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Types of Ownership of an Architectural Practice

Architectural practices are structured according to size and complexity. Frequently, a practice
will start as a simple entity, such as a sole proprietorship, and evolve into a more complex legal
structure, such as a corporation or a partnership of corporations.Several factors affect the type of
ownership, including relationships with professional colleagues, tax implications, and exposure
of personal assets. Architects should seek the advice of a lawyer and an accountant before
structuring a practice.

Agreements

All business relationships should be based on a written agreement. Business partners should
share certain values and financial goals, and architects are no exception. For partners or
shareholders, a well-structured agreement provides a vehicle to deal with expansion, difficulties,
and disagreements, as well as with disasters.

Sole Proprietorships
A sole proprietor is a single, unincorporated owner of an architectural practice. This architect has
full personal control over all aspects of the practice. A sole proprietor can range from someone
with a small, home-based office practice to an architect who employs many professionals and
para-professionals.

Partnerships
A partnership is comprised of two or more partners. Most provincial associations impose
restrictions on which an architect may form a partnership with.

Corporations
A corporation is a legal, collective entity authorized by statute to act as an individual business
unit.Incorporating a practice is done for a variety of reasons. The issues should be reviewed with
a lawyer and an accountant before forming a corporation and entering into a
shareholders’agreement.

Partnership of Corporations
A partnership of corporations is an architectural practice formed to preserve the individual
identities of two or more corporations. There are a variety of reasons for creating this form of
business entity. Such an entity:
• Enables individual architects who are incorporated for business or tax reasons to practice
with both the advantages of a partnership and the advantages of their corporation;

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• Allows two or more corporate practices to retain separate identities for certain types of
projects but join forces for other types of projects;
• Allows the bringing together of complementary but differing interests and ownership —
for example, one corporation may focus on architectural services, while the other is a
corporation providing support through drafting services, equipment, and real estate and
other chattels.

Joint Ventures
Joint ventures are usually formed to create one architectural entity for the purpose of a single
specific project. Frequently, a joint venture is set up to provide complementary services for a
particular project — for example, a practice specializing in hospital work may need to team up
with a firm located near the project site to provide contract administration services, especially
field review.

Multi-disciplinary Firms
Multi-disciplinary firms are professional companies which include architects and other
professionals, usually engineers. Such firms may also include urban planners, landscape
architects, interior designers, and other consultants.

Foreign Firms
Recently, certain architectural firms from a nation have established branch offices in another
nation. The structure of the foreignfirm and its ownership must nevertheless comply with the
requirements of the provincial association of architects.

Internal Structure of an Architectural Practice

Once a firm is established and grows, it requires an internal structure and mechanism for
delivering architectural services. The structure of the practice depends on its leadership and its
values and culture, and on the needs of the project.

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Illustration 1: Design Teams or In-house Studios

There are several models:

• Design teams or in-house studios (see Illustration 1);
• Departments (see Illustration 2);
• Any combination of the above.

Design Teams or In-house Studios

A design team is usually assembled for a specific project, drawing on the skills of personnel in
the office. The team leader, typically a project architect, coordinates and manages the team and
deals with the client, sometimes together with the “principal in charge.”

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Departments
Some larger architectural practices sub-divide staff into groups or departments. Usually each
department is responsible for a different phase of the project, such as:
• Marketing;
• Design and design development;
• Construction documents;
• Contract administration.

Sometimes, a project architect or senior employee (often called a project manager) is responsible
for ensuring proper coordination when the project passes from one department to the next.

Illustration 2: Departments within an Architectural Practice

Other Professional Services

Several professional services are required to support an architectural practice. These include:
• Legal;
• Accounting and tax planning;
• Investment and retirement planning;
• Insurance.

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Architectural Services and Fees

Introduction
Architecture is a rapidly changing, knowledge based, service industry. As a result, providing and
determining compensation for architectural services is more challenging than ever. This chapter
will help architects meet the challenge by discussing how to identify appropriate services for
their clients and how to valuate those services.

The Architect’s Traditional Services

Before an agreement (or interim agreement) is prepared and before beginning work on a project,
the architect must propose an appropriate complement of services to the prospective client.The
services should be based on the project requirements, the client’s own in-house competencies (if
any), and the architect’s capabilities. Because the architect is required to provide an appropriate
level of professional services, fees must be adequate to enable and ensure that this level is
maintained.

Basic and Additional Services

Traditionally, architectural services were limited to the design and construction of buildings, a
fact reflected in the following five sequential phases of a project:
• Schematic Design;
• Design Development;
• Construction Documents;
• Bidding and Negotiation;
• Construction Phase (Contract Administration).

Furthermore, the standard forms of agreement embrace the concept of basic and additional
services.
Basicservices: are those services the client and the architect have agreed are necessary for the
implementation of the project, using “Design-Bid-Build.” Basic services are deemed by the
profession, to be, with few exceptions, the minimum level of services.

Illustration 3: Basic and additional services

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Additional services: are those services for which the degree of the architect’s involvement with
regard to input and time cannot be clearly defined or estimated, or the need for which is not
determined at the time of signing the agreement. Fees for additional services are frequently
invoiced on the basis of agreed hourly rates.

Understanding the value of additional services significantly broadens the potential scope of
practice, and creates markets for new services that can benefit the practice and, in many cases,
the client.

Practices should prepare a briefing document that can be supplied to prospective clients. This
document should:

• Outline the types of services for which the firm has expertise;
• Clarify the distinction between basic architectural services and other services that the
firm might provide.

Identification of Services

The success of a project depends on the proper identification of services. At the outset, the
architect — together with the client — must determine the professional services required for the
project. Once this is done, the architect can prepare an estimate of the professional fee and
negotiate an agreement with the client.

To identify required services, prepare a list of tasks to be performed and a time frame for each.
The process also involves identifying and selecting engineers and other consultants necessary for
the project. The services outlined in the standard forms of agreement can serve as a checklist or
“menu” for selecting the appropriate services.

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The Architect’s Fee

The architect must obtain the latest fee schedule, tariff of fees, and conditions of engagement
from the appropriate provincial association of architects.

Methods of Compensation

Both parties — architect and client — will benefit if the architect receives adequate
compensation for the professional services provided. Compensation is usually by one of the
following methods:

• Percentage (of the construction cost);

• Time basis (per diem or hourly rates);
• Lump sum (or fixed fee); or
• Any combination of the above.

Fee Calculation

When calculating the distribution of the fee over the traditional five phases of a project, the
following breakdown is typical:

Typically, services are rendered and payments are made progressively, with final accounting
(100% of total fee) at Substantial Performance of the construction or after the preparation of the
final Certificate for Payment to the contractor. The three usual methods of compensation use the
following methods of feecalculation:

Percentage of the Construction Cost

Architects should base their fees on the recommended schedules prepared by the provincial
associations of architects. Obtain the most current schedule available, as they are occasionally
updated.

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Percentage fees are contingent on the size and type of project as well as the scope of services
required. For example, the schedules recommend:
• Lower percentages for simple buildings or buildings with a higher construction cost;
• Higher percentages for buildings which are more complex or have a lower construction
cost.

Illustration 2: Typical Allocation of Fees for a “Traditional” Architectural Project

The percentage fee provides a base fee, which can be adjusted depending on the scope of
services.By applying the fee to a known cost or approved estimate at the start of each project
phase, the fee can be accurately determined and both the client and the architect can budget
accordingly. The recommended percentage fees anticipate the following project conditions:

• The architect is providing full, basic services (traditional approach);

• The project is a unique, “one-off” design for a single client;
• The project will be tendered once, as a single, coordinated package of construction
documents;
• The method of project delivery is the use of a Stipulated Sum Contract The project size is
not extreme (neither very large nor very small);
• There are no delays, or the progress of the project is not intermittent (thereby incurring
repetitive “start-up” costs);
• The percentage fee is calculated at each phase as a percentage of the construction cost as
defined in the agreement.

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In all cases, ensure that sufficient fees are allocated for complete coordination. Architects can use
the following rule of thumb: the cost to the architect for coordinating engineering consultants is
approximately 25% to 33% of the engineering fee. Engineering services canalso be negotiated as
a percentage of the totalconstruction cost to avoid disagreement overthe amount to which the
percentage is applied.

To ensure the validity of the amount, use the percentage fee method as a check when calculating
a fixed fee (lump sum) quotation.

Time Basis (per diem and hourly rates)

A per diem or hourly rate is often the most appropriate method for establishing a fee, especially
in the early stages of a project. Some other situations when this approach would be appropriate
include:
• Pre-approved work being changed;
• Small projects;
• Pre-design or other types of feasibility studies;
• Intermittent work or services.

Per Diem or hourly rates are usually determinedby the following:

• A multiplier of direct personnel expense [payroll cost (+) payroll burden(x) A multiplier
(usually 2.5)];
• Provincial association-recommended minimums for per diem or hourly rates;
• Existing market conditions.Per Diem rates are usually calculated as hourly rates ($/hour)
x 7.5 hours (a typical day).

Lump Sum or Fixed Fee

To use the fixed fee basis, both the client and the architect must thoroughly understand and agree
on all tasks required and on the project schedule. The method also requires calculating all costs
and making a comparison with the two other methods of compensation.
When preparing a fixed fee quotation, include the following:
• All direct and indirect labor costs;
• All expenses, including materials;
• Overhead and profit;
• Risk factors involved with this client and this project;
• Consultant costs;
• Costs for coordination of consultants;
• Marketing costs;
• A contingency.

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Double-check the price proposal and do a “reality check” based on market conditions by:
• Determining fees as though they were based on a percentage of anticipated construction
costs;
• Re-calculating the costs to provide the fees very conservatively, using a worst-case
scenario;
• Checking the staff utilization rates and profit history of similar projects;
• Ensuring that staff or partners double-check or independently verify the fee calculation.

With clear parameters, including a well-defined scope of services and quality of project, the
fixed fee can be a satisfactory approach for both the client and the architect. However, when
unknown factors or an ill-defined project are involved, the fixed fee method can cause strained
relationships and lead to substantial losses for the architect.

Verify that all agreements include provision for determining the fee for:
• Changes in scope;
• Preparation of Change Orders;
• Time delays (caused by the owner or contractor).

Client-Architect Agreements
Regardless of the type of project, the architect should prepare and execute a written agreement
with the client after identifying the full scope of services and negotiating a fee.It may be
advisable to use an interim agreementor “binder” in order to start work while a full agreement is
being prepared.

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