The Art and Science of Increasing Profits
How might architectural practices improve their financial viability? Ian Motley argues that the profession needs to radically rethink the overall approach to fees and pricing work.
Over the last 10 years the world has faced financial hardships that some financial experts have compared to the great depression of the 1930s. The construction industry, considered by many as a great indicator of the overall financial health of a nation’s economy, was perhaps the worst hit.
In January 2009 the American Institute of Architects confirmed that its Architecture Billings Index – a diffusion index derived from the monthly work-on-the-boards survey compiled by the institute’s Economics and Market Research Group – had dropped to its lowest level in 13 years. This signaled a major reduction in project activity throughout the industry.1
On the other side of the Atlantic, the British publication, Building, reported that financing shortages, development delays and project cancellations brought on by the recession have resulted in more job losses for architects than any other profession in the United Kingdom.2
Even Germany, the largest national economy in Europe, has suffered. According to data published by Eurostat, the European statistics office, construction activity has dropped by 17.1% since the start of 2012, causing a significant number of layoffs and leaving many architects shocked by the country’s sudden economic shift.3
Here in Australia, the picture is also dim. Despite improvements in the economy as a whole, the architectural industry is still experiencing significant challenges. Statistics from the Australian Bureau of the Statistics confirms that architects are still paid significantly less than their equally educated counterparts. For example, while medical practitioners, legal professionals and engineering professionals earn an average weekly wage of $2,767, $1,895, and $1,987 per week respectively, architects only earn an average of $1,493 per week.4
Faced with unusually tough economic times, a lack of new projects and industry-wide underpayment, many architectural firms are struggling to maintain financial stability. So what should architects and architectural firms do to improve their situation?
Experts identify three ways in which businesses can improve their profit margins when when faced with economically challenging times:
- reduce overheads
- increase sales
- tap into undeveloped profits with a more effective pricing strategy
The last point is the place where architects can make the biggest impact – but this requires a fundamental shift in the way architectural practices price their services, and therefore set fees.
Most architects and design professionals price design services in relation to cost. That is, fees are determined by first estimating the costs to complete the work and then balancing this cost with local market conditions. This pricing strategy is typically expressed as a percentage of the construction cost, a lump sum or a unit rate fee. However, this approach is counter to business best-practice in the pricing of services – indeed, pricing expert Rafi Mohammed, argues that one of the biggest fallacies in business is that a product’s price should be determined by its cost.5
What does this mean? Basically, a cost-based pricing method is an essential starting point for any successful pricing strategy, but it is not enough on its own. When left undeveloped it creates two major problems.
Firstly, it makes it difficult for firms to differentiate themselves and their services from the competition. This differentiation is vital if architects are avoid competing on fee alone to win new work. Secondly, and perhaps most importantly, it mistakenly assumes that clients base their willingness to pay for design services on how much it costs the architect to provide them.
This cost-based approach makes it difficult for design firms to accommodate, and benefit from, a range of different client types and their reserve price preferences: from those clients who are prepared to pay you something for design services (but not as much as you would typically charge), to those clients who are prepared to pay you more than you are typically asking.
So, how can design professionals propose fees that promote their firm’s individuality and design ethos while also addressing the reserve price preferences and financial requirements of a wider audience?
The answer, of course, is that there is not one ‘magical’ fee – and yet this is what is typically developed from a single-fee approach. Instead, a practice should offer clients a range of different fees and scope of service options and then allow them to choose the option that is most appropriate for them.
Many design professionals fear that providing a client with options will lead to additional administrative and design costs that would outweigh the financial benefit of such an approach. Fortunately, however, it’s not necessary to produce a new range of products or services in order to achieve this goal. When applied correctly architects can use their existing services to create a range of different fee and scope options
If architects are to navigate increasingly difficult economic and procurement contexts, the profession needs to develop alternative approaches to fee setting and project acquisition. Providing a client with the power of choice during the fee proposal and negotiation process not only forms the foundation of a much healthier client relationship than is typically currently enjoyed, but also enables architects to improve their financial return and avoid being wrestled out of an increasingly competitive marketplace.
1. Monica Unhold, “Architecture Firms Forced to Lay off Employees in Hard Times,” AIA San Diego, (February 25, 2009).
2. Dave Lowery, Emily Wright and Ike Ijeh, “Architects and Recession: Battered, bruised and broke.” Building, (February 11, 2011).
3. Greg Pitcher, “Germany hit hardest as construction falls across Europe” Architects’ Journal (24 April, 2012) and Chris Bryant and James Wilson, “Belt-tightening reaches heart of Germany.” The Financial Times (August 26, 2012).
4. Australian Bureau of Statistics, “Employee Earnings and Hours, Australia, May 2012", (released 11:30am, 23 January, 2013).
5. Rafi Mohammed, The Art of Pricing, first edition, (New York: Crown Business, part of Random House Inc., 2005).
Ian Motley is a consultant at Blue Turtle Consulting, a firm that helps design professionals achieve financial success by developing more effective pricing strategies.
During November Blue Turtle Consulting is hosting a series of CPD Fee Proposal Workshops around the country aimed at showing architects and design professional the benefits of a multiple fee strategy and how such a strategy can be applied. ACA members are eligible for a 10% discount on the cost of the workshops.