Alternative Fee Arrangements

I constantly think about ways to make money in our business. It’s not easy. Not within the traditional “rules” at least.

These rules, and every thought on profitability, leads me back to the contract; the moment when we sign our services away to the Client based on what we think it will take to perform a certain phase of work or produce a certain deliverable. The numbers in the contract are derived from many different sources depending on the circumstance. If possible, they’re based off past projects of similar size, scope, budget and Client type. These variables are rarely all aligned, however, and any one change makes a big (and typically expensive) difference. We often set the numbers using our expertise of a specific project type to predict how many staff hours it will take to finish a job. Unfortunately these formulas rarely include past overruns and never provide enough contingency money (unforeseen situations) or additional services, and when they do, we have the choice between “maintaining good Client relations” (and not billing for additional services) and “looking out for the bottom line” (and damaging Client relations). Sometimes our fee is derived as a percentage of total construction cost. The Client sets an anticipated construction budget and we earn a percentage of that anticipated number. One of many problems with this method is that the budget was set in year 0 and our services are provided in years 1, 2 and on. During the (elapsed) time, there’s a good chance the price of steel has given the price of gold a run for its money, unions have increased their take by 20%, inflation rose 10% and health insurance costs increased 100%. The architect is there to remind you of the bar set in year 0, however; our fee hasn’t changed. Sometimes we even set fees based on what we think the Client will accept. Forget what it will take to do the work, we need this damn job, and that’s that.

All of this is a long winded way to say I’m ready to embrace the Alternative Fee Arrangement, or AFA. Beyond the litany of absurd (and very factual) reasons mentioned above, I’m most ready to embrace alternative payment options on ideological grounds. This ideology is summed up quite well by a quote from Thomas Sager, V.P. and Assistant General Counsel for DuPont:

“…DuPont, like other clients, does not want to buy time; it wants to buy results…”

The message is simple and clear, and presents a fundamental business principal I believe any rational person would buy. (Read: Don’t bill by the hour.) It doesn’t necessarily change the way we arrive at our fee, but it changes the way we manage it; it’s ours to manage. Who will be the first to swim upstream?  

The legal field provides a solid framework for our industry to begin this upstream swim. Fixed or Flat Fees are probably the most common, and we do see these a lot in our industry, but they’re usually tied to an AIA contract that cuts us down at the knees. Fixed Fees are my obvious answer though: Stated simply, the Client engages the architect/planner/designer to provide a specific service for a set price. One price, one deliverable, make it work. Another AFA is the Contingency Fee; payment based on results achieved. We would have to get creative with setting the rules of play here, but there are some interesting possibilities (I’m thinking along the lines of profit sharing, but this could go many different ways). There’s the Retrospective Based on Value Fee option. A minimum fee is established, and the final fee is determined based on the success of achieving a set of Client objectives defined at the outset. Again, setting the rules of play (for our industry) is key, but something to think about. Another AFA, and one more common to our collective vocabulary, is the Retainer. This works best with consulting work since the Client is making a deposit against future (and ongoing) service, but isn’t the Client much more likely to seek help when the money is already paid and the clock isn’t ticking. Why don’t we use retainers more? How about Blended Hourly Rates or Volume Discounts for a guaranteed set of future work? Who will be the first to swim upstream?

-Billy

4 thoughts on “Alternative Fee Arrangements

  1. Billy:To sell alternative pricing strategies, we are going to need to construct a comprehensive argument for why our fee arrangements are fundamentally better for our clients. One important advantage of both a Retainer (for planning consulting) and a Set Price (for architectural commissions) is the predictability of the final price and the payment schedule. There is also an advantage in being able to say: "We will bill you $x/month for 18 months and if the job lasts longer, you will not have any additional monthly payments after the term of this payment schedule. And if the duration of the project is any shorter, our payment plan means that we have extended you credit beyond the terms of our scope." It goes without saying, that predicatability of payment would simplify accounting and forecasting on our end as well. But for this to work well, we would still need to continue tracking hourly staff labor to keep us from letting the level of effort run ahead of the fee budget (our natural tendency!). The other psychological advantage of the new arrangement is the elimination of the latent desire to pass overruns generated by our design enthusiasms along to the client (a fantasy we all have shared!).-Tim

  2. Tim said:"To sell alternative pricing strategies, we are going to need to construct a comprehensive argument for why our fee arrangements are fundamentally better for our clients."I don’t think this going to work 90% of the time. If I’m your client, why would I risk an alternative fee structure for a traditional architecture or planning project? I’d probably choose another office. I think the answer is to re-calibrate our offerings so that they are so unique and value-laden that we are one of a handful of offices offering such services ala design consultancies. We bill at a fixed fee and do whatever it takes to get the job done in much more focused efforts.For this to work, we have to think WAY outside the box. Re-working traditional architecture-oriented contracts is not going to do the trick.-Ryan

  3. Great points. Any AFA certainly demands that you still track hours internally, it just might be liberating to control the process and have full (and undisclosed!) responsibility over the results, no matter the financial outcome.I also agree that we can’t rework a traditional architecture project. Deliverables are mostly fixed (by law) and there are too many players (other consultants). A unique deliverable could definitely drive it’s own alternative fee arrangement though. It would fall under the fixed umbrella with additional benefits of predictability, brand recognition, etc. -Billy

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