Sunday, August 18, 2013

DESIGN FEES

DESIGN FEES Determination and Negotiations


A professional earns more by exhibiting good Professionalism and behaviour. Rare skills provide a high return. An Experienced Professional earns more than an Amateur, however, a young professional with fresh or new talent may demand more fees.

Fees' determination is a very difficult aspect of professional practice. To determine a Right Fee, a professional is expected to know the following:

  • What is the Value of Professional Services to the client, and in the society?
  • What is the Cost of providing a Professional Service (cost of input)?
  • Will there be a surplus (profit) after deducting (B) from the (A)?
Senior Professionals have experience, and so are able to prejudge the value of their services. Fresh Professionals, and even some seniors venturing into unknown fields cannot do so. They would rather compute the Cost of Input first, and then add a fixed or a percentage amount, as Profit.

Professional Fees are very subjective, and vary from a professional to professional, from one project to project, and also from one client to another. There are no standards. Professionals take on assignments for fees, determined by themselves, and sometimes after further negotiating with the clients. Besides fees, a professional also collects: Applicable taxes and Expenses that are incurred on all supplies and other services.


PROFESSIONAL ASSIGNMENTS AND THE NATURE OF FEES

Nominally fees mean the cost of input required to detail a project plus some profit, and these somehow reflect the scale of a project. However, in case of Intellectual Projects,  a concept may cost very little to execute but the client gains extraordinary advantage from the professional’s contribution. Fees for such  projects, must be based on the value (to the client, society, etc.). Such fees do not match the cost of the project.

Commercial Fees are charged as per the professional's involvement in a project.
Such as: Personal attitude (sincere, commercial), Type of client (easy going, nagging, demanding), Nature of the assignment (routine, unusual, challenging), State of competition from others, Client's readiness to bear the additional costs (of intense involvement, extra ordinary contribution).

Cost of Design creation consists of expenses incurred to conceive, design and plan out a project. It includes cost of data collection, stationary, documentation, presentation, printing, conveyance, staff salaries, cost of management, cost of investments, cost of rents for plants, tools and equipments, etc. It also includes the cost of supervision, physical verification of the job for sanctioning its use, payment etc. Cost of providing guarantees and warranties, other quality controls, test operating a system, etc. may become part of the cost of professional input. It may include the value of patent ideas, royalties, and taxes.

Cost of a job includes cost of all items that make site execution possible.
Some of the problems faced in determining these are as follows:
On some sites there are pre-existing structures which are to be only reformed or reused, by altering. The design cost of continuing or protecting such structures is difficult to compute, and so must be value based. Cost of works or supplies by third party vendors and contractors are accountable, but items supplied by the Clients from the existing stock are difficult to document. Cost of Retained Structures, Antiques, Curios, used in a project are often indeterminable, instead their values, if available need to be used. On sites where several Professionals operate simultaneously, exclusive authorship to a creation is disputable, so cost of a patent idea is disputable.

Scale of a project varies during the various stages of the project, such as planning, designing, detailing and execution. Even at fixed spread (floor area) or volume, the costs inflate or deflate according to the economic conditions.

Costs of involvement in the project are pre-agreed conditions. These are based on perception of certain scale of the project. Any downward sizing of the project does not automatically reduce the involvement of the professional. Upward scaling of a project, though increases the professional's work.

Income viability for the Designer
is checked through Income Factor (ratio), which must remain consistent for all jobs in the design organization. It can be calculated by dividing the total fees of a job (gross income) by the cost of professional inputs.

Right Fee: Each project is set in a different context. Such as nature of Client, Location, Work conditions on site, and a design professional's needs and compulsions. A New Project is handled with wider experience and maturity then the past one, so charged with a higher fee. A young professional, on the other hand brings in freshness of new / modern ideas, and for that reason demands a higher price. A project within the line of specialization has advantage of built-in efficiencies, and so may cost less.

Right Fee is also judged on following counts:
  • Is one aiming at a reasonable profit?
  • Is one striving for a high return to manage a high risk situation?
  • Is one striving for a high return for the rare contribution?
  • Is one trying to break-even, -operate at a no or less profit situation?
  • Is one seeking to avoid the liabilities of new staff, technologies?
  • Is one looking for hypothetical - future benefit?
  • Is one, bartering an advantage?

TO TAKE OR NOT TO TAKE A PROJECT

It is always a problem situation for the design professional. The reasons could be many: Unknown Project, Too Familiar (repeating) a Project, Too Busy Schedule, Unsuitable Location, Lack of Resources (staff, equipment, finance), Too small or too large a Project, non profitable proposition, a doubtful client, etc.

A Design Professional first raises following questions:
  • A      If the project is taken, then. What would be the gains / loses?
  • B      If the project is not taken, then. What would be the gains / loses?
The second question may seem absurd, how can one make a profit or loss, by not doing a job? For a busy design professional an Odd Project will require reorientation of the firm's working, additional investments in plant, equipment, retraining or hiring of extra employees, slowing down some current assignments, etc. In such a situation, not taking on an additional project is advisable, unless gains are unusual in quality and quantity. On the other hand a Normal Project with reasonable and assured gains can be carried through the firm, if it fits within the working style, specialization, employees' capacity etc.


PREPARATIONS FOR FEES CALCULATIONS
  1. Define the scale of the project (at certain / optimum level) and the various professional services (project report, surveys, concept formulation, schematic presentation, working drawings, model making, other presentations, site visits, site supervision and reporting, bill checking and payment sanctions, certification etc.) required.
  2. Specify the nature of involvement, (calling for rates, contract negotiations, selection of venders, approvals from authorities, appointing other experts, etc.)
  3. Define an optimal amount of fees (a minimum take-home amount, or a break-even sum no profit-no loss), in consideration of item 1 & 2.
  4. For each of the sub components, define a matching amount, Clearly understand how inclusion / exclusion of a sub component will affect the optimal amount of fees.
  5. Define various sections and schedules of the job, and set matching sub-components of fees.
  6. Determine the chargeable costs for all other services, (fees payable to other professionals, cost of purchases for the client, cost of additional printing, copying or delivery, insurance, site visits, conveyance charges, etc.)
  7. State all taxes or levies that will be charged additionally on various components of fees.
The section 6, as above, should not, as far as possible, become a part of a design professional's fees. Incase of a dispute or delay in payments, it increases the professional's liability (as taxes are paid in advance or as soon as an invoice is prepared -whereas payment may not arrive or arrive on time). Inclusion of these items (section 6) adds to the turnover of the firm and increases the incidence of tax.


FEES' NEGOTIATIONS WITH A CLIENT

Negotiating a fee is not always an inevitable issue, as many clients without an argument accept the professional's proposition. But Fees Negotiation could become a long drawn, tiring and worrisome process. A client may not be asking for a discount, but just trying to understand the fees completely.

A lucky professional may get an exclusive meet to explain the merits of work, and to justify the effective value of the fees. However, here an inevitable mix of the two issues must be avoided by stating them distinctly. The process of fees explanation becomes extremely difficult when other professionals are present or being given a consideration. A busy professional, not acutely in need of a project would forgo the project, rather than attend such a meeting.

A professional must discuss fees as early as possible. Discussions, even if agreeable must be backed by a detailed communication in writing. All aspects of fees should be explained to the client, collectively in one meeting, and through a single written document. In the same presentation, the design professional should make a client understand following aspects:
 
  • Of the Total Professional Fees, what makes the Design Fees and what forms the Charges for various Services, (recoveries of expenses incurred for the client).
  • Consequences of delayed, part or non payment of fees must be clearly defined.
With organised clients, a professional may not get a personal meeting to explain or redefine the level of involvement and obligations. Even if such a chance is available to restate the case, it is professionally inappropriate to agree to reconsider the fees (for reduction in fees). Yet, a professional can (if one has structured the professional services and their costs) offer to take on additional responsibilities and services at no extra cost (while making the client aware of their costs), to make the offer attractive and viable.

Professionally it is not courteous to reject a client, or refuse a job, however, detestable or unwanted a person may be. A professional's only option out of this situation is to demand an abnormal fee and set extraordinary conditions.


COLLECTION OF FEES

A professional strives to collect some (however small) payment from a client. This sum even if a Token Payment, marks the beginning of a relationship. Professionals collect the such Retainer Fee in the first meeting, or on Confirmation of the Assignment. This may even precede any presentation of detailed terms and conditions for fees.

A professional must try and collect a large part of the Agreed Fees at the first available opportunity. The First Fee covers the value for the Patent Idea, or Extraordinary Concept, (a non physical entity) being delivered to the Client. These entities lose their effectiveness once made public, so their worth must be realized as early as possible.

Fees for Small Jobs, and of comparatively Smaller Amounts are collected in one lot, whereas large amounts are collected in multiple Time and Physical Stages related lots. A substantial amount of fees for each of the component of the job, must be collected, before, at the start, or, at least in the early time section of that work.


FEES : CONTRASTS IN PERCEPTIONS

Professionals wish to Time-Schedule their fees' components, whereas, Clients desire fees linked to a specific Physical Change or Achievement of the job. As a result, negotiated fees are generally specified by both time schedules and stages of achievements on the site.


OTHER ISSUES OF FEES COLLECTION

Ethics: 
A professional ethically may not Discount the Fees for a promise to get further work or favour. Similarly a recognized professional (members of government recognized professional bodies like, Architects' council, Medical Council, Chartered Accountants') must not participate in any tender like procedures, or pay any amount as a Guarantee Money for their services. Demand by some government departments and organizations for payment of a Security or Earnest Money Deposit and Retention Amount is inappropriate.

Freebies, Samples: A professional must not provide free samples, trial products, sketch designs or concept write-ups before a Retainer Fee has been paid, and a formal job commitment has been received. Even where a professional is voluntarily proposing a job, the project report or sketch proposals may not be handed over to anyone without a Receipt or Acknowledgment.

Fees for Failed Projects:
Determination, assessment, billing and collection of fees, under normal circumstances does not pose any major problem. Yet when for circumstantial, malicious, or any other reasons, jobs do get prematurely terminated and variety of problems arise. Even well detailed and lucid contracts, cannot foresee or solve all these problems.

Fees and Tax Liabilities: Professionals get paid for their professional work, and also compensated for the goods and other services that may be offered as inseparable part of their professional efforts. If such services or goods are considered as items of sale or commodity barter, under the relevant tax laws, the professional is liable to collect from client and pay to the Government the Tax.


FEES' FORMULAE

In design practice many types of fees' formulae are used, depending on the type of project, client and needs of the professional. Fees' are of two basic types: Lump Sum Fees and Percentage Fees (based on the cost of a job), with many variants through combinations, and additional riders.


Lump Sum Fees:
Lump Sum fees are easy to formulate, and simple to deal with. In this system of fees, a Professional knows the exact expected return, and the Client clearly realizes the outgoing sum.

The primary problem for a Professional at the start of a job, is How to decide an amount for the Lump Sum Fee, when due to complexity of the job, the likely extent of involvement is not known. On the other hand a Client, at least initially, may not be ready to appreciate the value of a professional's contribution.

Secondary problems arise due to the ever-changing nature of a job. A job may increase or decrease in extent and value, creating hassles, whether Lump Sum Amounts are accordingly adjustable. For a professional, overhead costs increase, in jobs that last longer. For a Client slower implementation of a job mean, not only delayed returns, but cost overruns due to monetary inflation. Lump Sum Fees have to accommodate such issues.

Percentage Fees:
Percentage fees are very flexible and accommodating because these depend on a variable, the Cost of Job. Any change in jobs extent, cost, and inflation, ultimately translate in the overall cost, and so fees for it.

A major problem with Percentage Fees system is how to decide a True and Fair Cost of work. Where executions involve third party vendors or contractors, a client usually allows the professional to check the bills of work done. A Professional calculates the fees as a percentage of the billed amounts. However, at least in Design field, Clients often purchase or supply some of the materials, request the reuse of existing components, or self execute some parts of the job; Determination of Cost and Fees, for such actions become very difficult.


COMPARATIVE EVALUATION OF DIFFERENT FEES SYSTEMS:

A lump sum fee system presumes a fixed cost for the job, which in reality is very changeable. Projects are shrunk or enlarged in size, hastened, or slowed down, affecting not only the professionals' schedules but also impacting the costs. Liabilities of a professional change due to external factors. Economic conditions affect the total cost of the job. A lump sum once agreed, cannot cope up with such changes.

A percentage fee system accommodates the variations in cost of a job, but when projects are substantially down sized, a professional may not get a break-even amount of fees. For a client, inadequate professional contribution may substantially over run costs of a project and also the incidence of fees.


MIXED FEES-SYSTEMS:

Mixed fees-systems overcome the short comings of both the fees' systems. Clients prefer lump-sum fees, but demand a lot of explanation on terms and conditions. Design Professionals prefer Percentage Fees for projects, where the scale, nature are, not yet determined. Intellectual Projects based on the value, can be charged better on Lump Sum Fees system. A mixed fee's system has a percentage fee system, where a professional would want a guaranteed minimum amount, and a client would need an assurance of a maximum amount limit on the payable amount of fees.

A mixed fee system is devised by including Riders to overcome situational problems. For example the percentage fees’ system can have riders specifying a cost factor (based on units / numbers, length, area, or volume) to arrive at an optimum cost of the job.


SERVICE-FEES OR PROCESS-FEES:

For very complex jobs a professional often functions as a co-ordinating agent for various sub professionals, experts, contractors, vendors, etc. Here the professional charges a Service or Process-fee, based on the payments being made to all sub agencies. In building construction often a structural engineer is paid by the contractor of the site, instead of by the architect or the client.

Value-based Fees: Jobs like renovation, alterations, extension, addition, conservation, etc. make a substantial change to the existing environment, upgrading the commercial value, or other advantages deriving out of it. A unique concept that costs very little to implement, provides a substantial benefit to the client. Should one charge a fee on the Cost of Job (the actual expenditure made on implementation - execution), or on the Value of the completed Job (benefits derived out of it)? Here determining an appropriate Cost Base for fees is very difficult, so Lump sum fees’ system is used.

Cost Plus Fees: Fees for very complex jobs or jobs that are unique, and without any precedents are very difficult to predefine. A Client wishes to see the job properly done, and the Professional wants a guaranteed, but a fair amount of income. Such jobs are executed on Cost Plus Basis.
 
  • The office work of the professional and the site work of the project, both are executed in a very transparent setup. All the expenses at the Professional's Office (salaries, stationary, conveyance, rents, service charges for equipments, etc.) and at the Project Site (on raw materials (stationary), wages, and salaries, rents for equipments, conveyance, postal and telecommunication charges, taxes, etc.) are well monitored and audited. The Professional is then allowed a percentage over the Audited Costs.

Fees As Part of Supplies: Where professionals, such as in Design + Build or Supply or Execute practices arrange to purchase, erect, execute and supply the items, no separate design fees are charged. The professional fees are part of the Cost of Supply, as included in the margin for profit. However, for Facilitating Purchases, a Commission or Facilitation Fee is charged in addition to the Professional Fees.

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