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Analyzing the Cost of Providing a Service
There are five basic steps to setting a fee:

1. Calculate costs.


2. Do a competitive analysis.


3. Do a risk analysis.


4. Choose a fee method.


5. Negotiate the fee.
   Calculate Costs
   One method, often referred to as top-down budgeting, starts with the assumed or
   desired fee and calculates how much can be allocated to the various services and phases.
   A second approach is to estimate the time and cost to do each task and phase. This is
   often called bottom-up budgeting. Probably, the first pass at the bottom-up method will
   yield a higher number than the expected fee, and further analysis will be necessary to
   reconcile it with the top-down calculation. If and when both methods yield the same
   results, this can be a good starting point. Nevertheless, it is not necessarily the right
   fee to quote if you are still competing for the project.
   Do a Competitive Analysis
   The next step in establishing a fee is to research the “going rate” for the service and
   the fees your competitors are likely to quote. A common range for comparable jobs
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   exists in most cases and can often be checked with other experienced firms that are not
   competing for the same project. This “comparing of rates” is done all the time, and a
   principal in either a new or established firm should not be shy about asking for advice.
   Determining what your competition will charge is much more difficult. Sometimes,
   other firms can help you, but in most cases you have to guess at this. Established
   firms are likely to quote within a certain range if it is consistent with their own bottomup
   and top-down analyses. Smaller, younger firms are far harder to evaluate.
   Do a Risk Analysis
   The next step in determining a fee is to analyze the risks. This subject, too, requires
   judgment, which will improve with experience. Among the most common areas of
   potential risk encountered on many projects are:
   ●● An indecisive client. These can be hard to spot in advance, but benchmarks include:
   reputation from previous jobs, a vaguely worded description of their proposed project,
   and the impression they give during preproposal contacts. A client with poor
   decision-making capabilities always adds to the cost of providing services.
   ●● An unreasonable client. Good clients expect their design team to make a profit, and
   will work to help ensure that happens. An unreasonable client does not care, and
   argues against even reasonable requests for additional compensation when the scope
   changes. Other clients—such as the large committees set up for some projects—are
   inherently indecisive even if they are well meaning. These clients often cannot be
   avoided, but some contingency should be built into the fee or contract to account
   for the extra time it takes to deal with them.
   ●● An extremely tight budget. A tight budget can significantly increase the effort necessary
   to reach a final design. If the budget is so tight that it is unreasonable, it may
   be indicative of an unreasonable client. Moreover, it may make it difficult to make
   the proposed fee seem reasonable in proportion to the total project cost.
   ●● A very tight or an unpredictable schedule. Many clients talk about unreasonably short
   schedules. As with budgets, if it is too tight, it may be indicative of a naive or unreasonable
   client. Conversely, tight, reasonable schedules are advantageous to the
   design firm since many of the design team’s costs increase over time. Thus, of equal
   concern is an indefinite schedule that stops and starts or extends beyond the time
   required, because many of the design team’s costs are a direct function of time.
   ●● An interrupted work process. Some projects are done in phases with indefinite breaks
   between stages to secure financing, obtain land use approvals, and the like. Each
   interruption can add to cost as a firm shuts down or remobilizes its efforts.
   ●● A difficult approval process. Clients often like to shift risk. For example, if they foresee
   risk in obtaining financing or land use approvals, they often will try to shift fee payments
   until after these hurdles have been overcome. Moreover, if these steps are
   risky, they are likely to require added effort by the design team.
   ●● Slow payment. Some clients are notoriously slow payers. This can place a real burden
   on a young design firm, hence should be a factor in both the fee and the contract
   negotiation. To reward prompt payment, therefore, it is often worth giving something
   extra to a client that does so. One early client paid within 24 hours of receiving
   the invoice. This sensitivity to the firm’s cash flow needs resulted in the client
   being given first priority throughout the life of the project.
   ●● A difficult construction phase. With a good contractor or construction manager, one
   site visit a week is more than required; with a bad one, five days a week is not
   enough. As for an indecisive client, a difficult construction phase is almost impossible
   to predict at the beginning of a project. Therefore, it is important to clearly
   tie the basic fees to an assumed level of service (number of site visits, length of
   construction, etc.), with any overages compensated as extra services.
   ●● An insecure client or a client in trouble. Many in the profession believe that the most
   dangerous client is one that is insecure or already in trouble. If a client gets into
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   financial or other difficulty, expect it to impact the design team. The only protection
   is to be sensitive to early signs of trouble.
   Choose a Fee Method
   The next step is to select the most appropriate fee method. There are many, each with its
   advantages and disadvantages, and no one works for all situations. The final choice often
   depends upon client preference. The most common are defined in the following subsections.
   Percentage of Construction Cost
   For decades, this was the most common method for setting fees. Its great advantage is
   that the fee increases automatically as the scope (as reflected in the budget) increases.
   Its major disadvantages are: it is arbitrary (if not based upon a project cost analysis); it
   penalizes the effort to contain or reduce budget, and clients view this conflict with
   suspicion; and the fee goes down if the cost goes down. Because of these