Design for Profit

When he started out 16 years ago as a practicing architect and partner in Socha Builders, Rob Adler did not charge anything for the creative phase. “We charged nothing so as to get noticed, and we agreed in advance that if the client was pleased with the design, they were only obligated to pay for the construction documents,” he says.

As Adler, a licensed architect, began to gain recognition, he raised his fees but still charged just 1% or 2% of the total job's construction costs. But he was competing for work with traditional stand-alone architects in his upscale central New Jersey market. “We needed to raise our fees … to improve the image we were projecting,” he says. “Prospective clients thought we didn't know what we were doing because we weren't charging enough. Once you have some level of reputation, you've got to capitalize on it right away.”

The road to creating a profit center out of design is itself a design-in-progress. Those owners identifying their companies as design/build already have made the conscious decision that design is a valuable service. But there also has to be a “mindset that it is and can be profitable,” says REMODELING contributor Victoria Downing, president of Remodelers Advantage, Laurel, Md., and co-author of a book about design/build. “Then you have to track time and schedules, watch for bottlenecks — treat it like every other part of the business.”

When thinking about profiting from design, you have to know what your market will bear and determine your rationale for selling design. Is it the No. 1 priority or is it a sales tool for construction? Your decision says a lot about who you are, what your fee structure might be, and how your company will be perceived.

Peter Feinmann began his remodeling career under the name Feinmann Remodeling. As the business grew and changed, taking on more high-end and more particular clients, the name changed to Feinmann Inc.

Now, after 19 years in business, Feinmann describes the $6 million Arlington, Mass., company as a “five-person architectural design firm with a staff of builders, estimators, and planners to implement this work.” The current name is Feinmann Inc. Designers, Renovators, & Builders.

For years, Feinmann used design as a sales strategy. “For a younger design/build company, it was a great selling tool to get people to commit and move forward,” Feinmann says. The company charged an upfront fee (4% of the total estimate), and any additional design was a budget line item in the construction budget.

“When you have a mid- to upper-mid-range client base,” Feinmann says, “this ‘blended' system where you charge for design and other design costs are included as a line item makes for a quicker, cleaner sale because you're competing against other like-firms. When you move into more complicated, higher-end design, the standard in the industry is 10%, 12%, 15%. If you want to be in the majors, you've got to play like a major.”

Feinmann is in the process of creating a separate design division because he feels that the company is “undercutting [itself] by blending.” He wants to be seen as a design firm first and foremost, and wants to compete with stand-alone architects. The company now charges design fees of 10% to 12% of the total estimate.

What drives Todd Jackson in San Diego — which he calls “an undeveloped design/build economy” — is construction. “My designers are on staff to facilitate my construction; I don't have a construction company to facilitate design,” says the owner of Jackson Design & Remodeling. “I don't have a lifelong burning desire to be the latest, greatest, and best designer in the world. I want to run a profitable company where I give clients an experience they can't get anywhere else.”

Jackson reports that in San Diego County design fees typically range from $800 to $5,000, depending on a project's size. Jackson has a highly systematized approach with a quick turnaround — between 15 and 25 days — from design agreement to the signing of the construction contract.

For example, for a recently sold $435,000 project, Jackson collected $3,000 upfront. Then, in his cost sheet (not shown to the owner), he added a fee of $3,000 for structural design and materials selection. Because his designers are part of overhead, he figures an additional 3.25% — in this example another $14,135 — bringing the total for design to approximately $20,000. “We have a design center that pays for itself,” Jackson says. “It's not a large money-making process, but what it does is allow us to move our clients through the entire process very quickly.”

Design can be developed as a profitable division or a separate company. Choosing to create another entity could be difficult because many remodelers might not feel comfortable running what is essentially an architectural firm. They need to align themselves with the right people, either designers or architects willing to work on par with a remodeler. (Check state laws regarding the remodeler-architect business relationship. In most states the use of the word “architecture” — or some variation — in the business name is regulated by state licensing laws.)

For years, Chris Ettel, owner of VB Contractors in Virginia Beach, Va., had an in-house designer who also did sales. But Ettel is in the process of bringing on two architects by the end of this year. “We've outgrown our one person in the office,” says Ettel, whose company earned $2 million in remodeling and $2 million in new homes in 2005. The pair comes from a well-respected architecture firm. The more experienced architect will be given an opportunity to purchase ownership in VBC as Ettel sets up a separate LLC for architectural services. “In our market, an architect has a higher perceived value than a designer,” says Ettel, who will raise VBC's design fees from 5% to 10%.

Dave Heaney, owner of Rockland Architecture & Builders, Newport, Del., agrees. An engineer by training, Heaney has three architects (one licensed, two on their way to being licensed) on staff. He finds that in his affluent Delaware and Pennsylvania markets clients want to discuss “their architect” with friends and colleagues. Heaney's architecture and building companies are two separate profit centers. “But from the clients' perspective, it's a seamless operation,” he says.

Whether design and construction are treated as separate divisions or separate companies, many design/build remodelers use separate contracts for each. Most charge for design one of three ways — as a fixed fee, as a percentage of the construction estimate, or hourly.

Socha Builders has a seven-person design staff and charges a fixed fee (which usually ends up being between 6% and 12% of the total job) depending on job size. “Doing it this way builds trust,” Adler says. “When you charge a percentage or per meeting or per hour, the design you come up with first is what you ultimately build because the more time you spend designing, the more time for the client to think you're doing it for your own advantage. With a fixed fee the client realizes that we're working on their behalf.”

He also believes that clients are more open with their ideas, wants, and needs when they understand that their fees are not based on the construction price. (The fees proposed don't include an interior design package, which Adler negotiates during the construction phase.)

Adler's process includes an “architectural” agreement (not a “design” agreement) for which he collects a 20% deposit. Then he breaks down the total fee into schematic design, design development, construction documents, and construction phase. Clients are billed at the 50% completion point of each phase — a judgment call for Adler — and the balance when each phase is completed. For example, in the design development phase, Adler waits until floor plans have been settled and they are moving on to exterior elevations studies, and then sends the bill for half the development fee.

He doesn't “track” jobs, he says. “We plan them. We set goals for each employee on each project.” Employees are salaried, and they use daily and weekly goals to plan their schedules. He uses the bottom line as a planning tool. “Our monthly design process costs are predictable, no matter how many jobs we work on,” he says. Adler makes sure to schedule enough design work so that billings are in excess of those predictable monthly expenses. He plans for at least a 20% margin.

Is he profitable? “If my month is profitable, then it's OK if some projects are more or less profitable than others,” he says. “Design and creativity are not commodities that can be defined and predicted like lumber. The image that the project portrays in the end is the billboard that finds me the next client.”

Orren Pickell Designers & Builders, outside Chicago, has seven separate LLCs, one of which is Orren Pickell Remodeling Group. Its fee structure, says architect John Anstadt, managing principal for the architecture division, is between 5% and 7% of the construction cost. After deriving a scope of work, an estimated budget is established, clients sign a design agreement and pay an initial $3,000 deposit to retain design services. The money eventually goes toward the total job fees and covers efforts in due diligence, field measures, photography, and an initial design meeting. Then Pickell spends two to three weeks coming up with preliminary concept drawings. This is followed by a design presentation meeting with the client.

Pickell comes up with a second budget and gets paid for one-third of the architectural fees (one-third of the 5% to 7%). They begin construction documents and produce a set of CAD drawings. Another meeting is held, at which Pickell is paid one-third of the architectural fees. The final third (minus the retainer) is paid after final construction documents are ready and reviewed.

For a $300,000 kitchen, design fees would range between $15,000 and $21,000. Profit varies depending on the amount of time spent or materials or outside consultants used on the job.

For clients uncertain about their scope or budget, Heaney's Rockland Architecture uses a design development agreement — a time and materials agreement with reimbursables (mileage, consultants, and blueprint reproduction for example).

If clients are certain, Rockland uses a fixed-fee design agreement. In either case, clients are sent an update every two weeks and billed once per month for the hours spent. (In the case of a fixed-cost agreement, the hourly billings are deducted.) In this way, clients can see how far they have progressed in the project.

Occasionally, the design work exceeds specifications. “If, for example, we factor in three concepts and the client ends up changing it to five or six concepts, that's clearly over and above what we discussed,” Heaney says. If the design team can't make up the costs elsewhere, the client is billed for the extra work.

To arrive at project scope and architecture fees, Heaney uses an in-office consultation and client “homework,” such as a project-specific questionnaire and a design criteria form, to help clients prioritize their needs and goals

His lead architect then goes through the documentation and fills out a spreadsheet that has line items for design labor (which makes up the bulk), consultants (engineers, interior designers), and materials (things like paper and binders). The architect calculates how many hours would be required for due diligence and design analysis, schematic design, design development, and construction documentation.

The spreadsheet contains different rates (depending on which employee is responsible for a particular task) for specific activities such as CAD work, field measurements, and code studies. Clients pay a $2,500 to $5,000 deposit or retainer, depending on project size.

Rockland uses a “design priority sheet” to track where the company stands and how many hours are spent. Using QuickBooks, Heaney compares his budget to actual costs by month and year-to-date.

With the salaries of three architects and Heaney, overhead is fairly high, but Rockland Architecture typically shoots for — and gets — 40% gross profit on design.

Stacey Freed is a senior editor for REMODELING.