The second in our series on pricing work in architecture, examines the ‘how to’ elements of calculating pricing.
Working out charge rates is in some ways the easiest aspect of pricing work. The process is essentially mechanical, but it requires a small amount of financial modelling which seems to make many architects and designers nervous!
Working out salary rates
OK, so let’s start with the easy bit. Every person your business employs (except possibly the directors) has a salary. Because of this salary the company will pay some employers’ National Insurance. Finally the company may pay a pension contribution, being a % of each employee’s salary. Adding all these up we get to the total cost of employment:
|Name||Salary||Employer’s NI||Employer’s Pension||Cost of employment|
|Mr Architectural Assistant||£30,000||£2,977||–||£32,977|
You can account for time on an hourly or daily basis. For this article I have assumed hours, which is the standard for architects. We have to work out the number of chargeable hours in a year, taking in to account working hours, holidays, sickness and training hours.
Let’s assume 7.5 hours per day x 260 working days less 30 holiday or Bank Holidays x 90% (I.e. a 10% allowance for training, sickness and other non-chargeable activities) = 1,553 hours.
So our salary rates become:
|Name||Cost of employment||Hours per year||Salary rate|
|Mr Architectural Assistant||£32,977||1,200*||£27.48|
*Includes a further allowance for study leave
Working out cost rates
Salary rates include the cost of employing someone, but not any of the costs of running an office, such as providing IT, insurance, support staff, and marketing. To work out the total cost of someone in your office you have to include a share of overheads. How you split the overheads between staff is subject to debate, but the simplest way is to allocate it in proportion to their salary. You can also do this using a rule of thumb or actual costs.
Rule of thumb (quick and dirty)
In a typical professional practice we expect costs and profit to follow roughly the rule of thirds. I.e. For every £1 of revenue we can spend 33p on chargeable staff costs and 33p on overheads including non-chargeable staff, leaving 33p for the business owners as profit. In this model, the total overheads is the same as total chargeable staff costs. So to add overheads we simply double the salary rate:
|Name||Salary rate||Overhead estimate||Cost rate|
|Mr Architectural Assistant||£27.48||£27.48||£54.96|
Actual overhead absorption
The more complex method requires you to take your annual overheads budget* and divide it by the total staff costs, then apportion it. How much this adds to each salary rate depends on the level of overheads your practice carries. Of course this doesn’t tell you if your level of overheads is reasonable or fits your business model!
Let’s assume our practice has just these three staff and our overheads are:
Rent and rates £50,000
Computer software £10,000
Office costs £10,000
Legal and professional £14,000
Marketing and bids £3,000
Total overheads £108,000
*If you don’t have an overheads budget then you need to prepare one now.
Dividing total overheads in to the total costs of employment of the three staff allows us to split the overheads across the team:
|Name||Salary rate||Overhead actual||Cost rate|
|Mr Architectural Assistant||£27.48||£18.69||£46.17|
So having derived cost rates, if we simply used these rates for our projects (assuming we kept the whole team busy for the year and charged every hour in line with our expectations) we would cover the cost of employment and all of the overheads. In other words, we would, at best, break-even. Assuming we would prefer to make a profit we have to add an additional amount to our cost rates to create this profit.
Working out how much mark-up to add will depend on what the market for our services will bear and how much contingency we need to build in to cover correcting any mistakes we make or dealing with any unforeseen matters. I would say that for a successful design-led architects practice you should aim for a profit margin before tax of 30% and accept that, after overruns, the margin will be 20%. So taking my example above, adding a 30% notional profit gives us:
|Name||Cost rate||30% Profit margin||Charge rate|
|Mr Architectural Assistant||£46.17||£19.78||£65.95|
Once you’ve derived your charge rates, you need to benchmark them. How do they compare with other firms of your size? How do they compare with rates you have negotiated for previous jobs? It is important that your charge rates are more than just aspirational; they need to be achievable.
Whilst my final article in this series will discuss discounts and premiums, your default position ought to be that fee proposals use your firm’s nominal charge rates, otherwise you will not achieve the level of profits you budget for.
For more about pricing, you can read: The four things architects need to know to price work
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