Fees as percentage of construction cost

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    Wendy Dyba (Edited )

    How does it work if the contingency stays the same but the construction fee changes?

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    Kurt Fanderclai (Edited )

    Sarah and Wendy:

    There may be several questions at once in this thread.  One of them seems to be how you set a contingency amount -- and there is no set rule for this.  So that part, as far as it goes, would have to be a given in a question -- it could be a flat number or a percentage.  If the scope increases or decreases, it would typically make sense to increase or decrease the contingency proportionately.  A contingency can typically go from 2 - 10 % in commercial, and you will see 5% quite a bit.  Usually also determined by whether it's new construction, and addition, or a remodel, as well as how complex the project is. 

    There are several types of contingencies, as has been mentioned.  Even within construction contingencies, you might have some variations, such as a Contractor-managed contingency, or an Owner-managed contingency.  Both would still be added as a line item in the budget.  Owner-managed contingencies are often used as a planned-for fund to pay for change orders and unforeseeables -- this often makes life easier when dealing with, say, a school board so the administrators don't need to go back to the board for more money for every single change.   

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    As far as what I think was Sarah's original question goes, which was:

    If an architect is basing his fee on percentage of construction cost, does that percentage include the amount for contingency?

    I've had this question as well -- Sarah, check my reasoning:

    In practice -- where firms often handle procedures completely wrong -- I know that both happen.  I've seen the construction contingencies added to the total Construction Costs, and then the fee percentage taken as a function of that total -- and I've seen the fee calculated from just the Construction Costs only, without adding the contingency.  Again, never go completely by tradition in practice or anecdotes.  So, the question is -- which is correct?

    B101-2007: 

     

    This seems to get a bit closer, and I don't think it could be justified to add the contingency to the construction costs.

     Also, from a "logical extreme" bit of reasoning, since the contingency is essentially an arbitrary amount, it would be conceivable to add a disproportionately and unreasonably high contingency to the project.  In which case, if the architect were basing his/her fee on including the contingency in the construction costs, then the architect could likely be collecting fee on the big contingency, but may have have performed no service for that inflated portion of the fee.

    Sarah and Wendy -- that's where I'm at on this -- you? 

     

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    HANNA KISIALEVA

    I found this acticle helpful. It talks about AIA 2017 documents though. Apparently, the calculation of architect’s fees as a percentage of construction cost was an issue before, that 2017 documents attempt to resolve. https://www.bdlfirm.com/architects-compensation-based-on-a-percentage-basis-the-new-aia-documents/

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    Wendy Dyba

    For me the question is about construction contingencies. I believe they are immaterial to the architect (in terms of determining cost) because they are "emergency" type funds set aside by GC (on their end).

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    Wendy Dyba

    I just took the test and I wondered about this, too. I will let you know if I find it. Hopefully someone might know.

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    Justin Teufel

    I believe so - this is from my AHPP notes:

    Steps to Top Down (Percentage of Construction): Construction Budget: 10,000,000, Gross fee is 7%: 700,000$, Subtract 40% for Consultant Fees to get Net Service Revenue: 420,000$. Subtract 5% for Contingency and 5% for Direct Expense Budget to get Project Labor Budget: 378,000$

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    Sarah Scott

    This is what I'd like to know as well.

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    Justin Teufel

    Apologies I thought you meant design contingency.

    I thought construction contingency is usually included the total cost  - so I would assume yes. I'm taking the test next week so I'll do more digging. Also, isn't contingency usually a percentage so wouldn't the 25K be adjusted with the scope?

    Maybe someone else can chime in. 

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    Sarah Scott

    This is exactly why I'm confused.  In my experience, it almost is always based on a percentage, but I'm confused as to whether or not we're supposed to assume this is the case if it doesn't explicitly say in a question format...

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    Wendy Dyba

    Page 705 of the AHPP (15th edition) simply states that the construction contingency is included in the bid to ensure they won't lose money. It states nothing about being a percentage (unlike design contingency).

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    Justin Teufel

    You should read the Cost Estimating Chapter in Brightwood - it says standard practice for contingency it 5 to 10% of construction cost. I haven't read anything in the AHPP (yet) that goes into construction cost estimating in depth. 

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    David Pindell

    With regard to the original question does the scope of work change after the Owner and Architect have a signed contract?

    -Thanks

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    Sarah Scott

    In my experience, it's common for the scope to change after the contract is signed... (But maybe I've just had some particularly... different... clients.) This scope change would be reflected in a change order/added service, though, and the fee would be adjusted accordingly. ... Right?

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    Wendy Dyba

    The problem with these tests is that at times, we can't rely on experience. We have to approach these questions in a black and white AIA world. The question I had, which might be different from the original question here, is if you are working on a percentage of the construction fee and during construction, the construction cost changes, does your fee change? I think yes. The crux of the issue, for me, is the construction contingency. How does this affect the cost of construction?

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    Justin Teufel

    Did it say anything on what the Owner - Contractor agreement was? Like was is Stipulated Sum or Cost of Work Plus Fee with GMP?

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    Wendy Dyba (Edited )

    I am concerned to have an issue with NCARB not wanting us to discuss test questions. I am not sure how much in depth we can go.

     

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    Kurt Fanderclai

    Sarah's original question: "If an architect is basing his fee on percentage of construction cost, does that percentage include the amount for contingency?"

    I would actually like to get NCARB's take on this.

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    Justin Teufel (Edited )

    Here's my best guess on how to approach it:

    If the change happens during construction, and the Owner - Contractor Agreement  is Stipulated Sum - I'd include the contingency in the cost because the client will be billed for the contingency regardless if it's used or not. 

    If the change happens during construction, and the Owner - Contractor Agreement  is Cost plus work with GMP - I wouldn't include the contingency because the client isn't guaranteed to get billed that amount. 

     

     

     

     

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    Justin Teufel

    Also see this article that touches on the subject:

    https://www.constructionspecifier.com/determining-cost-of-construction-in-the-absence-of-construction/

    note in the commentary where is says "When final completion is achieved, the cost will be the total cost paid by the owner for the work"

    It would be nice to get NCARB's input though. 

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    Sarah Stumpo

    Did anyone end up determining what they think the answer is? I'm a bit confused on contingency in general and could use an explanation if anyone is willing to share their thoughts!

    My immediate thought to answer the original question would be no because construction contingency is different than design contingency that is used to calculate the design fee. Or am I wrong? 

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    William May

    Would this be 2 separate considerations?

    The architect bases a fee, say 7%, on the Estimated Construction Cost - $1,000,000 @ 7% = $70,000.

    The Contingency fee is a set fee: $25,000.

    The scope changes.  The architect now sees that the Estimated Construction Cost to be $843,622.  Fee is now $59,054 rounded.

    The Contingency fee is not affected, it remains at $25,000.

    I had a client for a new home.  My fee, 3%, was going to be based on the average Estimated Construction Cost.

    My Contingency fee was set at $5,000.

    The Average Estimated Construction Cost was $637,400 with consideration of the scope.  My fee was $19,122

    Two weeks after we got moving the client asked for a change in the scope to include a pool and pool house.

    I had the contractor do an updated ECC.  We added an additional $121,000 for the pool and pool house.  My fee was adjusted for the new pool and pool house.

    The contingency was kept at $5,000.

    Without context of the actual question, almost any answer is possible is it not?

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    William May

    I would agree.  Contingency fees suggest that one expects there to be problems otherwise why have it in the contract.  And, how does one arrive at a price for a contingency?  If it based off of the ECC, what does than do for the client, architect or GC?  It seems that Change Orders would cover issues.

    I put a contingency into a project one time.  I'll never do it again.  It has no purpose.  Maybe someone can help me see a different situation to use one.

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    Morgan Brown

    NCARB - Can you provide any guidance on this question:

     

    If an architect is basing his fee on percentage of construction cost, does that percentage include the amount for contingency?

     

    Thank you!

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    Raphael Arsenian

    I am not sure whether anybody is following this tread but here are my two cents:

    Architectural fee is based on a percentage of the Cost of Work (which, as Kurt pointed out, excludes any contingencies). If the Contractor included contingencies in their cost estimate than that money is part of the Cost of Work. If, at the end of the project this contingency is not spent, the Cost of Work will be modified by a Change Order to be credited to the Owner.

    If the Owner carries contingencies, this amount is part of their Budget, not the Cost of Work. It helps to pay for Change Orders. If any of these change orders are due to scope added or unforeseen conditions, the Architect will get their fee adjusted at the end of the project - in my experience a very painful process. That is why AHPP keeps reminding us to document each reason for a change order.

    Design contingency is a very different animal - it is added to a Cost Estimate when not all of the design decisions have been made and we usually want to see 5% to 15% of the cost estimate, depending on the design phase during which the cost estimate was made.

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    xixiao zhang

    This is a very late reply. But I found this article very helpful...

    https://www.aia.org/articles/202726-calculating-the-architects-fee-is-there-a-b

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    Kelly Duignan (Edited )

    Thanks everyone for the helpful links!  I was wondering if anyone was still following this question, and has taken the new 2017 documents into account for this question.  The AIA article that Xixiao posted states that "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.”"

    • To reference B101-2017, Section 11.6: When compensation identified in Section 11.1 is on a percentage basis, progress payments for each phase of Basic Services shall be calculated by multiplying the percentages identified in this Article by the Owner’s most recent budget for the Cost of the Work. Compensation paid in previous progress payments shall not be adjusted based on subsequent updates to the Owner’s budget for the Cost of the Work.

    Unfortunately the article does not mention contingency, but if we are to understand that contingencies are for "known unknowns", will be spent at some point and are included in cost estimates, it seems like yes, then an Architect would include that amount for contingency in their fee if they are using a percentage of the owner's budget for the cost of the work. 

    • B101-2017, Section 11.6.1: When compensation is on a percentage basis and any portions of the Project are deleted or otherwise not constructed, compensation for those portions of the Project shall be payable to the extent services are performed on those portions. The Architect shall be entitled to compensation in accordance with this Agreement for all services performed whether or not the Construction Phase is commenced.

    So it seems like this is saying that the Architect would receive payment for parts of the project that they worked on drawings even if it did not get physically built.  How would this relate to contingency?  If contingency is a hold or allowance for a certain amount of money, but that amount of money does not end up getting applied to anything or used to design anything, then the Architect would not have worked on it and would have nothing to bill?

    Alternately, if the contingency is not enough and the cost of the work is more than the original estimate, therefore increasing the Architect's fee, can they bill for more money?

    I really wish NCARB would be able to comment on this to provide some clarity.

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