Time to read: 7 minutes
Unless you’ve been living under a rock lately, you might have heard that it’s expensive to build right now. Then again, that rock of yours is an increasingly valuable construction resource so someone has probably already offered you good money for it. I guess either way you know what I’m talking about.
Let me quantify just how expensive.
Under normal times, input prices to the construction industry usually go up 2-3% a year. But this past year they rose an eye-watering 17%.[i] Even with inflation at an also high 7%, those are some tectonic plates a-shifting under construction prices.[ii]
Which means a bunch of big things for architects. Not least of which is that the many studios pegging our livelihoods to the construction industry via percentage fees will have been seeing some big windfalls this year. Check this out for some demonstrative arithmetic:
Old budget = $1,000,000
10% architectural fee = $100,000
+17%
New budget = $1,170,000
New architectural fee = $117,000
Windfall = $17,000
But should architects profiteer off construction industry inflation? Is it ethical that our clients suddenly face big price hikes from their architects? Heavy questions. And you might have noticed their provocative and slightly hysterical tone:
Are we profiteering? Holy smokes Batman, are we being ethical!?
You see, like many in the profession I’ve launched with the assumption that increasing our fees along with the rest of the construction industry is somehow fundamentally wrong. That our clients’ needs come before our own. That profit is icky. That money is best not talked about at all, poppet.
But I’m weary of this attitude. I think it’s seriously unhealthy. It devalues the work we do, it devalues our time, it devalues us. And more pointedly, it makes no room for the measured objectivity this subject sorely deserves. So let’s take a big old calming breath of air and ask again.
Should architects profit off construction industry inflation? Is it prudent that our clients face big price hikes from their architects? Somewhat less provocative and hysterical.
Should architects profit off construction industry inflation?
My short answer to this is: it would be foolishly short-sighted not to. My longer answer is broken into three parts:
Part 1: The Economy
The seismic shifts underway in construction pricing are not isolated to packs of bricks and mortar. Inflation is rearing its sleepy head across the entire Australian economy, lacing up its boots and setting out for a jog. Lots of things are getting more expensive, starting famously with petrol and lettuce, and spreading into every other corner of our lives.
One of those many corners is wages.
According to the Association of Consulting Architects 2022 Annual Salary Report, 57% of all architecture practices offered salary increases greater than inflation this year.[iii] Meanwhile, Molly McCloy at Bespoke Careers has observed “a return to pre-pandemic levels for architecture roles on offer. This has produced a shift in the market, giving candidates the upper hand in negotiations. Most notably there has been an increase in salary expectations, with architecture practices competing to find the right fit for their teams.”[iv]
Another of those corners is insurance.
Vincent Rizzuto at Austbrokers Countrywide, insurance brokers for ArchiTeam, has observed that “rates for professional indemnity insurance have been increasing steadily over recent years, with some insurers adjusting base premiums by as much as 10% in 2022.”[v]
So, if your daily commute is getting more expensive, your lunch is getting more expensive, your staff are getting more expensive, and your insurance is getting more expensive (not to mention your rent and your printer paper and your daily orange mocha frappuccino), it seems reasonable to me that your services should be getting more expensive too.
Part 2: The Grind
Now is a devastatingly hard time to be an architect. There’s a general climate of risk shedding around that’s shovelling unwanted risk onto the architecture profession, transforming what it means to even practice architecture in the first place. Novated contracts, binding warranties, performance solutions… You name the risk, we’re being asked to shoulder responsibility for it.
Then there’s the extra workload caused by construction industry inflation itself. My business partner, Erica Slocombe, ticked off the following on her fingers without pausing to breathe at all:
- Quantity surveyors pad out their cost estimates with huge contingencies, forcing us to seek second and third opinions from other sources.
- Clients are anxious about cost escalation and in need of careful handholding throughout their projects.
- We need more builders on our tender lists just to ensure we receive enough bids to draw a decent comparison.
- Supply chain issues force us to reselect materials, fittings, appliances, and then redocument each and every change.
Between the extra risk you’re being asked to carry and the extra workload you’re being asked to take on, it stands to reason that you should be rewarded in return.
Part 3: The Contract
All else aside, there’s also the small matter of that pesky percentage fee agreement your client signed with you. Remember, the one that says that your fee is calculated as a percentage of their cost of construction? The logic diagram isn’t rocket science:
If their cost of construction goes up, then your architectural fee goes up
This is another way of saying that your client has assumed the risk of their project budget affecting your fee. If you change course now, you may as well have signed a fixed fee agreement and been done with it. But you didn’t. So here you are, sitting on an agreement that has placed at least one risk on your client’s shoulders. Do you think a bank would hesitate in sliding that invoice into their DMs? Or a lawyer, or a dentist, or a doctor? No, I didn’t think so.
You shouldn’t either.
Is it prudent that our clients face big price hikes from their architects?
I hope by now you’ve joined me in agreeing that profit is delicious. Perhaps you’re already nodding to yourself at the idea of using this unique moment in time to grab some more of it. But before you flesh out your daydream of that beach in Sicily in too much detail, it’s worthwhile pausing for a moment and asking whether it makes good business sense to do so.
Imagine the scenario:
Your client has just been informed that their forever home is going to cost them a whole lot more than they were expecting. The shock is setting in, they’re in the first stage of grief, they’re wondering how much a kidney fetches on the black market. And then your next invoice rolls on in, as puffed up as their new construction budget. They fall backwards off their chair, bruise their coccyx and sue you for damages.
Daytime television melodrama aside, while I’d argue earning more money is the definition of good business sense, how might your client feel about your decision to continue to peg your fees to an inflated construction cost? Are there any downsides? And indeed, are there any upsides?
I imagine that the primary coccyx-bruising downside in your client’s mind might be the impression that you’re being greedy. Their project was $1,000,000 yesterday and you were happy with your $100,000 fee. But today you’re suddenly demanding an unreasonable $17,000 more and haven’t lifted a finger to earn it!
There are two ways to tackle this.
One option would be to point to the extra work you’ll be doing for the extra fees, everything I’ve covered above and more. The issue with this approach is we’re talking some seriously technical stuff here. When you’ve got a client contesting an invoice, I really don’t recommend your go-to response be a lecture about the evolving nature of regulatory compliance. Risk shedding and tender arrangements and supply chains might be fascinating to you and me, but your client probably neither understands nor cares about the minutiae.
Much better I think would be to remain as high-level as you can and address the principles of your percentage fee agreement itself. Which fortunately is something I’m sure you’ve had to do during normal times already. Your client’s critique probably went something like this:
“What happens if we make a last-minute fridge substitution that increases the cost of our home by $20,000? Do you charge your percentage fee on that, even though you’ve not really done any extra work to earn it?”
To which you probably said:
“Look, I might not need to do much work to help you select the expensive fridge. But on another day I might put in a huge amount of work to relocate a skylight that doesn’t increase the cost of the project at all. I win with the fridge, but I lose with the skylight. It all comes out in the wash.”
In my experience, clients are generally very comfortable with this. They understand the balancing act and respect the fairness of the engagement. There’s an elegant transparency to the percentage fee after all, particularly if you use a well-crafted invoicing template. The same holds true even within these abnormal times. All this is to say that, with care, I think it’s possible to sidestep the accusation of greediness altogether by focussing on the bigger picture of balance within the client architect relationship.
Which leads me to the primary upside, namely that continuing to peg your fee to the cost of construction honours the agreement you signed with your client in the first place. Doing so keeps your financial relationship simple. Which is more important than you might at first think.
You’re probably comfortable with the percentage fee, but that’s only thanks to familiarity. From your client’s perspective, this is almost certainly the first and last contact they’ll have with it. They’re extremely unlikely to encounter it from any other product, service or experience provider.[vi] I wager they struggle each month with your invoices, I know some of ours occasionally do. The last thing you want to do is introduce even more complexity into their monthly calculus. Check this out for some more demonstrative arithmetic:
Old budget = $1,000,000
New budget = $1,170,000
10% architectural fee should = $117,000
But for some reason still = $100,000
Architectural fee = 8.547%
Keep it simple, it’s better for everyone.
So where does this leave us folks?
Your costs are going up left, right and centre. The risks you’re shouldering are mounting. The services expected of you are expanding. All these boil down to the same thing: it’s more expensive than it has ever been to run your business. Fortunately, your client architect agreements are legally binding documents that tie your fees to a construction industry in inflation-mode. If you handle your clients with care and sensitivity, they provide a pathway to adjust your fees upwards to cover your costs, keep you in the black, and maybe – just maybe – get you to that beach in Sicily.
This article was originally commissioned by the NSW Chapter of the Australian Institue of Architects for Volume 79 of Architecture Bulletin: Practice and Materiality. See pages 40-41.
Footnotes:
[i] Input to the house construction industry; Australian Bureau of Statistics; June 2022.
[ii] Consumer price index; Australian Bureau of Statistics; June 2022.
[iii] 2022 Annual Salary Report; Dr. Soha Matour and Associate Professor Lindy Osbourne Burton; Association of Consulting Architects; 2022; page 8. Note that annual inflation at the time was a paltry 3%, but still.
[iv] Email correspondence with Molly McCloy of Bespoke Careers; September 2022.
[v] Email correspondence with Vincent Rizzuto of Austbrokers Countrywide; August 2022.
[vi] Real estate agents do use percentage fees I suppose, but these are for a single transaction and famously don’t change a bunch of times during a multi-year project.
Image:
- Bank robbery; The Untold Story of The Architect Who Became The Greatest Bank Robber In History; Ranker; 2017.
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