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Know your risks when calculating fees

Time, resources and break-even points in fee negotiations

28 November 2019

Calculating fees is absolutely fundamental to running a viable practice. Perhaps the most basic consideration of all is the break-even point.

Stephen Brookhouse is keen to remind practices that they cannot have a useful negotiation with a client without knowing this bedrock figure. Brookhouse is a Part 3 leader at the University of Westminster who has provided CPD seminars on fee calculations around the UK. Without a break-even point, practices cannot accurately assess their profit and risk.

There are many approaches to fee calculation. Architects can, of course, obtain benchmarking data. This can be good as a sanity check or a source of vicarious pleasure, Brookhouse suggests, but it is ultimately not very conclusive. It can be difficult to judge where you should position yourself against benchmarks, especially for practices that are just starting out.

Brookhouse favours a more fundamental approach. Looking at the split between a practice’s salaries, costs and overheads and profit is an excellent starting point.

Adding salaries to overheads produces the practice’s total costs, which should then be divided by the number of fee earners. Dividing this by the number of working days in a year (227 days) based on a nominal 7.5 hour day (less any non-productive time), gives a break-even point for an individual’s role.

With that break-even point worked out, you can then calculate the charge-out rate, factoring in your profit target and a safety buffer covering any anticipated risks on the project. The difference between the break-even point and the charge-out rate will provide a practice with a fees range, within which it can sensibly negotiate.

The risks associated with different fee structures fall in different ways. Percentage fees are linked to project costs (so the architect’s risks are covered). Lump sum fees leave the architect with the risk. Charges based on architects’ time leave the client with the risk. In practice, Brookhouse says most negotiations tend to move towards a combination of lump sum and time charges.

“Because it is all about our time, it is absolutely essential that we create a project programme based on work stages with possible milestones and key events,” Brookhouse counsels.

When calculating and negotiating fees, time is a practice’s most significant commodity

Work out a detailed plan to calculate your time charges. The plan will almost inevitably change in practice, but it can always be used to document and explain to the client what has been done and when.

Armed with a plan, a practice will know where it stands. It can then choose to walk away from an inadequate fee offer, or negotiate with the client to improve it.

Brookhouse suggests that the provision of additional services can be offered for negotiating purposes, such as the CDM Principal Designer role. But he warns that any additional services should always be offered as a way of increasing profit, never as a means of getting back to the break-even point.

It can be tempting, and contractors frequently bank on identifying sources of added value to make their bottom line, but Brookhouse warns that for architects it is dangerous to think of these as being anything other than extras.

When the practice is to be paid can be regarded as another legitimate point of negotiation. Brookhouse advises strongly against invoicing solely against milestones, and recommends monthly invoicing wherever possible. “Your invoices should not by wholly tied to RIBA work stages,” he suggests.

When it comes to calculating fees, it is all about the architect’s time. Beyond time calculations, it is all about risk, and all parties to negotiation should understand where the risks lie.

“The architect should work on the principle that if there is doubt, there is risk, and risk comes at a premium,” says Brookhouse. “Otherwise it will all end in tears.”

Thanks to Professor Stephen Brookhouse, Associate Head – Design, Creative and Digital Industries, University of Westminster.

Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas.

RIBA Core Curriculum Topic: Business, clients and services.
As part of the flexible RIBA CPD programme, Professional Features count as microlearning. See further information on the updated RIBA CPD Core Curriculum and on fulfilling your CPD requirements as an RIBA Chartered Member.

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