Compensation: Percentage of Construction Cost?

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    Michael Ermann

    These are great questions, Angelo. . . My response is in CAPS

    Hi all, I'm incredibly confused when it comes to architects being compensated as a Percentage of Construction Cost. Hoping somebody can shed some light before my exam next week.

    Question 1: An architect is getting paid 10% of a construction cost of $1M. The project actually costs $1.5M to build, is the architect's fee $100K or $150K? 

    THE ARCHITECT'S FEE IS 150K.

    Question 2: Assuming 10% fee for the architect again, what if the project is bid at $1M and the lowest bid comes in at $2M? Is the architect's fee $100K or $200K?

    THE OWNER WOULD HAVE THE OPTION TO EITHER HAVE THE ARCHITECT REDESIGN TO MEET THE $1M BUDGET FOR FREE, OR MOVE FORWARD WITH THE $2M BUILDING. IF THE OWNER CHOSE TO MOVE FORWARD WITH THE $2M BUILDING, THEY WOULD BE PAID A $200,000 FEE.

    What if the bid also has a contingency of $100K so it comes in at $2.1M? Would the architect get paid $210K or is contingency not included?

    IT DEPENDS IF THE CONTINGENCY IS USED. THE "COST OF THE WORK" MOVES UP AND DOWN THROUGHOUT THE PROJECT (OKAY, IT ALMOST ALWAYS MOVES UP AND ALMOST NEVER MOVES DOWN IN PRACTICE) . . . ARCHITECT IF THE CONTINGENCY IS NOT USED, THE ARCHITECT WOULD BE PAID 200K; IF 50K OF THE CONTINGENCY IS REQUIRED; THE ARCHITECT WOULD BE PAID 205K; IF ALL OF THE CONTINGENCY IS REQUIRED, THE ARCHITECT WILL BE PAID 210K; AND IF THE PROJECT GOES WAY OVER BUDGET, THE ARCHITECT WILL BE PAID EVEN MORE.

    Question 3: Is there a difference between "% of Construction Cost" and "% of Cost of the Work"?

    "COST OF THE WORK" IS THE CURRENT TERM IN THE CONTRACTS. % OF CONSTRUCTION COST MAY BE EITHER AN OLD TERM OR ONE THAT PEOPLE USE COLLOQUIALLY. THE COST OF THE WORK INCLUDES ALL THE MONEY IT TAKES TO BUILD THE PROJECT, INCLUSIVE OF CONTRACTOR PROFIT; IT DOESN'T INCLUDE DESIGN FEES, LEGAL FEES, OR THE COST OF ACQUIRING THE LAND 

    In AHPP, p.966, they state that, "When the cost of construction is known, fees are adjusted up and down. The risk in fee based on % of construction cost is volatility of construction cost."

    HOPEFULLY THE MEANING OF THAT SENTENCE IS CLEAR TO YOU NOW. THE AMOUNT THAT THE ARCHITECT IS DUE IS ADJUSTED AS THE COST OF CONSTRUCTION IS ADJUSTED.

    Schiff-Hardin, in his lecture https://youtu.be/gDNRGtq0Hp8?si=MuCGYju6iKljAEG7&t=7293, at around 2:01:30, he states that per B101 11.1.2, if an architect's fee is 10% of the cost of the work and the cost of a house is originally $1m to build but actually costs $1.5m, then the fee goes from $100K to $150K.

    EXACTLY. SEE ABOVE.

    However, B101 11.1.2 states, "% of the owner's budget for the cost of the work." So, if their budget is $1m and the architect gets paid 10%, I perceive this to mean the architect gets paid 10% of the initially agreed-upon budget, regardless of where the project cost lands. I feel as though this AIA link https://www.aia.org/resource-center/calculating-the-architects-fee-is-there-a-better-way corroborates that by saying, "The percentage- based compensation is defined as a 'percentage of the owner’s budget for the cost of the work' rather than as a 'percentage of the cost of the work'.”

    YES THIS IS CONFUSING, BUT IT IS NOT A CONFLICT. THE BUDGET DOES NOT MEAN THE INITIAL BUDGET BUT RATHER HOW MUCH THE BUILDING ACTUALLY COSTS OR WOULD HAVE COSTED IF THE CHURCH DIDN'T HAVE VOLUNTEER LABOR BUILDING IT AND A PARISHIONER WHO HAPPENS TO OWN A LUMBER YARD WHO DONATED MATERIALS. THE WORD BUDGET IS FAIRLY NEW IN THESE AGREEMENTS AND IS INTENDED TO PROTECT THE ARCHITECT FROM DONATED LABOR, DONATED MATERIALS, OR SIMILAR BACKDOOR UNFORESEEN WAY OF REDUCING THE ACTUAL COST WITHOUT CHANGING WHAT THE BUILDING WOULD HAVE COST.

    And in reviewing Amberbook's PcM practice exam, one question states that if a bid comes in higher than the agreed-upon percentage sum, the architect is out of luck in getting more money.

    IF I PUT THAT IN THERE, AND YOU KNOW WHERE IN THE COURSE, LET ME KNOW AND I'LL CORRECT IT. IT IS LIKELY THAT I WAS TALKING ABOUT THE ARCHITECT OUT OF LUCK BECAUSE SHE HAS TO REDESIGN TO MEET THE BUDGET FOR FREE (NOT THAT SHE WOULDN'T BE PAID A HIGHER FEE BECAUSE THE COST OF THE WORK CREPT UUP).

     

    The very next question then states that "Percentage of Construction Costs" gives great flexibility for fees to grow or shrink with scope.

    I'm definitely missing, misinterpreting, or not grasping what I'm reading correctly. I feel like some of these things agree that the fee changes with construction cost and some do not. Any help would be greatly appreciated, thank you!

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    Angelo Capobianco

    Michael, this is incredibly helpful! Thank you for taking the time to read through my whole post and give commentary. I think I was getting hung up on the various ways of phrasing I was seeing for % construction cost/cost of work/budget.

    The Amberbook questions I'm referencing are #s 47 and 48 on the PcM practice exam. I feel like the Feedback/Answers for both seem to conflict. Poshya, under the "Discussions" tab for the exam also had a similar question that went unanswered.

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    Michael Ermann

    Angelo, your questions inspired me to add the following test item to the Amber Book PcM Practice Exam 

    . . . thought you might like a peek. . .

     

    An architect signs a standard contract to build a non-profit building to house refugees with a fee set at 10%of construction cost. In each case, below, for how much does the architect invoice the client? Drag the dollar amount to the box next to each scenario. Not all dollar amounts will be utilized.

     

    Numbers to be dragged. . .

     

    $90,000

    $100,000

    $110,000

    $120,000

    $130,000

     

     

    The budget is set at $1M. The low bid comes in at $1.2M and the owner agrees to the new budget. $100,000 is set aside as contingency but is not used.

     

    The budget is set at $1M. The low bid comes in at $1.2M and the owner asks the architect to redesign to meet budget. The agreed-upon cost for additional architectural services is $200/hr and the redesign requires 500 hours. The new bid comes in at $1M and the project goes forward. Change orders total $100,000 for additional labor plus $100,000 for additional materials plus $100,000 for additional contractor profit.

     

    The budget is set at $1M. The low bid comes in at $1M but the final cost is reduced to $900,000 because the owner secures volunteer labor and donated materials.

     

    Scroll way down to see the answers

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    The budget is set at $1M. The low bid comes in at $1.2M and the owner agrees to the new budget. $100,000 is set aside as contingency but is not used.

    A: $120,000

     

    The budget is set at $1M. The low bid comes in at $1.2M and the owner asks the architect to redesign to meet budget. The agreed-upon cost for additional architectural services is $200/hr and the redesign requires 500 hours. The new bid comes in at $1M and the project goes forward. Change orders total $100,000 for additional labor plus $100,000 for additional materials plus $100,000 for additional contractor profit.

    A: $130,000

     

    The budget is set at $1M. The low bid comes in at $1M but the final cost is reduced to $900,000 because the owner secures volunteer labor and donated materials.

    A: $100,000

     

     

    Feedback:

    The “cost of the work,” which is what the architect’s fee is based on, includes the final cost of construction. It really has nothing to do with the initial budget so get the initial budget number out of your head.

    Cost of the work: includes change orders (because those are in the final cost of the construction)

    Cost of the work: includes contractor profit (because that is in the final cost of the construction)

    Cost of the work: does not include contingencies not used (because that is not in the final cost of construction). . . but does include contingencies used (because those are in the final cost of the construction).

    Cost of the work: does not include land acquisition costs or soft costs like legal, design, and engineering fees.

    The architect’s fees can’t be reduced by volunteer labor or donated materials; that wouldn’t be fair to the architect.

    If the bid comes in above budget, the owner can have the architect redesign to budget (fee free) or accept the higher cost and proceed with construction at the higher cost.

    What are examples of contingency costs? Weather delays, building material price fluctuations, labor strikes, and acts-of-God such as war, earthquakes, pandemics, or terrorists targeting the crane on your site.

    Why do we need to set aside contingencies ahead of time? Why not wait for the weather delay and only then find the money to fix it . . . since it’s such an unknown, why do we need to give it a dollar figure at the beginning? Remember that almost every building is financed by some kind of loan. Lenders know that a million-dollar project may have a weather delay and therefore lenders require the owner to set aside a “contingency” as a risk management measure. The bank doesn’t want the project to fail because of an unusually cold winter; owners of failed projects rarely make their loan payments to the bank!

     

    --Michael Ermann, Amber Book creator.

     

     

     

     

     

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    Angelo Capobianco

    That's awesome to hear! I'm also pleased to say I understand the topic enough now to answer the question above! Thanks for the thorough explanation. I appreciate the program you've put together and the dedication you have towards teaching it. I'm sure this question will clear up a lot of confusion around this topic for other folks too.

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    Jacob Lebowitz

    Thank you for these explanations,

    I have one question why is this answer below 130k? Isn't the architect required to redesign for free in order to meet the budget?

    The budget is set at $1M. The low bid comes in at $1.2M and the owner asks the architect to redesign to meet budget. The agreed-upon cost for additional architectural services is $200/hr and the redesign requires 500 hours. The new bid comes in at $1M and the project goes forward. Change orders total $100,000 for additional labor plus $100,000 for additional materials plus $100,000 for additional contractor profit.

    A: $130,000

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    Michael Ermann

    Architect redesigned to the million dollar budget for free….but there were 300,000 in change orders that added to the cost of the work ….the budget moves during construction and the architect is entitled to the new dollar amount.

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    Jacob Lebowitz

    Ohhh, got it. It was a bit confusing because the $200 x 500 hours is 100k which I thought it's the change order of additional hours. maybe you can change the amount of hours it should not be confusing.

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    Michael Ermann

    No that’s the point, the distractor choices…it’s a drag and drop and to get it right you have to know that the redesign is free but the overages (change orders, including contractor profit) impact the design fees. If the redesign cost 90,000 you’d know that it wasn’t in play because all the choices are multiples of 100,000

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    Katerina Buscemi

    Great response, Michael. I’m not sure whether we need to get this granular with the fees but I was wondering - assuming the architect bills monthly for design fees during the earlier phases of design development, would those final payment work retroactively to this earlier payments when the cost estimation was lower? Assuming during the SD phase, the budget was $1 million and the percentage was paid on that budget during SD but in later phases, or after construction, the total was 1.5 million. Is payment for earlier phases increased retroactively? Or does it continue to be 10% of whatever the budget was during that phase?

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    Eugene O'Callaghan

    Assuming the standard B101 fee structure of splitting it up by phase and billing throughout each phase by percentage complete then no, there's no retroactive additional billing for complete phases as the budget changes later on. Each phase is almost a mini-project on its own that gets closed off when the owner signs off the deliverables and the architect bills for it (based on the budget at the time).

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    Katerina Buscemi

    That makes sense - thank you!

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