So, you have decided that you need to renovate your office space, now what? There are certainly several factors to consider but the important team members that will need to lead you through the process will be your design team. While the cost of these services will be significantly less than the direct costs of construction, it is important to understand the soft costs that will need to be incorporated into the overall program budget. Here we will take a look at how those fees are established and help clarify how the fees are structured.
Before we dive into specific fee structures, it is important for an owner to provide a clear scope and define an engagement process that will align the right design team with the project. While ground-up construction can be more complex, workplace design carries its own challenges with programming and change management. Depending on the degree to which a project may need this service, it can significantly impact the overall design approach and fee.
First Step: Clarify Scope to get the Most Accurate Fee
To understand the structure of design fees we first must need to demystify the structure of the design process and the language that designers use to describe the parts of the process. The design process is a unique journey that has two main points: the analytical understanding of a project’s parameters and combining these parameters into a complete design. There are (5) standard services design phases in a project that define milestones along the path of a successful design. These follow each other in a linear path and at each phase the owner and design team formally acknowledge the phase is complete and move to the next step in the design process.
Programming or Pre-Design
This phase is not always required on every project or for every owner and therefore is not one of the (5) standard services. This is an informational gathering phase to review as much information about the owner’s goals and the project requirements. This can take many different forms depending on the project; however, the design team will ultimately need the building programming. Building programming is the analytical understanding part of the design process that lays out the needs of the owner. The program consists of the distinct pieces of the project and their required relationships. An example in an office renovation project could describe that the owner needs (5) private offices on the 2nd floor and the CEO’s office needs a direct entrance to the conference room. The reason this is not part of the (5) standard services design phases, in some cases the owner or their forces will provide this information.
Schematic Design (SD)
In this phase, the design team begins the process of synthesizing the program into design concepts. The initial concepts are broad and involve multiple options and organization schemes. These schemes are reviewed by the design team and owner to define fundamental design concepts. By the close of schematic design, the size, scale, scope, and interrelationships of the project have been generally determined.
Design Development
During this phase, the synthesis of the design concepts becomes more focused and less global. By the close of the design development phase, the project has progressed to the point where major changes in the design are unlikely. The drawings are refined with key details developed, and coordination of all of the design team consultants’ work and materials are selected.
Construction Documents
This phase is the highest level of design refinement. All drawings are refined to develop the final construction-ready documents by the end of this phase. The documentation in this phase includes drawings, key details, reference documents, and technical specifications.
Bidding and Negotiation
Some owners may have a contractor already in mind for the project, and as such this phase is not in all projects. If there is not a contractor on board, the design team will work on the owner’s behalf to issue the Construction Documents to potential contractors. The design team will answer any questions from these contactors as well and issue any clarifications or modifications to the construction drawings. And finally, the design team will help advise the owner on the bids received.
Construction Administration
During construction, the design team will act as an advisor to the owner, visit the construction site, and answer any questions that arise. It is common during this phase for design to continue with any unforeseen circumstances that arise, or owner requested changes. This phase also includes checking the construction progress for conformance to design.
The Design Selection Process
Having a good understanding of the design process and the project's potential scope will be beneficial when it comes time to solicit services. There are several methods by which one can select a design team, and each carries its own set of advantages. We will discuss what we see as some of the most common methods.
RFQ (Request for Qualifications)
An owner can advertise for services with a request for qualifications. With this method, design firms are generally asked to submit references, similar projects, and often times answer questions that are specific to the project's scope. If there are still some unknowns in the final scope of the project or if the is potential for additional services, this can be a great way to align with a firm that meets the criteria for the desired outcome of the project. We have found that it is important for the owner to have a clear understanding of what they view as the most valuable attributes for the design team and create a matrix or selection process that allows them to compare the qualified firms objectively. Once a firm is selected the final fee structure can be negotiated, or there is even a potential for the fee to be advertised within the initial RFQ.
RFP (Request for Proposal)
The request for proposal can ask for many of the same qualifiers as the RFQ; however, the differentiator here is that an actual fee is being proposed by the design team. In this instance, it is very important for the RFP to be well written and the scope to be clearly defined. While it can certainly be monetarily advantageous for an owner to select the lowest cost option if there were scope gaps in the initial RFP or undefined program the selected firm will often need to make an additional services request. We also feel that this selection methodology should still weigh the qualifications alongside the fees to be sure that the correct team is selected to execute the design.
Direct Award
Our favorite! In all seriousness, there are great examples of when direct awarding is the best solution for an owner. There are significant time savings by being able to reach out directly to a design firm and move the contracting process quickly. This tends to most often be leveraged with owners and firms who have worked together repeatedly. In those cases, the owner understands who their team members are, the quality of work being provided, and has a general feel for how the fee structure will work. The design team also has a working knowledge of the project type and understands how the decision-making and approval process will work on the project. The efficiencies that are gained in these scenarios are often recognized through fees that are better aligned with scope and a more productive schedule.
Definition of Fee Structures
Design fee structures generally fall into (4) categories: Hourly Not-To-Exceed (NTE), Percent of Construction Cost, Unit Cost, and Stipulated Sum. Each design fee structure has pros and cons for both the owner and the design team. Some projects also may use more than one fee structure or contract during the life of the design. The different fee structures also require more advanced effort from the owner prior to the start of design.
Hourly, Not-To-Exceed (NTE)
Hourly compensation is simply invoicing for every hour that the design team works on the project. This is when designers and Architects bill like lawyers. Hourly rates can vary widely from $40-70 for an entry-level staffer to $200 or more for a principal. Hourly compensation is especially useful when the scope of the project is not yet known or when the owner makes a lot of changes to the design or scope of the project. Services such as developing a preliminary design or programming (when not provided by the owner) are examples of when this structure could be beneficial. Setting an amount as NTE will limit the exposure of the owner to not entering into an open-ended agreement with the design team. Any expenses related to this work that is incurred by the design team are typically passed on to the owner with markup. Expenses could include travel, printing, and any consultant fees. Expenses are typically marked up by the design team at 10% or more. When a project uses an hourly fee structure to complete pre-design phase work the project can be converted to a different fee structure when the scope of the project is determined.
Percent of Construction Cost
There is often a direct relationship between the design fees and the probable construction costs. The size, complexity, and detail level of the projects allow for these percentages to vary. However, can be as low as 2-3% for simpler projects and up to 15% for very detailed and complex projects. There is also an economy of scale that sees fees go down as construction costs increase. When design fees are based on the construction cost, they often include any of the design consultants (Civil Engineers, Structural Engineers, etc.). Billing to the owner will typically happen at the end of a design phase or on a timely basis. When the cost of construction is known at these times the fee can be adjusted up or down. Previous payments are not adjusted at this time. There is a risk for both the owner and designers based on the volatility of the construction market. Owners may feel that the design team is less inclined to use more economical materials and methods to drive up their own fees. When starting a project with a percentage fee the owner has more work to do prior to hiring the design team. This type of work might require the owner to hire an Owner’s Representative or other professional prior to the start of the project. The owner will also need to have a clearly defined scope of work for the project for the initial estimate to avoid design change orders after the project has begun.
Unit Cost/Cost Per Square Foot
Design fees that are calculated in this manner are as you would expect, a unit cost is defined by something measurable or quantifiable. Examples could be renovation areas or the number of workstations in an open office. There are services and project types that lend themselves to a Unit Cost Fee. These types of projects tend to be interior tenant improvements projects and require the owner to have a clearly defined scope for the project. For example, an office renovation for an owner that has standards for the products to be used such as carpet or furniture. For owners who frequently work with the same design team, rapport, and expectations may develop to allow for clear expectations from the design. In the case of a restaurant or car dealership that is expanding and repeating the owner and design team will have clear expectations from the previous projects. This type of project requires the owner to fully outline the scope of the project and expectations prior to contracting with a designer. Unit cost can also be used in conjunction with other design fee structures to add specific scopes of work to the project. An owner may contract with an architect for the design of a strip center, and then add the design of a white-box tenant space once a lease is signed. The strip center could be contracted under the percentage of construction, and separately work on a cost per square foot for the tenant fit-out.
Stipulated Sum
A Stipulated Sum is a fancy way of saying fixed fee. This fee structure is most successful when the design team is familiar with the client, local jurisdiction, project delivery methods, and the owner has a fully defined scope of work. Owners will appreciate the fact that costs are known and can be budgeted accurately prior to starting the design process. The fixed fee is a risk-reward for the design team. If they can complete the work in less time there can be increased profits, however, if they take more time and the scope does not change – there will be no increase in fee. Designers will propose their fee based on the anticipated number of hours of work, or historical fees, or by starting with a percentage of construction costs. Stipulated sum design fees require the most upfront work from the owner. All aspects of the project will need to be clearly defined and provided to the design team. Any changes in the scope of work will result in changes to the design fee. Stipulated sum design fees are typically used in public works projects. This allows the government or university to advertise for design teams with a clearly defined budget. The fee is typically defined by a percentage of an anticipated construction cost. For these types of projects, the owner will typically engage an Owner’s Rep to define the project scope, schedule, cost estimate, and probable construction cost prior to advertising for a design team. Once they have completed the probable construction cost, they will assign a percentage fee similar to the percent of the construction cost model. However, this fee is not re-evaluated and remains fixed for the project.
Contracting and Payment
Contracting could be its own book, however, it is worth mentioning a few options here that owners may have. With many corporate office users that frequently update their workspace, it is fairly typical for a master services agreement (MSA) to be executed. Then, orders can be created against that MSA as the design team is engaged. For individual engagements, it is advisable for the owner and the designer to establish terms and conditions. Most design teams will have their own, and it is standard practice for the owner to have their legal counsel review. The AIA (American Institute of Architects) has several widely recognized prepopulated contract agreements that work well as a starting point and have various options available depending on the size of the project or type of engagement. ConsensusDocs is another series of contract agreements that have become popular in recent years offering similar options to the AIA document series.
Finally, we come to the payment. For your design, the billings often reflect what phase of the project you are in. When budgeting it is important to know that this is often not done in a flat line. Each phase requires varying amounts of effort and therefore the billing phases reflect that. Your design team should be able to share a billing schedule that would clarify approximate amounts and when they would be billed during the project.