Fee calculation

Fee calculation requires a method of analysing the cost of time, calculating the expenses of a business and determining minimum charge out rates for staff, all of which is necessary to determine the level of fee below which one cannot go without suffering a loss.

Salaries Overheads Profit Charge out rate Time records Historical records Charging unrealistic fees The legal status of fee scales

There are two things to be concerned about when quoting fees to clients. First, to be sure to quote fees which will enable a proper professional service to be provided and, cover all costs and make a reasonable profit . Second, to be sure that the level of fees quoted is consistent with the prevailing market. The key information required to accurately establish fees for architectural services are:

Accurate historical records of the cost to the practice to provide services for various types of project. A clear understanding of the scope of service required for the project. Realistic hourly rates for the staff to be used for the project. An appropriate margin for profit. An appreciation of the market conditions.

In order to run a business successfully, a practice must know how much it costs to do a job and receive a fee which covers the costs and achieves a profit. There are three basic requirements to run any business: time, people and money. People provide the skills and put in the time. Money is required to fund the business, to pay the people, to fund the expenses, to fund the equipment needed and to provide working capital. Money is derived from three possible sources:

from capital invested in the business by shareholders or principals of the practice, from income (in the case of an architects practice, fees) and capital obtained from borrowings.

~ Salaries
The costs of running an architectural practice consist of fixed and discretionary (controllable) overheads and technical and non-technical staff salaries.

Technical salaries
The term technical staff covers directors or principals who are involved in projects, along with staff architects, architectural assistants, drafting staff, specification writers, CAD operators and any others working directly on projects. It is important to include salaries for the directors or principals of the practice, set at a realistic level, commensurate with their expertise and experience, to enable accurate project costs to be established. As few technical staff will spend 100% of their time on project work, a record of the time spent working on projects should be maintained over the year by each director and technical staff member. See time records . In this way time spent working on project work can be accurately assigned to each project and time spent on non-project work can be assigned to overheads .

Non-technical staff
Non-technical staff include staff such as an office manager, secretary, receptionist, librarian or accountant. The cost of non-technical staff will generally be included in overheads however they should also maintain time records as they may also spend some of their time on project related work.

~ Overheads
Overheads are the non-project based costs of running a practice and include administrative staff costs, premises, office equipment, motor vehicles, insurance, printing and stationery, to name just a few. Overheads can be divided into five categories:

1. Non-project component of salaries (NP)

Non-project salaries are the salaries of non-technical staff, such as an office manager, secretary, receptionist, librarian or accountant. Where particular staff in this category are allocated to projects, they might be classed as technical staff and the project and non-project components calculated accordingly. The non-project components together with the total of the non-project salaries form the overheads under this heading.

If it is the office practice to charge-out some of the time of non-technical staff, then they should be treated the same way as technical staff.

2. Staff on-costs (SC)

Overheads include all staff on-costs such as payroll tax, superannuation, fringe benefits tax and other salary on-costs, if any. Some on-costs such as Payroll tax are state taxes and the rate may vary from state to state and is only payable where the total salaries exceed a regulated minimum. Workers compensation premiums are dealt with as part of fixed overheads (F).

3. Fixed overheads (F)

The fixed overheads are those over which one has little or no control on a weekly or monthly basis as they are fixed commitments. The following are examples of fixed overheads:

architects registration fee auditor bank charges bad debts depreciation filing fees (ASIC) insurances professional indemnity bank interest leasing equipment motor vehicles hire purchase equipment rent subscriptions

Additional or other cost centres of fixed overheads should be added if any are applicable. It would be prudent to follow the relevant cost centres set down by the firms accountant.

4. Non budget items (NB)

There will always be unforeseeable expenses that arise during the year. Some allowance should be made for such items, rather like a contingency sum.

5. Controllable overheads (C)

These are those over which one has some control on a fairly regular basis. The following are typical examples of controllable or variable overheads:

advertising cleaning computer expendables consultant fees couriers electricity entertainment (non tax deductible) legal expenses library expenses petty cash photography postage printing and stationery public relations, marketing professional development repairs and maintenance staff amenities subscriptions telephone/fax travel expenses vehicle expenses

Additional or other cost centres can be added if required. Again it would be prudent to follow the cost centres set down by the firms accountant.

Total annual expenses

The total annual expenses of the practice will be the total of all salaries, staff on-costs, fixed and controllable overheads and non-budget items.

~ Profit
All architectural practices should seek to make a profit. Normally, a profit is achieved if there is a surplus of earnings over costs. Profit is distributed to a companys shareholders or the partners in a partnership. Where the shareholders or partners are also receiving salary which has been included as costs, the total income of the architect who is a principal will be the sum of their salary plus their share of the profit. For further detail, refer to Profit and profitability . A profit is necessary to provide a return on the capital invested in the practice, as well as to provide additional incentive for the principals. A profit will also fund the development of the practice, for example, for the purchase of equipment and the reward of staff with bonuses (which, of course, become an expense of the practice). Profit is usually expressed as a percentage above costs and the level of profit should reflect the risk involved, the complexity of the project or the experience that the practice has had with projects of the type being considered. As a guide a profit margin of 25% above costs is advisable. The actual margin must be determined by each practice considering such other matters as competition, reputation of the practice, the nature of the projects and other factors considered relevant by the practice. The target rate of profit may well vary from project to project, but the overall profit should achieve the planned rate. When calculating fees including a realistic profit margin above the projected costs is critical to the long term success of the practice.

~ Charge out rate

Where an architect provides a service on the basis of hours worked it is necessary to establish a charge out rate which reflects the total cost per hour to provide the service. The charge out rate must include salary, a factor for overheads or on-costs and a realistic allowance for profit. The examples set out below are based on a technical staff member on a salary of $80,000 p.a. working a 37.5 hour week in a practice with an overhead factor of 1.5 and a profit factor of 25%. In order to establish accurate charge out rates for technical staff the practice will need to determine: the number of hours worked in a year for each technical staff member, the percentage of time worked on projects and the percentage of non-project time (which should be allocated to overheads) a factor for overheads, and a target profit margin.

Number of working days/year Days Less Weekends Annual Leave Sick Leave Public Holidays(Vic) Sub-total Working days per year 104 20 10 10 144 221 365

Working hours per year (HRS/YR): Apply working days to each member of technical staff x relevant working hours to each member of technical staff whilst observing all industrial awards. In this example the working hours for the technical staff member are 1657.5 hours (221 x 7.5).

The cost rate

The cost rate of each member of technical staff is the base rate of salary ($80,000) divided by the number of hours per year (1657.5). $80,000/1657.5 $48.25 x 1.5 (overheads) $72.75 + 25% (profit) $48.25 $72.75 $90.00

The charge out rate for this member of staff is $90/hour.

~ Time records
In order to calculate project costs, staff costs and charge out rates , accurate knowledge is required of the way in which time is spent by staff (including working principals) because not all working time is spent on projects. Some time is spent on general administration, personal matters and on various management activities, such as marketing. The proportion of project time to non-project time will depend on the role and duties of each member of staff. A principal involved in marketing and administration may spend as little as 20% of working time on projects, yet someone engaged on contract work may spend 100% of their time on projects.

Time sheets, can be used to calculate the proportion of project time to non-project time for each member of staff. A method of time record-keeping is provided in Keeping time records. These records allow staff time and therefore costs to be allocated to individual projects. The cost of non-project time is added to overheads and this can also be apportioned to individual projects to establish the real cost of a project. It is useful to record the management time in different categories, for example marketing and continuing professional development . The staff time taken on these activities should be costed together with the direct expenses of, say, public relations', 'marketing or continuing professional development which are included in the category of controllable overheads and which are necessary to be able to estimate the total cost of these activities for budgeting purposes.

Number of working hours per year per person

The number of working days per year varies from state to state. In Victoria, for example, there are 10 public holidays while in New South Wales, there are nine. The number of normal work hours per year will vary from person to person. A principal may work 50 hours per week, an assistant may work 40 or 37.5 hours and a person on contract may work a different number. The number of hours per year for each person must be established. In determining the hours worked by principals and senior staff, consideration should be given to the number of hours that the practice expects them to work, as distinct from the number of hours they actually work. For example, it might be reasonable to expect that a principal will work 50 hours a week, whereas his or her actual hours are more like 70 hours a week for a substantial part of the year. It is recommended that in these circumstances the expected hours (50 in this example) should be used. Principals and senior staff should not bind themselves to working excessively long hours. Regardless of the hours used in undertaking the calculations, time sheets should be filled in to reflect the actual hours worked so that, in estimating the time required to carry out work on future projects, accurate records will be available. The following example uses time records to divide the salary of a technical staff person into project related staff costs and overheads. Salary say $60,000. Records from the previous twelve months show that 78% of time was spent on projects, therefore project salary (P) = $46,800 non-project activities salary (NP) was $13,200.

The figure of $13,200 becomes part of overheads .

~ Historical records
The historical record of the cost and profitability of previous projects provides one of the key inputs when developing a fee proposal for a new project. At the conclusion of each project, when all work is finished and all costs are known, a summary of the cost of the project to the practice should be prepared. Time sheets for all staff including directors or principals involved in the project should be used to determine the time that each staff member spent on the project. The total of the hours multiplied by the individual charge out rates will give the staff cost for the project. To this figure all other direct project costs should be added to give the total cost of the project to the practice. The total cost can then be compared to the fees received for the project to determine the profitability or otherwise of the project. Over time the accumulation of the historical records of the cost to undertake various project types by the practice will greatly assist in the preparation of fee proposals . In order to maintain the accuracy of the records escalation should be applied to the costs on an annual basis.