NCARB Practice test Q#7
An architecture firm is awarded a project for an addition to an elementary school. Project details follow:
- Negotiated fee percentage: 5%
- Construction budget: $5,000,000
- Gross fee profit: 10%
- Consultant expenses: 35%
The firm now wants to manage the available architectural fee with the hours required to complete the project.
What is the value of the fee the architect should use in planning these hours?
| A. | $137,500 |
| B. | $146,250 |
| C. | $162,500 |
| D. | $187,500 |
CORRECT RESPONSE
$137,500
CALCULATIONS
1. $5,000,000 (construction budget) x 0.05 (negotiated fee percentage) = $250,000 (negotiated fee)
2. 0.35 (consultant expenses percentage) x $250,000 (negotiated fee) = $87,500 (consultant expenses)
3. $250,000 (negotiated fee) - $87,500 (consultant expenses) = $162,500
4. 0.10 (gross fee profit percentage) x $250,000 (negotiated fee) = $25,000 (target profit)
5. $162,500 - $25,000 = $137,500 (available architectural fee)
I don't understand the Architecture fee deducted from the profit % here. I included and added the profit% for the Architecture fee.. this question is very unclear, they don't give any information about the Contractor and only the contractor and Architects used to add a %of the profit fee for their services, we never had any case if the consultant take %profit fee they might count for that but it should be included in consultant fee.. I am just not sure who gets
%Gross Fee profit in this question if not Architect. I believe we need to add on the % Profit fee for architects' fees.
Please NCARB can you explain this answer a bit more? why we deducted profit from Architect's fee instead of adding it on? thanks
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So, the Architecture Firm has to pay their staff, bills, rent etc. The majority of the money the firm makes goes to the direct and indirect salaries. The question states that 5% of the gross fee is the firm's profit, the rest of the money that is earned from the job goes to bills and that is what they were asking.
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It's simplest to think of this question with the following equation:
Project Budget (billable time) = Gross Fee - Consultants' Fee - Target Profit %
If you were to add profit in this equation, you'd not only be eliminating your firm's profit percentage, but also allocating more labor hours to the project than you're being compensated for overall.
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The available architectural fee is the billable rate, isn’t it? The billable rate accounts for profit, so why is the profit subtracted in this question? I am reading AHPP and cannot find an answer.
negotiated fee - consultant expenses - target profit = available architectural fee
I think it is incorrect and NCARB made a mistake here.
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I think the gross profit fee must have taken from 162,500 after taking out consultant fee whatever is remaining is gross revenue for the architect , so after taking out the profit fee from that then whatever remained it will be architects fee. The confusion here is why take out profit fee from the main part , it almost looks like took out profit for both arch and consultant portion all together.
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You have a markup on the consultants' fees for the required coordination work. If you calculate gross profit only from the net architectural fee, the figures in your Balance Sheet and Income Statement will be incorrect, and therefore your financial KPIs. Therefore, you need to strip the gross profit from the negotiated fee.
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poshya,
I originally saw it the same way, but then I realized the whole negotiated fee is considered the architect’s contractual fee. They just happened to hire outside consultants, but those consultants could also be in-house staff, and then it would simply be another staffing expense within the firm. So NCARB is likely treating it as one architectural fee that the architect decides how to allocate: first reserve the target profit, then pay consultants and other project expenses. In this case, consultants are treated more like a billable expense under the architect’s contract with the owner, not as a separate fee with their own profit structure. That’s probably why the profit is calculated from the whole negotiated architectural fee.
However, that still does not justify subtracting profit when calculating the hours required to complete the project. Net multiplier accounts for profit.
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LeventK
Do you think the $137,500 shown as the correct answer is supposed to represent direct labor only?
If Profit is already subtracted to get that number, then where does overhead go?
What are the billable rate and net multiplier used for? (if not for planning hours as you suggest)The Architect's Handbook of Professional Practice, 15th Edition, page 1119:Billing rate: The price per unit of time (hour, day, week) for staff (principal or employee) billed to a client for work under a contract for a project. -
InnaL,
The contract fee in question is on a Percentage Basis as per B101-2017 - Article 11 Compensation; hence, it's a "percentage of the Owner's budget for the Cost of the Work", including the parties' targeted profits, required fees/overheads/expenses for coordination of the services, the Architect's and Consultants' Basic Services fees.
Consultants' service fees already include their own profit/overhead/markup. The targeted profit (Gross Profit) here is not an actual business/company profit, as you may recall from the percentage amount (10%), but the percentage for the fees, overheads, and expenses required for the coordination of the Consultants' services. Despite the name of "Gross Profit", this amount is generally recorded as a liability item in the financial tables, because it's mostly overhead, expense, or indirect labor. The Architect's Basic Services fee includes direct and indirect labor costs, overheads, and a targeted company profit, which is - as you already mentioned and referenced here - calculated by taking the sum of (Employee Direct Labor Hours x Hourly Rate x Net Multiplier) or (Employee Direct Labor Hours x Billing Rate).
By applying respective percentages for the Architect (65%) and the Consultants (35%) to the negotiated fee (Owner's Budget x 5%), we calculate the "profited" or "marked-up" amounts for the scope of their Basic Services.
- Consultants' Net Fee: ($5,000,000 x 5%) x 35% = $87,500
- Architect's Gross Fee: ($5,000,000 x 5%) x 65% = $162,500
- Gross Profit: ($5,000,000 x 5%) x 10% = $25,000 (Architect's coordination fee)
- Architect's Net Fee (Design, Bidding & CA): $162,500 - $25,000 = $137,500
Without stripping the gross profit from the negotiated fee, the financial figures in the Balance Sheet and the Income Statement will reflect incorrect amounts, as you would otherwise be recording the coordination costs as a revenue/asset item, even though they are a liability. The calculated $137,500 fee is the Total Labor amount, including Direct Labor, Indirect Labor, Indirect/Overhead Expenses, and a targeted reasonable company profit.
Even more basically;
Consultants' % + Gross Profit % = 35% + 10% = 45%Architect's % = 100% - 45% = 55%
Architect's Fee = Negotiated Fee x Architect's % = $250,000 x 55% = $137,500
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InnaL,
I should acknowledge that my earlier comment brought in some real-world practice assumptions. With more than 30 years of practice experience, this sometimes catches me out, and I find myself drifting outside the exam context and evaluating questions through real-world experience. Yes, in actual practice, I would not call the 10% the architect’s entire business profit, because both the architect’s internal fee and the consultants’ fees already include overhead and profit. A separate percentage above consultant costs often functions as consultant coordination markup, administrative burden, risk allowance, etc.
I agree that the NCARB/ARE terminology is a bit awkward sometimes; however, for this NCARB question, the label “gross fee profit” should be treated exactly as given: a target amount reserved from the total negotiated fee before calculating the amount available for architectural hours. In other words, NCARB is not asking how the firm builds its billing rates. It asks how much of the already-negotiated fee remains available to plan architectural hours after reserving consultants and target profit.
Hence, the calculation is easy in that aspect:
- Consultants' % + Gross Profit % = 35% + 10% = 45%
- Architect's Available % = 100% - 45% = 55%
- Architect's Available Fee = Negotiated Fee x Architect's Available % = $250,000 x 55% = $137,500
or
- Architect's Available Fee = Negotiated Fee - Consultant's Fee - Gross Profit = $250,000 - $87,500 - $25,000 = $137,500
Hope I'm clearer now.
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