Successful pricing for architecture projects is often easier said than done. While there are few guarantees regarding profit levels, there are some good practices to follow, and various pricing options are available.
While organisations such as the Architects Registration Board can provide some guidance regarding best practices, accurately pricing your services (and being confident in doing so) is the cornerstone of your practice's overall success.
Whichever pricing method is ultimately chosen, the first step is to ensure that your hourly/daily cost rates are accurately calculated. Unfortunately, there is huge potential for errors, and in our experience, most architects get this wrong by over 50%. That kind of error margin can lead to you completely under-pricing your fees resulting in severe consequences for your bottom line, so it's essential to understand the drivers behind your costs and how this influences the different pricing methods.
Pricing Methods
There are many possible pricing methods you can use. So what is each method, and when might they be appropriate?
Hourly or Daily Rate
An Hourly Rate, sometimes billed as a Day Rate, is often the simplest pricing method. It's ideal when the project's scope is unclear and generally used on smaller projects, making it easier for both the architect and client to understand. Billing rates are established for each employee or job category, so that they cover the salary, non-project time, company overheads and a profit margin.
It's the most widely used approach on small projects, with your client being billed for every hour that you and your team work – similar to lawyers. This is usually done by filling out a timesheet and then invoicing your client at specified intervals. Typically, this will be monthly but can be over other time periods if that makes more sense to the way you operate. This approach can simplify accounting.
An Hourly Rate approach may be used on larger projects when a client hasn't fully worked out the complete scope of their project. This can indicate associated costs and what might be deliverable before a more detailed project is commissioned.
One potential drawback of this approach is that your client may challenge your invoice, so accurate timesheets, with detailed notes, are essential.
Fixed Fee based on your Cost plus Margin
The more popular approach to pricing is a fixed fee or lump sum - because it removes the risk to the client of any nasty surprises.
A fixed fee approach to pricing gives makes it easier for both the client and architect to factor into their financial planning. It also gives you a good understanding of what future billables and income you will earn, allowing you to plan your business resources more effectively.
The fee is worked out based on the anticipated costs plus a profit margin, usually around 20%. While this has its advantages, it's unwise to opt for this method unless the project has a tightly defined scope.
Have a detailed understanding of the scope and deliverables allows your firm to budget from the bottom up, looking at the costs of human resources with their associated rates, as well as other expenses like sub-consultants and travel costs. Your budget should ensure that all expenses involved with the project are accounted for.
That said, this approach requires high levels of accuracy when it comes to accounting for all time and costs upfront. In addition, the project's scope needs to be tightly defined as any scope creep will decimate profit margins. For this reason, it's usually a pricing method favoured by more experienced practitioners.
Having a well-defined and agreed scope of works has a further benefit: it allows you to easily identify any items that fall outside the agreed scope. These variations should be tracked and billed separately – otherwise your profits will be eroded.
Percentage of construction value
If the scope of a project is less tightly defined, charging as a percentage of construction value can be a good approach. However, there is only a loose relationship between effort required to deliver a project and its construction costs – so this percentage fee approach can be dangerous.
It's a transparent approach for clients who aren't exposed to a potentially costly hourly rate. There are also good benchmarks in the industry, with many professionals and clients having some understanding of what constitutes an acceptable construction fee. Organisations such as The Fees Bureau can provide professionals and procurers with up-to-date business operating information to assist with pricing.
On the downside, there's no incentive for you to stick to a set budget, so the potential for disputes increases. Similar to the fixed fee pricing, this approach favours more experienced professionals who have a tightly defined set of standard operating procedures for specific projects that they have done many times in the past.
Choosing your pricing method
You don't have to use a single solution for all your proposals. You can even choose to mix different pricing approaches within the same quote. For example, in the initial planning stage, using a fixed fee quote, and once it's been approved for construction, move to an hourly rate/percentage of construction costs.
Irrespective of the choice of fee methodology, we'd advocate that you always establish a solid budget against which you track your actual effort - which you can easily do using our architect fee calculator.
Pricing a project can be a minefield. If you'd like to learn how you can successfully navigate the process and make your architect firm more profitable, book a 30-minute demo with us today.