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How to handle being undercut on fees

Words:
Stephen Brookhouse and Peter Farrall

With practices reporting losing work to 'impossibly low' fee bids, it is increasingly important to set out the true value of the services you are offering, write Stephen Brookhouse and Peter Farrall

Fees have to match the resources needed, otherwise the slide away from breakeven can be rapid.
Fees have to match the resources needed, otherwise the slide away from breakeven can be rapid. Credit: iStock

A significant number of architects have approached the RIBA regarding other practices undercutting them with what look like impossibly low fee bids. Has this happened to you? If so, it is worth considering the following questions:

1. Did the client select the successful bidder purely on price without properly assessing the quality of the bid?

2. Did you define the scope of service you proposed to deliver and identify any qualifications to your bid? 

3. Did the client explain the project brief? If not, did you attempt to discuss this with them?

4. Was your fee bid calculated on an objective basis to reflect the estimated resources required to deliver the project with an allowance for profit and risk?

If your answer to any of these questions is ‘yes’, then it was probably best you did not secure the commission since a lower fee would almost certainly have lost money – or worse, your practice might have embarked on a project with poor definition and, therefore, a high degree of risk.

Fee negotiation

Of course, things are not always this simple. Fee negotiation is about the grey areas. In our research for the updated Good Practice Guide: Fees book, we spoke with a wide variety of practices and a number of common themes emerged. These ranged from the basics of calculating your baseline costs and breakeven point, to clearly communicating the scope of services. A recurring comment was that the profession needs to explain the value of the services it offers – to all stakeholders. 

Further soundings confirm that the pressure on the fixed and variable costs of delivering a professional service is now even greater – from the increases in professional indemnity insurance and National Insurance to the rising costs of maintaining competence, particularly in the area of building safety. Practices are now experiencing the true resourcing costs of implementing the statutory reforms brought in under the Building Safety Act – and not just with high-risk buildings.

For most architects there will be pressure to win work – but not at any cost

 

Review your breakeven point

It is ever more important to understand the true costs of running your practice by taking a critical view and interrogating historical data within the practice when estimating fees for new projects. Now is the time to review your breakeven point, whatever the size of your practice. It is important to be confident about the accuracy of your project costs and calculate your fee by critically assessing the resources needed to deliver your services.

Marginal gains are under our control and have a direct impact on the bottom line. The proportion of staff costs to overheads can change. Look at the utilisation or ‘non-productive’ rates. ‘Over delivery’ can be an issue at different stages for many practices. We all want to provide the best service for our clients, so focus on where you add value.

Monitor real costs of delivery

Competitive bidding is a fact of life for most architects and there will be pressure to win work – but not at any cost. Being confident about the fees you put forward requires you to constantly monitor the projects you are delivering and understand what the real costs are to the office. This also allows you to flag up when resources are being expended on tasks that did not form part of the original brief. In this situation, there may be opportunities to discuss additional fees with the client. This is why it is important to have an agreed professional services contract and be aware when the scope is being exceeded due to factors beyond your control.

Skilled negotiation is also important. It is a misconception that this is something that follows the fee bid. Negotiation starts with a clear idea of the ‘what-if’ scenarios and what to allow for profit, risk and the value you add to the project. Inevitably, having estimated your resourcing and breakeven point, these are the areas with most flexibility. 

Pitching your fee bid?

Where do you pitch your bid? Winning a job below cost will contribute to turnover in the short term. It may position the practice in a new sector or with a new client but it is not sustainable in the medium or long term. (Think of recent contractor failures.) The strong message from practice is not to win the ‘race to the bottom’ by cutting the level of resourcing so that it is below the true cost of delivering a professional service.

Cutting costs by deploying junior staff with insufficient levels of competence, expecting excessive unpaid hours or winding down your service to the point where you are no longer delivering a professional service all carry a high degree of risk. Attempting to go back to the client cap in hand when these actions fail and you are running out of cash arguably contravenes professional standards and the requirement to resource projects fully. It may also reinforce the client’s expectation of low fees, making it more difficult to regain a viable negotiating position in the future.

Negotiation starts with having a clear idea of the “what-if” scenarios

In this perfect storm it is worth remembering that it is not in the client’s long-term interest to negotiate down to a point where it risks the delivery of a successful project. If you lose a bid, then ask for feedback. It gives an insight into their thinking. What criteria did the client apply? Often, we hear practices concluding they could never match the winning bid on cost alone. However, clients sometimes come back when they realise that the service provided by that winning bid is not satisfactory. Part of our negotiation position has to be to communicate the principles on which we base our fees, including the risks we manage and the value we add. We bid at the point of greatest uncertainty in a project and it is essential to leave room in your contract to renegotiate when the scope and programme change. 

Finally, the complex, fluid statutory regime provides opportunities to deliver services where we add greater value – including the new principal designer role or offering complex planning advice – which will set your practice apart. 

Good Practice Guide: Fees, written and edited by Stephen Brookhouse and Peter Farrall, RIBA Publishing, 2024

 

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