Low fees - implication for practices

Effects of low fees

With insufficient funds to provide an adequate level of service, there is a resulting strong temptation to reduce documentation time and attendance on the project. These circumstances expose the architect to a higher risk of litigation, disputes with contractors, reduction in quality of performance and the high potential of client dissatisfaction affecting ongoing and repeat projects.

Under these circumstances, the architect is constantly seeking to accelerate cashflow and prompt fee recovery, with the possible outcome of a reduction in client confidence and an unsatisfactory client relationship.

When making a low fee submission, architects:

1. should define precisely the scope of services to be provided – refer Client Architect Agreement (CAA 2019). Clearly identify inclusions/ exclusions of scope of services
2. should state the time period within which the service will be provided; this is particularly important if the contract period is extended for any reason. If a time period is apportioned you should stipulate any additional fees incurred for additional time spent, ie an hourly rate charge
3. should set out precisely the method of engagement and payment of secondary consultants
4. should state the number of options to be prepared in the design stage
5. should set out the terms of the client-architect agreement and, in particular, the method and timing of progress fee payments
6. under current market conditions, may find it preferable (both for the architect and the client) to agree a lump sum fee

Costs of all projects in an architect's office should be well documented, so that the fee offered is based on previous records. This enables fee submissions to be carefully calculated to compensate for the time, resources/ skills and responsibilities for specific projects.

A low or inadequate fee will have a significant effect on an architect's resources, but results in very little financial saving to the total project cost. In evaluating the services to be provided, the following criteria are very important when considering a commission with low fees:

• expertise in the type of project envisaged
• ability to develop brief functional requirements
• technical and management skills
• previous experience and track record
• methodology and project-control methods
• time cost and quality performance
• design approach and ability
• qualifications, experience and availability of key personnel

To provide a professional level of service, the architect should be adequately remunerated and, while there are no mandatory or minimum fee scales, architects should assert their right to fair and reasonable compensation.

Why you must make a profit on every job

Contrary to popular belief, profits are not funnelled straight into the pockets of the practice's principals. The profits of a typical consulting practice are essential to support the ongoing business in a number of ways:

1. Profits in the form of retained earnings provide a cushion that enables a practice to operate in lean times without either going out of business or laying off key staff. The cyclical nature of the construction industry demands that considerable retained earnings be available to ensure stability.
2. Profits are the source of investment in new equipment, furniture and other capital goods which are essential for the continued growth of the practice.
3. A record of consistent profitability is a key measure which all banks use to determine the amount of credit which should be made available to a practice to finance its day-to-day operations. If the practice's borrowing capacity is too low, its ability to grow will be severely impaired.
4. Continued profits provide the money to compensate the practice's best performers with pay increases, improved benefits, bonuses and profit sharing.
5. The profits earned must provide the shareholders with a rate of return greater than could be obtained from more secure investments such as Treasury bills, money market funds and high quality bonds. If the return falls below these more secure investments, the sources of capital will soon disappear.

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Fee cutting – case studies

Cutting fees as a means of growing a business, or by reducing the scope of service or as a gesture of friendship can result in reputational or business damage and litigation.

The following case studies discuss incidents which have occurred in Australia and overseas and, individually, do not represent any one case.

Case study 1 – Growth by fee cutting

Practice A was a medium-sized practice that decided the way to success lay in increasing the number and frequency of commissions, so that it could achieve its growth target.

It adopted an aggressively consistent policy of winning work by offering reduced fees while simultaneously priding itself on maintaining its high-quality standards.

Initially, the losses were disguised by the large jump in cash flow and, by the time the insidious loss record was evident, the practice had no option but to maintain its fee structure to ensure that the workload was continued at the high rate.

Having exhausted the practice's reserves, the partners were compelled to finance debts by borrowing against their own assets to secure the necessary overdraft. It did not take long for the bank to assess the practice's potential and increase overdraft rates as a precaution against probable delinquency.

The more perceptive senior staff foresaw the consequences and sought more secure positions with other practices and the practice was then saddled with the higher costs of recruitment and the use of contract staff.

Inevitably, the bank foreclosed. The partners lost all their assets and a once proud practice with an enviable reputation simply disappeared.

Cause: low bidding in pursuit of jobs at any price

Effect: bankruptcy

Case study 2 – Design reduction

Although they set out to gain more work by cutting fees, the directors of Practice B were craftier than those of Firm A. They kept sight of the fundamental need to maintain profit levels and decided that this could be achieved only if the design content of each commission was reduced to the necessary minimum. It was also decided that a good deal of costly and time-consuming checking could be eliminated.

The consequences of inadequate attention to detail and the deterioration in design quality became evident as defects, which appeared further down the track. Some clients could be fobbed off with expensive rectification work, but others sued for consequential damages based on the practice's negligence.

Practice B's poor reputation spread rapidly and they found it increasingly hard to secure work at any price. Design quality was further eroded by the defection of staff, whose motivation to apply their skills in the atmosphere of cutting corners and whose job satisfaction in designing cheap projects was reduced to zero.

The loss of experienced staff was the final blow. The partners dissolved the practice before lack of work and crippling professional-indemnity insurance premiums sent them broke.

Cause: poor quality design as a deliberate component of cost cutting to sustain low fees

Effect: loss of reputation, loss of staff, litigation

In most cases involving litigation, the practice ends up worse off than if it had missed out on the job in the first place.

Case study 3 – Token fees for friends

Practice C was recommended by a friend (A) to carry out a pre-purchase house inspection. They did so and produced a brief report which satisfied the friend and prospective buyer (B) who subsequently purchased the house.

Because the inspection and report was for a friend of a friend, Practice C charged only a token fee for this work.

A year later, the new owner (B) decided to extend the house and called in another architect for advice. This architect's preliminary report listed several structural defects which required costly and extensive modifications to be completed before the extensions could be added.

The owner (B) sued Practice C who, in its defence, stated that it had already done more than could have been reasonably expected for the token fee and that, in any case, the inspection and report had not anticipated possible extensions to the house.

The court ruled against Practice C for failing to observe and report defects which on any reasonable inspection, should have been apparent to a qualified person. The judgment went to appeal, but was upheld.

The court's findings were that the duty of care must be exercised to the same level as would be shown by a reasonably qualified architect and is not limited by the reward received for performing the service.

Cause: token fee

Effect: cursory inspection, incomplete report, expensive litigation

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