Posted on September 5, 2008 - by Pete

Cost vs. Value

We recently submitted a proposal for a project of a type with which we are very familiar.  I thought (and still think) that our fee was very fair and was the appropriate fee given the amount of time necessary to perform the tasks in order to assure that our client had a successful experience.  Three firms of similar size and expertise provided fees. Our fee was in the middle.  We were 10% lower than the third firm but we were 40% higher than the firm that gave the lowest fee.

When I evaluate contractor bids on our projects, I generally feel that we prepared a good set of documents if we get 4 or 5 bids with a total spread of 10-15%.  Here we have a case where the work level is not as fully defined as it will be when the documents are done so a wider spread is probably acceptable.  Maybe 20% total spread between three numbers might be reasonable.  50%, however, seems odd.  What other elements might contribute to this spread?

It is possible to perform design services to a variety of levels of quality and it is important that all design firms understand the quality that the client wants.  In this case, all three firms have worked for the client in the past and should therefore have a good idea as to the quality required so lack of understanding of the client’s needs should not be an issue.

There are, of course many ways to break a design fee apart.  In particular, some firms exclude services that the client will need from their scope and then charge the client extra for that service when asked to add it.  I really hate this approach because I think it gives the entire design industry a bad name.  It does, however, make a firm’s initial proposal look very attractive to a potential client.  If clients get used to this, it may even be possible to keep a client happy while doing it because they may just assume it is the way the industry works.  I like to think professional design firms are better than that.  The public, however, tends to evaluate all professions by the lowest standards they see (for example, lawyers).  Firms that take this tack are therefore responsible for lowering the reputation of our entire industry.

A firm could be in dire financial straits and would need to take a job at any fee just to keep the doors open.  If this is the case, I would think we would need to look back on what the firm has done over the last year or two that caused them to get into this condition.  If they have been doing a poor job managing their business, they probably are going to fail eventually and this sort of pricing is only going to hasten the end.  When they do fail, the client is going to be left holding the bag and the industry’s reputation will suffer some more.

A design firm could use inexperienced people on a project and thereby reduce their costs.  This would probably be a disaster for the client since it takes a lot of experience to know what goes into putting a building together.  It might be possible for the firm to make a buck even while the client struggles to keep their project going.  Another idea that can only result in lowering the reputation of our industry.

I am also confused why firms feel the need to lowball fees given the demographics of our workforce.  Even when the economy is as slow as it is, finding quality employees for design firms is very difficult.  We live in an age where there is more work than can be performed by the staff available to the industry.  Basic economics says that when demand exceeds supply, prices rise.  Why then would any firm feel pressured to levels that are inconsistent with quality work?

Productivity is one of the great buzzwords of the last couple of decades and I’m sure that we have become more productive as an industry. Unfortunately, a December 2004 white paper by Haskell indicates that productivity in the building industry as a whole only increased our productivity by about 33% since 1966.  This is, by the way, well below the gains of the US economy as a whole, but that is a discussion for another blog article. Anyways, given the minimal productivity gains we have experienced, it seems unlikely that any particular firm is hugely more productive than any other.  In addition, I assume that firms of similar size will be even closer in efficiency that the industry as a whole. So I don’t think that efficiency can justify the difference in fees in this instance.

A firm might give lowball fees in order to “buy” their way into an industry or a geographic location.  If this is the case, the firm probably won’t survive in the given industry or geography since they will have created an unprofitable fee expectation for their prospective clients.  I don’t see how this can be good for our industry either.

So, what is the answer?  In this particular instance, I really don’t know.  I would be interested to learn if the firm in this case consistently gives lowball fees or if this is a one-time aberration.  The answer to that question would go a long way to understanding what the issue is.  In any case, I really don’t understand why anyone who goes through the extensive education and experience necessary to lead a design firm would then have so little respect for what they do that they are willing to risk our industry’s reputation by giving lowball fees and subjecting us all to the potential problems discussed above.

Technorati Tags: fee, finance, low bid, proposal

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