Milton Gregory "Greg" Grew, AIA is CEO of Grew Design, Inc and Grew Construction, LLC in Woodbury, CT. Greg is a licensed architect, building official, and contractor with over 20 years designing/building residential, commercial and institutional building projects. www.GrewDesign.com
BUSINESS OF ARCHITECTURE (OXYMORON?)
June 27th, 2010 by Milton Grew
I admit it! We architects are notoriously bad business people. For instance, we are at the bottom of salary surveys comparing other professionals such as doctors, lawyers, and yes, even engineers. For some reason, we are not good at collecting and, when we collect, not particularly good at pricing our services. I know this problem continues based on many online discussions I take part in and local roundtables with other architects. I have been principal of my own design firm for 22 years and still have “business issues”.
Part of the problem is that architects get into this profession for the love of the work and not initially for the money. We love designing buildings and spaces and drawing by hand or by computer and having clients ogle our work and tell us what wonderful solutions we have devised and how we will make their life better. Really feeds the ego.
However, those same enthusiastic and devoted clients suddenly stop worshipping once they see our fee proposal, or if we are working by the hour, our first invoice. Then we get “It can’t possibly take that much time to do such simple work”, “I could do that”, “I could get the same work from an unlicensed draftsman”, “You can’t be serious”, “I’ll have to think about it”, or “Maybe I’ll get some other proposals to compare”. But you want that project and so you drop your fee or agree to some arrangement that in the end results in you losing money but, after all, you get your building built and they get to reap their investment at your expense. Satisfying?
I have been to many design firm business management seminars where they talk about the “value of your services” and how you should sell yourself, but for most of us, these lessons don’t last long and we fall right back into the same rutt. I will keep going to those seminars to remind myself what I should be doing. At the very least there are a few simple business lessons I have learned and try to apply and I hope they will be of some value to other design professionals. Here are my top four business reminders…
1. DO THE MATH
You don’t have to be math wiz, which many architects are not, to figure out what you need to charge for your services. There are so many types of fees such as stipulated or lump sum, hourly rates, percentage of construction cost, per square foot of building, per sheet of drawing, and the dart throw. Regardless of how you want to present your fee, you need to know what that represents and whether it is adequate to keep you and your business alive. Here is what I do and see if something like this works for you.
At this time I have five employees and a 1,500 square foot office on Main Street, of course. I have to know what all my costs are for operating the business so I add up the annual total for rent, electricity, heat, all insurances, licenses, magazine subscriptions, professional association memberships, employee benefits (including vacation time),paper (architects use a lot), printer ink (same), other office supplies, software and upgrades, computers and upgrades, telephones, internet service, website hosting, gas and anything else that is a predictable business expense. If I don’t have an exact amount for an item from a previous year to use then I estimate. I also include half of my time and all of my secretary’s time as non-billable and, therefore, part of this overall overhead expense. The total annual expenses are then divided by the total number of billable hours for me and my employees to arrive at a cost per hour above payroll. At present that amount is about $25 per hour.
So now I know that for every hour of work in the office, besides payroll, I must charge at least $25 per hour to break even or cover expenses. Now we get to the issue of profit. Some projects you might estimate high, some low, and some just right, but you need cushion for more lows, investment in growing your business, bonuses for jobs well done and money for rainy days, weeks or months. I have used 30% profit over expenses as a fair amount to cover this.
So my equation for arriving at the hourly charges for my office personnel is:
Hourly rate = [ hourly pay + $25 ] x 1.3
Now all I have to do is make sure I budget my project time accurately and all will be well.
The other trick is to have enough projects to fill up the hours so that the overhead gets paid and some profit is made. But that is another subject, marketing, and will have to wait for another article.
2. PUT IT IN WRITING
You may start out on a very friendly relationship with a prospective client and everything looks perfect for the future. When you get that giddy feeling do a reality check. Misunderstandings and disappointments of either party go with the territory and happen much more frequently if you do not put it in writing.
Whether you use standard industry contract documents or write you own, make sure you provide your client with a proposal or agreement that clearly outlines your understanding of the project and its objectives, what services you will provide to achieve the desired result, how much those services will cost, how long it will take you, when you want to be paid, what you will or won’t do if you don’t get paid, and what other services are not included and cost more if it turns out they are needed.
As the project goes along be sure to document by letter, memo or emails any decisions that are made, changes that occur, or events that affect the out come of the project. If anything happens that will have some affect on the terms of your agreement, put it in writing and have it agreed to by your client as soon as possible. Hesitation will cost you.
3. GET PAID
This may seem pretty obvious so why bring it up? Because so many of us wait or put off sending invoices until it is too late to get paid in full. Have we already passed milestones in the project? Have we already given the client final drawings with which to get permits or build? Have we waited until we no longer have any leverage left with which to get paid when we need the money?
It is important to include in our proposals or agreements a list of incremental payments that the client should expect to pay at the time that certain milestones in their project are achieved. I have told my clients “You need me to do many things such as design, meet deadlines, help you sort through options, help you get permits, contractors, and complete the project. I only need two things from you- decisions and checks.” It really is that simple and helps them see that for all the demands the client may put on me it is very reasonable for them to simply pay me at the agreed upon times.
I make sure I get paid a modest retainer before I start work, which shows the client’s good faith, and I require successive payments when I complete certain phases or important tasks. Invoices are due and payable upon receipt, not 30 days and not 15 days. As an architect the most important leverage I possess is that all invoicing must be paid in full before I will hand the client signed and sealed drawings for a building permit. If during construction I am needed to sign off on draws from the lender or to contractors, my final bill must be paid before I hand over my last signature. These conditions are not surprises to the client because they were down in writing in advance in our agreement.
4. CHECK YOURSELF
Even if you are a sole proprietor working by yourself it is in your best interests to keep good records on how much time you spend on each project. When that project is complete and before you put the files away, review what you originally budgeted and what you actually spent. If you made money, well, you should have. If you did not, immediately figure out why and make sure you adjust your future budgets or determine how to accomplish the job more efficiently in the same time.
Even though I love to tinker with drawings, research new products and techniques, run around trying to please clients, and take photos of jobs, I have to discipline myself to buckle down once in a while to take care of business. After all my family must come first and I do the work I love first and foremost to take care of them. I am blessed that I can do work that I love. What I do is called architecture and it is the art of shaping spaces but, underneath that, it must be a business, too.
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