This article is a simple step by step guide on how many architects and other building professionals 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!