Beware the Boogeyman of Design Fees
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The F-word you’re likely to hear before construction starts
A creepy clown hiding inside a sewer. A chainsaw wielding crazy man in a hockey mask. A hideous villain who tends to show up at night. If you’re a fan of scary movies, you can probably cite each of those movies by name. In reality, each these are different versions of “The Boogeyman.”
On any construction project, there’s a name for this Boogeyman too: Scope Creep. Any number of unexpected scenarios can cause Scope Creep, from weather delays to scarcity of materials to change orders. That’s not news. Here’s what is. And it has everything to do with that F word – Fees!
Design Fees as Usual?
Design fees typically range anywhere from 4% to 14% of the total construction cost. Almost all design firms and many design-builders will state this fee as their agreed upon terms. We know because it is a part of our history too. It’s considered business as usual. It’s one of the costs of business that owners expect to pay, no different than site procurement costs, when deciding to locate a new branch or main office. (The Art of the Branch: Site Selection Edition.)
Here’s why design-fees-as-usual needs to change.
The costs of design is not a function of construction costs. It is a function of people-hours. It is the creativity, productivity and talent it takes to bring a unique solution to the table. Design has nothing to do with machine and tool rental, hardhats or safety glasses.
“Let’s say you’re building a typical house on Main Street USA, and the designer quoted a fee of 10% of the construction costs. The median house cost in the US is $188,900, so you pay $18,890 as a design fee. But, let’s say you decided to arbitrarily add 10 lbs of gold inlay and fixtures into the design (hey, it’s possible.)”
“This would add 146 troy ounces to the construction costs. Given the cost of gold, you’ve almost doubled your construction cost, and in the process…(drum roll please)”
“You also doubled your design fee – with little additional effort from the designer!”
What really matters?
To be sure, complexity, size and scope do impact the cost of your design, but so does your ability to state your desired aesthetic…along with your ability to make decisions. Communication skills matter, and knowing what you want really impacts the cost of design.
Applying what you just learned to future projects can only help. Knowing your likes and dislikes. Narrowing down a choice of concepts. Working within the budget (for real, not just a general direction that can be tweaked later). Construction-led design-build is all about designing and building to a budget, so you don’t wreck the Titanic!
Can you get the Fox out of the Hen House?
The problem with agreeing on a design fee as a percentage of construction cost is it offers an incentive to increase costs, indirectly. That’s not to suggest a designer compromises their professional integrity. They don’t. It’s simply that contract commercial terms must align with goals and objectives. So there’s no reason to allow the fox into the hen house!
Let’s try something different.
At the end of the day, all clients are concerned about the budget. At LEVEL5, we have been working to offer a different model to introduce more predictability into the process. A process that marries contract terms with the client’s preferences and needs.
For others in the industry, who are all too happy to reap the fruits of numerous design changes after the fact, this model may seem scary. Not hockey-mask scary mind you, but enough to keep you awake at night.
Everything starts when you decide what kind of facility is right for you.
Perhaps answering these five questions about your strategy will start the conversation.
Don’t let your branch suffer the same fate as the Titanic
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- Branch Transformation
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Who doesn’t love that new bank smell?
The grand opening of any new bank or credit union is typically cause for celebration. Ribbon cuttings, community leaders posing for the local press, and free hot dogs for the kids. These images remind us of a simpler time, when simply opening a branch was the key to success.
But for all the time spent on decor, messaging and branding, and even what type of potted plant is most appropriate, it’s the not-so-glitzy stuff that really determines if the new location will be a success. That’s not to discount the importance of branding. Marketing communications and advertising help differentiate one bank from another. But in truth, design decisions represent only 10% and 15% of a new branch’s costs. Surprised?
The unseen iceberg
With much to-do about what’s going on above the surface, too many executives put emphasis on design, rather than projecting a realistic budget, determining schedule and controlling construction costs. These massive costs represent the iceberg. The 85% that can cause you to, yes, sink or swim.
If you don’t effectively impact the major centers of gravity for costs (size of the branch, building materials, time and quality) then branch performance will suffer.
What we found…
LEVEL5 looked back at historical spending by banks and credit unions on the total cost of projects. Here’s what we found:
First, branding is important, from the color schemes to retail merchandising to point-of-purchase displays. But, too much focus on this may not be the best use of creative energy for a component representing less than 5% of total dollar spend.
Second, store layout, furniture decisions, and even floor finishes matter. Materials can be expensive, and the need to create a space to fit your local community’s desires can result in costly considerations. Still, these costs are often just 7-10% of the entire spend.
Third, total cost projections of a branch should reference three data points:
- National cost databases
- Historical cost data
- Market pricing
Whenever client budgets run over, it’s almost always because whoever was estimating the project at the bank or credit union overlooked something crucial.
Market pricing and schedule
While clients and other design-build firms spend most of their time and energy on the visible 15%, LEVEL5 understands that the 85% below the water drives performance.
Determining what the credit union or bank is willing to spend and aligning that spend with design, and the supply chain is what we do well. At LEVEL5 we specialize in solutions that go beyond design-build, by helping you decide what kind of branch solution works best for your markets and needs.