Best Practices – Architectural Services – How to Negotiate Your Architect’s Rates?

Every construction project begins with procurement of architectural services.

Architects take concepts and ideas from the Owner and turn them into a design that fits the Owner’s needs.  It takes great skill and experience to do this well, therefore Architects are the one resource in your construction supply chain you would not want to select based on price.

Your selection criteria for Architects should be based on the Architect’s experience and skill.  You can determine this in a variety of ways.  I’m typically under time pressure so I have a developed a questionnaire which I use to solicit all of the information I need to determine which firms is best qualified.

For an Owner who is just starting to consider a project, you might have more time on your hands, so you may choose to take a more personal approach and interview each candidate.

Regardless of which approach you select, I recommend making this decision based strictly on qualifications and experience.  This approach should help you narrow your selection down to no more than 3 or 4 firms.

Once you have a short list of candidates based on qualifications, (and ONLY then) you can consider price.  Typically, I solicit an initial quote together with qualifications.  This approach gives me a starting point for negotiations and helps frame my understanding of where the fee should be for the project.

Architecture services are all about man-power and design skill.  Most Architects develop their pricing based on how many man-hours they expect the work to take.  They may also triangulate their pricing by checking against percent cost of work or price per square foot metrics.  Regardless, all of these pricing methods are based on the amount of labor they will spend on the project.

Even if your contract will be a fixed price contract, you should also ask for an estimate of man hours.  This will help you understand how many hours each firms expects to spend on each phase of work.

Be careful not to confuse a fixed price with a time and material contract.  For a fixed price contract we are soliciting the number of hours only for evaluation purposes.  If your final contract will be a fixed price contract, the number of hours are irrelevant.

If your review of the man-hour estimates turns up any anomalies (number of hours in a phase of work are higher or lower by more than 10% to 20%) you will want to spend time understanding what that firm included (or excluded) in those hours.  Your goal is not to adjust the hours, it’s simply to ensure their interpretation of the work is consistent with all other bidders.

Assuming all bidders interpreted the work correctly, you don’t want to cut down your Architect’s time.  You want them to be efficient, but cutting the Architects time out of a project as a way of reducing cost is detrimental to the quality of the work.  This holds true for the design phase as well as during the construction phase.

Yes!  Your Architect should have hours allocated in the construction phase.  This is critical because it serves as a double check on the contractor’s work.  For more about this read my article where I discuss the Cole Report and it’s findings.

So if your Architect’s hours are right, then where is your negotiation leverage?

Like any service provider Architects add profit to their costs.  Your negotiation needs to focus on the amount of profit added to each man-hour.  The only way to know this margin is to ask them for it.

When you solicit the price request a price break-down of the hourly rate.

Keep in mind that besides the base salary of the resources, each organization also has overhead costs and of course insurance and benefits.  These costs are all fixed and you should not expect them to come down.  A reduction here means you probably are getting a lower cost resource and lower cost resources will impact the quality of your work.  This is an example of where you want to pay more.  Let’s refer to this as your “fixed resource costs”.

The profit the organization adds to the fixed resource costs is the part of the cost you want to target.

Many Architectural firms have multiple rate tables.  These rate table increase profit margins by salary range.  The firm’s goal is to use the highest profit margin possible.  If you don’t challenge their initial price, they will use the highest margin they think they can get.

No matter where in the world you ask for this detail, you will experience resistance.  Suppliers will always object and will always tell you it’s against their policy.  While it may be true that their policy is not to reveal their margins, the simple fact that you are asking this question, will get them to sharpen their number.

I should note that some of the new privacy laws in the EU may make this level of solicitation challenging.  It may actually violate GDPR regulations for them to share the detail of a specific individual’s salary, but it’s not a violation for them to share rates and margins for a role.

Press them on this, but don’t forget, your goal is not necessarily to find out what their margins are, it’s for them to reduce their costs without reducing the quality of the resources.  If you get them to reduce cost (without reducing the quality of resources), you have achieved your goal.

If you do get them to reveal their margins, then you can focus on negotiating a fair rate.  Once a firm’s actual expenses (salaries, overhead, and benefits) are covered, profits for the organization offer no value to an Owner.  Yes, you want the firm to be profitable, but we don’t want them to make a win-fall.  A 10% to 20% margin on top of all fixed resource costs should make them very happy.  Keep in mind that Large Architecture and Engineering firms like Stantec report financial statements that show 1.89% net profits.

Closing

In the end, your top priority is to get the highest qualified Architect at the best possible price.  If you are working towards a fixed price contract, you really don’t care how the final price breaks down.  However, it is important to understand that your leverage is ONLY over the profit margin added to the fixed resource costs.

Have you negotiated Architect’s rates?  How much of a reduction were you able to achieve?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

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