Over the last 10 years eTrack has discussed business processes and practice management software requirements with about 10,000 architects and other building professionals. These Thought Leadership articles share trends, business practices and ideas we have gathered from our discussions.
Many Architects invoice Stages based on a % of adjusted contract fee. However clients can be surprised and upset when invoiced for past stages. This Thought Leadership article explores the practice of quoting as a % but billing the time done. This achieves the benefits of both low risk and client happiness.
#3 Time Management Tips
Five top time management tips that can really make a difference.
#2 Calculating Charge and Cost Rates
How much is your time worth? Or the time of your staff? These are two of the most essential metrics in any architectural practice and can often spell the difference between profitability and loss. This ‘how-to’ guide, based on years of talking to architects, will help you establish your hourly rates based on actual costs.
#1 Estimating Fees: Basic rules for avoiding costly oversights
This article is a simple step by step guide on how many architects estimate fees to ensure they are both profitable and competitive.
Have you ever provided a quote based on a client telling you they had $X to spend on a project, only to find later they are spending more?
This can result in Clients getting cheap early project stages.
Architects have mitigated this by basing their fees on a % of the estimated building contract so if it goes up they are compensated.
This is fair for the architect and may well be in the contract but can be disconcerting to the forgetful client who gets invoiced for completed stages already paid.
To avoid this upset you could quote using % Based fees but invoice the actual time worked.
If the building cost increases, a ‘credit’ is indicated on the invoice for the completed stages plus the overall balance of (% based Fee $ – hours worked * rates).
The benefit to the client is that they see exactly what they are being invoiced for since based on actual work done in the current stage.
The benefit to the architect is that you cover your risk of the building cost increasing and working more hours, since you have more ‘credit’ you can invoice in later stages. The balance of the (% Based Fee $ – Hours worked * rates) is clear on the invoice and can be carefully tracked by both the client and the architect.
If the balance (credit) is positive at the end of the project:
– the client feels great at being “under budget” (a likely case for referral or repeat business);
– the architect has been paid for all their work and has managed the risk of increased costs throughout the project.
If the balance (credit) goes negative at any point, depending on the agreement either:
– the architect can invoice for the extra hours (with full justification since the whole project has been invoiced hourly),
– or not, in which case the architect is no worse off than if % Based Invoicing was used.
Ideally though, by providing staff visibility of estimated hours to complete in their timesheet for each stage, overruns are detected before they happen and can be mitigated (eg: by raising variations or assigning a lower rate consultant).
This win-win solution helps manage your risk if clients spend more than they estimate, while keeping clients happy for referred and repeat business.
Here are five top time management tips that can really make a difference.
1. Stay focused without the stress.
It is almost impossible to be 100% focused and not have distractions jump into your mind. Fighting these thoughts is stressful so let them in and quickly write them down on a sheet of paper.
If you avoid the urge to ‘do it now’ or to change screens to record electronically, you will find it easier to remain focused on the current task. Then later you can group like items together so you can action or log more effectively.
2. Save draft emails to your Inbox.
Have you ever neglected to send half-written emails due to interruptions? To avoid this happening change Outlook to Autosave Draft Emails to your Inbox and not to Draft.
(Outlook 2010 Select File/Options, select Mail on left, scroll down to Save Messages section, 2nd item. Outlook 2003 Select Tools/Options, Preferences tab, Click Email Options, Click Advanced Email Options, top item).
3. Exercise as you make phone calls.
When needing a progress update from your staff, or a similar call, why not combine it with some exercise and fresh air? Take a walk out of the office to make the call.
Ask the person to summarise the conversation in an email as you talk and send it to you. This takes no more of their time, helps you to be clear and not ramble, keeps a record and will let you know if they have understood! This is valuable even with staff who sit next to you!
4. End the day with tomorrows To-Do List.
Last thing in the day make a very simple list on a post-it note of what you want to achieve the next day. Add a ‘phantom task’ for the unexpected. Check it is realistic and that you will be content if just this is done. You will sleep better, your subconscious can mull over it, and you won’t get that false feeling you have done something if you write it in the morning!
5. Hide Away during your most productive time.
Work out when your most productive time is and every day during this time ‘hide away’ for a couple of hours. Turn the phone off, stop new email notifications and ask people not to interrupt you. If you are consistent and don’t make it too long, people will respect and soon know they can’t contact you.
How much is your time worth? Or the time of your staff? These are two of the most essential metrics in any architectural practice and can often spell the difference between profitability and loss. This ‘how-to’ guide will help you establish your hourly rates based on actual costs.
To estimate and track project budgets you need to decide what hourly or daily rates to use. These are used not just for time-based quotes but are important as a verification guide for Percentage Based or Fixed Fee estimates as discussed in our earlier article ‘How to Estimate Fees’.
Most architects plan and track projects using two rates:
Cost Rate is best defined for each staff member since the rate can change at any time during the project due to pay rises (and cuts) and promotions, either temporary (such as when in a higher role) or permanent.
Charge Rate can be defined for each staff member or for each Role and can vary from project to project depending on building location, staff location, building type (commercial/retail etc), the client or from year to year. It may contractually stay the same for the life of the project or go up each year for example by CPI (consumer price index).
Cost Rate Calculation
First a few definitions:
A rough calculation for the Cost Rate per hour for each staff member could then be as follows:
Cost Rate ph= (Annual staff salary + Staff overhead pa) / Productive Hours pa
Charge Rate Calculation
The Charge Rate of each staff member doing billable work needs to also cover for all non billing staff.
Consider these some definitions:
A rough calculation for the Charge Rate per hour for each staff member could then be as follows:
Charge Rate ph = (Cost Rate ph + Contribution) * Staff Margin %
Now, providing that all your fixed price, percentage based and time based estimates use these charge rates when doing hourly resource based estimates and verifications, you should be covering all your costs and making a profit included in the Staff Margin % above.
Note 1. You could take this further in a spreadsheet and derive %billable for each staff member.
Note 2. The denominator is only the Billable Staff Cost and not the Total Staff Cost since Charge Rate is effectively zero for the Support staff if not billing their time.
Note 3. And more overheads if you wish but note overheads have already been included in the calculation of the Cost Rate.
Role-based Charge Rates
Many architect firms estimate projects using Roles and define Role-based Charge Rates rather than rates for specific staff members, in which case you can adjust the above calculations by replacing Staff with Role throughout Note 4. The advantages of using Role-based Charge Rates are:
Note 4. Remember to include all salaries of staff with each Role, and dividing the Overheads by number of Roles.
This article is a simple step by step guide on how many architects estimate fees. This article is a ‘how to’ guide which presents a few simple calculations you can use to help ensure your fee estimate is both profitable and competitive.
There are many ways to estimate fees. You could use a ‘gut feel’ method that works if your projects are similar, or you could base your estimates on past project performance. However, in most cases you should also follow a fee estimation process. Here are some steps to follow.
First you need some metrics
CF = BF * C%
Our experience is that Contract Percentage for Australian architects ranges between 6% and 11% with a mean of about 8%.
SF = CF * S%
Some stages may be “lump sum” and be excluded from the percentage breakdown. The total of the percentages need not always add up to 100%.
For Fixed Fee, be clear what disbursements are included and excluded (eg travel / flights / number of prints) and it is a good idea to cap all variable disbursements. You can be generous, but this will limit your risk. Make clear the cost of additional disbursements. Try to exclude disbursements that you know are risky or that can be a good source of additional income.
For Percentage-based Fees, clearly set expectations that the client may be charged more (or get a credit note!) for completed stages if the Building Fee changes.
For Time and Materials, you may still need to provide an indicative amount and disclose hourly rates (often by role) and disbursements fees by type.
Stage Fee 2 = (Hours * Charge Rate) + Disbursements + Margin
For Time Based stages, the Stage Fee calculated in step 3 is a verification guide and typically changed to equal Stage Fee 2 which may be communicated with the client as an indicative amount. If profit is built into the Charge Rate then Margin can be $0 (since the risk is low compared with Fixed Fees).
For Percentage-based, the Stage Fee 2 is the verification guide and the two should roughly match. A Margin can be applied for risks associated with items not related to the Building Fee increasing or it can be $0 if completely built into the Charge Rate.
For Fixed Fees, the Stage Fee 2 is again a verification guide. Since by fixing the fee you are taking the risk, a margin is typically added on for risk, contingency and profit in addition to that built into the Charge Rate. Margins seem to vary widely in Australia between 0% during the GFC to 200%, with 25% being typical in early 2011.
There are other ways to verify the estimates but never forget the “gut feel” check. Sit back and think about the project compared with all your past experience and current competition and ideally don’t send before checking you can sleep on it!