Are Architects Losing Money through Poor Negotiation? 1

Thursday, May 12th, 2016
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As with any type of business, the amount of money which architecture practices throughout Australia earn in terms of profit represents a function both of the volume of work done and the margin achieved on each job.

That margin, in turn, will depend partially upon the outcome of fee negotiations. This prompts questions as to what to avoid in such negotiations and what strategies can be put in place in order to a deliver successful outcome.

According to Charles Nelson, an instructor of project management, quality and risk management for AEC education and consulting firm PSMJ Resources Australasia, many architects are not aware of common negotiating strategies and tend to become entrapped in downward fee pressure.

Arguably the most critical challenge, Nelson says, is to avoid offering a commoditised service and thus being forced to compete on price. He says a good way to achieve this is to target a particular niche, such as education or retirement accommodation. One architect based in New Zealand, Nelson says, works only on airports; another in Mackay does mainly retail within airports.

“If you want to go out and buy a car, if what you want is the ability to get from A to B, you are going to buy a Ford or some kind of inexpensive car that runs well and does what it is supposed to do,” Nelson said. “You are not going to buy a Mercedes Benz or a BMW or anything like that because you don’t see the need for it.

“I think that a great deal of architecture is purchased within that sort of ‘Ford or GM mentality.’ A lot of it is going on price.

“The problem that people have is that they don’t know how to break out of that. They don’t know how to differentiate their services very well and they end up getting caught in a downward spiral where basically, they are competing in a race to the bottom.”

Outside of commoditisation, Nelson says other traps into which architects can fall revolve around a lack of clarity as to their given ‘walk point’ in particular negotiations, a lack of an accurate understanding as to the true costs of performing different types of work for different types of clients and agreeing to base their fees around a percentage of the overall cost of construction on a given project.

In terms of the first issue, going into any negotiation without knowing their lowest acceptable price creates a situation whereby the architect in question could end up being bargained down to the point of accepting work for which the financial return derived is not adequate, Nelson said. On the second point, a failure to maintain accurate records with regard to the full cost of working on different types of jobs and for different types of clients creates a situation in which architects are unable to determine the price point at which the job in question becomes uneconomic.

Finally, there is no connection between the cost of design and that of construction. By quoting on this basis, Nelson says architects are invariably moving down the path of commoditisation.

Other commentators agree that fee negotiations represent a critical area of challenge. Ian Motley, managing director of fee proposal and negotiating skills outfit Blue Turtle Consulting, says architects do not typically learn about negotiation during formal training, and that some therefore lack awareness about how to develop an effective negotiating strategy.

In a recent video post, Motley said there are a number of issues to look out for. First, it was important to avoid a mentality of trying to ‘outsmart’ clients and to instead view negotiations from mutually beneficial perspective. The majority of architecture work typically comes from repeat business and/or referrals, Motley said, and the benefits from any gains made at the other party’s expense are therefore likely to be short-lived.

Another issue to avoid was ‘single number’ fee proposals. Whilst many clients may prefer this approach, Motley says it presents a number of problems. For one thing, it leaves the architect with only one number to negotiate and makes it difficult to devise innovative options for mutual gain. In addition, having only one number makes it difficult for architects to address issues such as payment terms and schedules within the negotiation.

It was also important, Motley said, to be aware of negotiation tactics which are sometimes used by clients. One such tactic, known as preconditioning, involves the developer indicating a strong desire to work with the architect but indicating that the design budget was limited and requesting that the architect therefore provide their ‘most competitive fee’ – effectively preconditioning the architect to accept a low fee.

One way around this, Motley says, is for architects to ask questions try to understand the client’s interest and situation and to ask them for indications about their budget in order to discuss with them the type of service which could be provided within that budget. If the client genuinely is keen to work with the architect, Motley says their response will be supportive.

Under another scenario, Motley says clients respond positively to fair and reasonable proposals put forward by the architect but indicate that a modest reduction in fees will be required in order to secure the job. Upon hearing this, many architects agree to revise their fee downward only to be told that they were ‘getting close’ and the cycle continues until the client has bargained the architect down as far as possible. One way to handle this, Motley said, was to ask for specifics about what kind of discount is being sought in order to finalise the agreement. In return for any reduction in fees, he says, it might also be possible to secure offsetting advantages, such as more favourable payment terms.

Overall, both Motley and Nelson agree that is important that architects learn about some of the basic strategies for successful negotiation.

On a final point, aside from avoiding traps on the negative side, Nelson says one way in which architects can set themselves apart during negotiations revolves around looking at the types of things which the client wants to achieve and using data to demonstrate how they had delivered on those outcomes in past situations. An architect doing high rise office buildings, for example, could talk about the range and average of net lettable floor ratios they had delivered on recent past projects, or the average lot per hectare delivered for different types of sites in the case of residential land development.

In one case, Honolulu-based high-end design outfit WATG at one stage advertised on their site that hotels which they had designed had delivered on average a room rate which was $50 per night better than that of competitors. In another case, a mechanical engineer talks about how every air conditioning system his company had developed over a 15-year period had delivered air quality which meets or exceed federal standards (and has air-quality reports to support this).

Doing this, Nelson says, shifts the focus toward results delivered, provides clients with reassurance and demonstrates a sense of conscientiousness on the part of the architect with regard to final outcomes for the client.

“It’s not that your data is better or worse than somebody else’s data, it’s the fact that you are probably the only contender who has put any data down at all,” Nelson said. “Because you put data down, you are perceived as somebody who cares about that and worries and thinks about it. That actually at a psychological level brings comfort to the client.”

In seeking work, the question of whether or not architects are able to derive a financial return which is commensurate with the role performed can depend largely upon their success or otherwise during fee negotiations.

Learning some basic negotiating strategies could make a significant difference.

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  1. Grant Spork

    "Architects poor negotiating ability for fees" There a convergent forces which have turned the Architectural services sector into bottom feeders. In the 1970's Architects undertook the role currently undertaken by "Design Managers" "Project Managers" "Cost Planners" and Quantity surveyors. With a sometime poor record of programme and cost control, Architect's retreated from this space. Now there is one truism in life, the bean counter always ensures that there are enough beans for themselves, first and foremost and every one else can go rattle a tin for their supper. So being at the end of the feeding chain is like being a runt in a large litter, they are most often pushed aside and unable to get good nutrition. The other factor is that BIM places more power and prestige into every discipline other than Architecture and Interior Architecture. The results of these influences are seen in the Cooky cutter style architecture we can see around us. Design has come last in too many instances. Featureless boxes which have E glass, and a five star rating get the nod, while architects are designing more box like and boring buildings, as they can be designed for the fee, and to program and budget constraints. Sooner or later clients and the public will demand a higher content of "Design" and Architecture may regain some ground. Why do so many prestige projects get given to foreign design firms? Largely because Australian Architects are not encouraged to design "Out of the Box". Architectural services have been under pressure for at least two decades, one must also ask where our learned and professional bodies are in this debate…..probably ensuring the big firms can export services into Asia and the US, while smaller firms suffer