THE HIDDEN COSTS OF LOW FEES

Simmy Peerutin considers the implications of the recent survey on fees commissioned by the South African Institute of Architects (SAIA), which confirmed a depressing reality.

Simmy Peerutin is a senior partner at Peerutin Architects, in Cape Town. He is Chair of the Practice Committee of the South African Institute of Architects, a Practice Committee member of the International Union of Architects and a member of the SACAP Fees Committee.

The recent survey on fees commissioned by the South African Institute of Architects (SAIA) confirmed a depressing reality, that in 2017 architects were charging fees roughly 40% less than the last Guideline Fee Scale published in 2015 by the South African Council for the Architectural Profession. This, at a time when the level of responsibility (and liability) is mounting with each new piece of legislation and technological innovation in design, and 3D software is increasing client expectations while at the same time putting additional financial strain on practices. A single properly equipped Revit Workstation costs around R40,000 excluding VAT and the Revit network license of about R14,000 excluding VAT is renewable annually!

When I decry the low fees paid to architects at a time when responsibilities are increasing, my father-in-law remarks that that is how the (free) market values the service. But buying architectural services is not the same as buying a commodity or an appliance. What you pay for is not necessarily what you get.

The main consequence of fees too low to cover a full and proper service is increased risk to Clients, delays and errors on sites, and inferior buildings which aggregate into inferior environments.

It seems that there are three ways architects manage their businesses in order to offer market-related, competitive fees. The first is to have a significant volume of other new work; the second is to cut overheads and/or limit profit; and the third is to reduce the service – either explicitly or not. All three are likely to have negative effects on the projects and increase risk for clients. Let’s examine each in detail.

The cashflow palliative – feeding the beast with new work.

Generally, projects are broken down into six work stages. The first three relate to the design process and 40% of the fee is generally assigned to these three processes. A further 20% of the fee is related to half of the next stage that leads to a major milestone – Council Submission. Therefore, a full 60% is due upon Council Submission. However, it is often the case that not near 60% of the staff costs accrue to this point and therefore most projects show a very healthy ‘profit’ upon Council Submission. I deliberately put profit in inverted commas as it really represents fees in advance but few, if any, practices put the required amount aside to pay for later costs in work stages where the fees do not cover the real costs.

Now, if everyone understood this and put aside the money there would be no problem, but instead, the cashflow (and false ‘profit’) generated in these early work stages can disguise an overall fee that is simply too low for the job. And if one adds multiple projects overlapping in a staggered manner, one can continue to see healthy ‘profits’; until, of course, there are not enough new projects and the latter, time-intensive work stages catch up and start to show losses. Recording Fees Earned against Income Received should highlight if there is a problem or not.

Low overheads/low profit = high risk

The SAIA Benchmark Survey revealed shockingly low levels of investment in key areas and well as low average profit levels, especially in micro and small practices, which constitute 60% of SAIA Practices. Expenditure on IT and software is, on average 4% of turnover, with Education and Training accounting for another 2%. This is surely unsustainable and insufficient. Staff salaries account for 47% of costs but salaries are low when one considers the years of university education needed to train an architect. The median annual salary for a candidate architect, who has graduated after 6 years of study, is R205,000. For professional architects with less than ten years’ experience the salary climbs to a median R338,000. It is no wonder that the number of building professionals registered with SACAP has fallen by 6% over the past 8 years (although the number of professional architects has risen by 11% in the same period). It is not a particularly attractive profession.

Low levels of investment almost certainly predict lower levels of skill and lower levels of risk mitigation as well as poor working environments. These days the best practices will have robust network, server and UPS systems with an offsite backup regime, running to hundreds of thousands of Rands. An individual workstation is likely to consist of two large-format screens supporting a PC with an i7 processor and 32GB of RAM as well as a serious graphics card. Contrast this to someone working off a 13” laptop, possibly with no server, UPS or proper backup. I wonder when clients will start drilling down to this level of detail, and vetting their professionals, not only on what they can see but also how their office is set up.

Do clients know what an architect does? – Cutting the service to match the fee

While writing this part of the article, three recent interactions are playing in my head.

The first is me sitting at a coffee shop with a developer, starting to explain how fees are related to service quality and watching his eyes wander until he finally tells me that he pays X% to his architects and that’s that. He was clearly not interested in what we need to do to make the fee work.

The second is a colleague from another practice describing what work they do at risk or for deferred fees. They go all the way to a full Building Plan Application and only upon approval do they get their first invoice paid. But they do not carry out many of the tasks defined in the Professional Client/Consultant Services Agreements (Procsa) for stages 0 to 4.1. They define precisely what they will do for deferred fees, but I suspect many clients do not fully appreciate what is being omitted or deferred until later in the project and so have no real idea of the risks and hidden costs associated with this approach. Furthermore, it is highly likely that many practices are not disclosing what work is omitted or deferred till later.

The third is a discussion I was having with a sole practitioner during which he/she confessed that they have to limit their work, or they will not be able to make ends meet, given the agreed fees on many of their projects. Limited work often results in an inferior service and that often has consequences for the buildings and building owners.

A recent analysis by a few practices of the actual time spent per work stage on a small sample of projects revealed big differences between the practices, and even big differences amongst the projects within a practice. The time has come for a common understanding of the work required to be done in each Workstage, particularly Stage 2 – Design Concept, and Stage 3 – Design Development.

For example, it is my opinion that the Design Concept Stage should include conceptual designs for each of the major services and systems, and that Design Development should include the development of ALL design aspects of the project – each package and service. The latter is implicit in the Procsa descriptions, but the former is not, although it should be.

Do architects know what their service costs?

The Benchmark Survey revealed that less than half of practices tracked project costs. Not surprisingly, the percentage is much higher in large and macro practices, but every other category did not reach 50%. Curiously, only 1 in 3 Principals completed timesheets even though they must be the most expensive category of ‘staff’. When it came to reviewing the timesheets only 24% of respondents claimed that they always review the timesheets. If one does not measure the costs, then one will never understand the relationship between costs and fees. While in the short term that may be good for clients, with some architects accepting almost whatever fee is offered, or tendering very low fees, it cannot be sustainable.

How can one size fit all?

For many years until its withdrawal in 2015, the guideline fees published by SACAP were presented in one table for all project types and the fee percentage only responded to cost of the project. The higher the cost the lower the percentage fee.

The SAIA Fee Survey has, not surprisingly revealed quite a range of fee percentages for different project types and, if we ever get another guideline fee scale published, at the very least there should be three categories – simple, ‘average’ and complex. This could reflect or align with the categorization proposed by the SACAP Identification of Work Committee, resulting in a fairer, more nuanced guideline fee scale.

Where to from here?

Here are some initial thoughts:

  • We need the entire Masters of Architecture degree to be supported with financial aid, not just the undergraduate degree.
  • We need staff to be able to earn enough to live on, starting with G It is not moral to allow people to work for nothing or for little pay, just because they are prepared to. And it is not moral to expect high degrees of unpaid overtime.
  • We need to provide an office environment which conforms to a minimum standard in relation to software, hardware, backup, network and the like.
  • We should allow staff time to increase their skills through well-designed, affordable courses.
  • We should commit to defining the service we provide to our Clients in detail, in each and every instance, whether they want to fully understand it or not. If we are going to omit or defer parts of the early work stages, let us understand and explain the implications.
  • We should commit to completing timesheets and evaluating the results on a regular basis, to understand the costs. This applies to sole practitioners as much as to large practices.
  • We need to engage and educate Clients about what we do and the added value that we bring. Anyone can ‘draw a plan’. We should be able to, and be allowed to, make practical AND beautiful buildings that contribute positively to their environment, while managing the whole process in a manner that one can be proud of, and that brings credit to the profession.
  • We should not abdicate management responsibilities on a project. Indeed, we cannot, even if some would have clients believe that others can take over that role. There is no other member of the Project Team that has total project comprehension.
  • SAIA will soon be offering a Quality Management Toolkit to enable members to take their first steps towards service excellence: Plan – Do – Evaluate – Adjust.
  • SAIA should engage with software and hardware resellers to lobby for reductions in the costs of these mission critical tools. Or maybe SAIA can organise a bulk purchase discount?
  • PI Insurers need to pay more attention to excessive fee reductions. Of course, that begs the question about what the appropriate fee should be.
  • Perhaps SACAP, too, needs to pay more attention to fee reductions, especially when architectural professionals are brought before the disciplinary committee.

Conclusion

What we all surely want is a sustainable, responsible, accessible, transformed profession that offers value to clients and to society. That we are not there yet seems self-evident. How we get there is clearly up for debate.

SIMMY PEERUTIN

Simmy Peerutin is a senior partner at Peerutin Architects, in Cape Town. He is Chair of the Practice Committee of the South African Institute of Architects, a Practice Committee member of the International Union of Architects and a member of the SACAP Fees Committee.

The views in this article are those of the author alone. He is neither writing it on behalf of his own practice nor the various organizations in which he is active.

AUTHOR: Simmy Peerutin

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