I feel is fully detailed is Construction Administration. No doubt the design phases are too variable to describe in detail. To oversimplify, the result of each phase is to:
When you find yourself working with a Building Committee, you will normally find that they do not have any particular experience of serving on building committees or managing a building project.
There are exceptions - public schools, higher education, hospitals and organizations with a facility manager - but your first step is to determine what work they have done so far.
You want to know if they have a documented plan for the project as most Owner/Architect contracts state. So, if they have a documented plan and program, budget, and schedule, and they all seem realistic, you are ready to start designing.
If they do not have a boni-fide plan, and if you begin designing in order to 'stumble upon' a solution that works for them, then you will almost certainly have some re-designing to do sooner or later. You and the building committee need a coherent plan for their project - a plan that will require little or no re-design.
If there is no plan, or if it doesn't make sense, then you will need to back them up and take them through the planning that they need to do. The engineers and contractors on the committee will balk at this. This is where you point out that you are being asked to go 'off-script' and to proceed in a way that is unpredictable and that is not anticipated by the contract. So either way, planning first or jumping into design, you will need a larger fee than has been proposed because the scope of your work has changed.
If you are asked to begin designing anyway, you should try to get the fee for Schematic Design changed to an hourly basis to compensate you for the inevitable redesign that you will have to do. You might consider spending some time, in that case, doing the planning that needs to be done so that the redesign doesn't come back to haunt you after Schematic Design is approved and you are back to a standard fee for Basic Services.
If you are given the chance to help them with the planning, here is an outline of how you might proceed.
orig post date Nov2012
The key way to avoid going over budget is to have a realistic budget in the first place. There are 10 issues that your budget must address in order to be realistic. Those ten key issues are:
1. PROJECT COSTS VS. CONSTRUCTION COST
There is a tendency for everyone to focus on the constructions costs, but they aren't the whole story, sometimes they are only 70% of the story. Include all the non-construction cost.
A contingency is intended to make up for omissions or just plain mistakes in the budget. It is common to reduce the contingency as the project progresses, but it is wise to have at least 5%.
3. LABOR RATES
Some projects require union workers, compliance with the Davis-Bacon Act or "prevailing" wages. This can add 8% to 15% to the cost of construction. If this applies, add a factor.
4. SMALL PROJECT MULTIPLIER
In construction, smallness is uneconomical; and, at the extreme, can make a difference of over 100% in the cost of your project. Add a line item to compensate for the smallness of the project.
5. FINANCING IMPACT
Nearly all projects have interim financing costs. Determine the amount and how long it will be needed to estimate how much to budget. Show a line item for financing.
Although inflation has been low, you should anticipate the lag between your budget and when the costs are actually incurred. Add a line item for inflation.
7. BONDS AND INSURANCE
Some projects require performance and payment bonds, which add up to 2.5% to the cost of construction. Builder's Risk insurance is needed on all projects, but it is one-tenth the cost. Include these line items.
8. TAX-FREE ASSUMPTIONS
Even if you aren't tax exempt, historic districts or enterprise zones could provide a savings. If you are exempt, see if it is practical to take advantage of the exemption. Rules vary by state. Add a line item for tax breaks.
9. IN-KIND WORK
It is very difficult to budget accurately for donations or work by your own forces. It is often best to ignore the impact on your budget. If in-kind work becomes a reality, you will have a positive impact on the project.
Obtaining permits is not usually expensive, but the unanticipated work that may have to be done can be substantial. Include permit costs.
"Getting money is like digging with a needle; spending it is like water soaking into sand." - Japanese Proverb
When you are embarking on a new project, it is crucial to have a plan for the project. You need to know the goals you need to achieve for success. This building planning process has six parts that build upon each other:
From that point of view the whole planning process is about money. Each of the six areas of the planning process, while necessary in its own right, are also needed to answer that bottom-line question about cost. Space needs translate directly into construction costs; and so do the building characteristics and land use. These might also affect design costs. Project constraints and implementation issues can affect design costs as well as other "soft" (non-construction) costs. Finally, budgeting is about bringing all this cost information into alignment with the money that is available to fund the project.
It really is all about money.
To keep nasty surprises at bay, we've found that, if your budget is comprehensive, then surprises are much less likely to occur. "Comprehensive" means lots of detail; and lots of detail also makes your budget more accurate. Besides the main costs of construction there are many issues that are easy to underestimate or overlook altogether. Construction costs are the "hard" costs. The "soft" costs fall into two categories: Design, Development. All these costs are listed in our template for a comprehensive Project Budget. Strive to incorporate all of these budget concepts into an integrated process for answering "How much will the building cost?"
It's easy. For the past fifteen years we have used an all-inclusive template for documenting our estimates of project costs. The first embedded template shows our format. This part summarizes every cost that we think the client will face. The construction costs are pretty obvious, and even the breakdown isn't very unusual.
However even during Pre-Design we are able to create this level of detail. The reason we can do that is the second embedded document - the assumptions and the quantities we derive from those assumptions. From there we feed the quantities into an RS Means CostWorks model for the construction type that we anticipate. The result is surprisingly accurate.
Having created a project cost projection, it is important to live within the assumptions that you have made. Very few architects do this and our reputation regarding cost control is a result. There are all kinds of weasel words to hide behind, but you don't see contractors shying away. It's not FM. It takes a little time, but you recoup it on every estimate you do thereafter.
The secret sauce is the quantity takeoff without drawings. This is done once and rarely needs to change. Special features just become new line items. You set up formulas in your spreadsheet to calculate every element of construction that you have. Many of these are very simple. For instance, the quantity of flooring usually equals the net area of the building. The amount of carpet flooring is simply the net area times the percent of the floors you think will be carpet. The quantity takeoff spreadsheet refers to the assumptions that you have documented on the assumption sheet of the workbook.
Another example is windows. This is more complicated because it works with assumptions about gross area, building proportions, number of stories, story height, and percent of exterior wall that is glass. The trickiest calculations are square feet of interior partitions and number of doors. These require factors pulled from a table. The factors can be found with some digging. If you work with just a few building types, you can develop your own from past projects.
Once the data is entered, we have all the quantities. The last step is to transfer the quantities to the model you built in Means CostWorks. With a little forethought this is a simple transcribing exercise that takes twenty minutes. When you have your system set up, which will take about three man-days, an estimate can be pulled together in an hour, including the twenty minutes of transcription. You are probably spending more time than that and getting poorer results.
Once upon a time the percent fee was the standard. The AIA said so. Then the Department of Justice sued the AIA to eliminate price-fixing, and all the standard fee scheduled were destroyed (or at least filed discretely away).
Today it is hard to imagine that it was a problem, and it probably wasn't. But then, you know government always does what is best for us.
In any event the tables have turned, and now it is government that is dictating fees. In case you have never seen one here is a table of fees based on a percentage of construction cost.
Click the image to download it, but first promise that you won't use it to fix prices.
Finding the resources for project funding is THE KEY ISSUE for getting your building project implemented. You may not need a lot of money to start up your project planning, but it is the nature of building that you will need large injections of funds to get beyond the planning and design stages. There aren't endless solutions to the funding issue. The main solutions that are used over and over are listed here for your consideration.
Money in the bank.
This methodology either takes foresight and patience or the project must be small in comparison to the organization's annual revenues. A large benefit is that interim financing is all but eliminated, and that can be a major cost.
Borrow money from a bank.
Borrowing money from a bank would usually take the form of a mortgage. Complications may arise if ownership of the land and any existing buildings is not simple, or if the proposed building will be non-commercial, e.g. a museum or a church.
Industrial Revenue Bonds.
Not every project will qualify for Industrial Revenue Bonds, but despite the name the project does not have to be industrial. Experts will be needed to handle the "red tape". Even so, the overall cost can be less than bank financing.
Developer or investor funding.
This method provides the funding through a developer or an investor who then leases the completed project to you. This is like leasing a car. This "build to suit" approach can be more affordable because there is no limits on how you structure the deal, but it usually costs more in the long run - just like leasing a car. This process is simplified if the other party already owns the land.
Community Development Block Grants are available for very specific community needs and are open to government agencies and some non-profit organizations. Competition for the funds is stiff. The big
benefit is that up to 75% of the costs could be paid by the grant. The downside is that you will spend about 10% of the cost of the project with no assurance that you will ever receive funding.
This approach is usually only available to non-profit organizations. The first key to making this work for you is to find a foundation whose mission is in alignment with your own. The second key is making a compelling case. Most foundations are very rigid in their requirements for submitting an application, so don't give them a reason to turn you down by not following the "rules".
You need to be a non-profit organization for this to be viable. A 501c3 tax status is almost mandatory. An appealing mission and a compelling need are big helps. A fund-raising consultant can teach you the ropes and guide your efforts. It is a major advantage if you already have a good base of supporters.
This is rare; but, if you are part of a larger organization, your project may be able to get funding from your parent organization.
If you have the right political connections, you could be the beneficiary of an "earmark" or "line item grant" in a spending bill at state or federal level. This is otherwise known as "pork barrel legislation".
SIGNAL VS. NOISE [blog of 37signals]
March 29, 2011
They are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle…Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don’t ever know what’s going to happen…
I mean, when times are good, it is kind of like Cinderella at the ball. She knew at midnight that every thing was going to turn into pumpkins and mice, but it was just so much damn fun, dancing there, the guys looked better and the drinks got more frequent and there were no clocks on the wall.
And that’s what happened with capitalism. We have a lot of fun as the bubble blows up, and we all think we are going to get out five minutes before midnight, but there are no clocks on the wall.
—Warren Buffett’s answer to “What are the key lessons you took from the financial crisis?”
SINCE THIS ARTICLE WAS FIRST PUBLISHED a lot has changed. So it's time for an update.
Finding information on Architekwiki can be done in two ways.
The first way is by using the Google site search widget to filter the articles based on your key word(s).
The second way is by using the categories of the blog in question to filter the articles. We will address them one at a time. [Footnote: from time to time duplicates show up in the lists of categories for unknown reasons. I attempt to eliminate them.]
For the WIKI page there are 20 categories, listed below. Every article is tagged with one of the first four categories and also with one or more of the other 16 categories. (You will note the actual category list are in alphabetical order.)
WIKI categories and a brief description of their intended content.
For the DETAILS page there are 14 categories, each represents a category in the UNIFORMAT II system. This article will give you more information about UNIFORMAT. The one exception is Proj Dwgs, which is used to tag articles about an entire project.
For the BLOG page there are 6 categories as follows. Others may be added from time to time.
Updated: September 28, 2013