I can clearly recall times when my former architectural peers and I were so excited to receive word of a new design and construction project. We moved too quickly through the fee estimating and contractual agreement process, bedazzled by the possibilities of a new opportunity, the thrill of the win, and our team’s excitement to design an award-winning and client-satisfying solution.
Yet over time (and the hard way) we learned the importance of slowing down this process. We learned to calculate a fair fee by understanding the client’s budget, amenity wishes, and their vision of the process and deliverables. Doing so became the key to a mutually satisfactory, long-lasting relationship and outcome. Since there’s so much emotion and divergent thought that goes into pricing, breaking down several of the components of a solid pricing strategy has become near and dear to my heart.
Here are some of my hard-earned pricing lessons learned that I hope you and your firm can benefit from:
1. Understand Your Labor Costs with Accurate Time Sheet Recording
I cringe when I think about how loose we used to be in our early days regarding the documentation of time spent on a project. It certainly can be a pain in the behind to relentlessly track time. Yet,
accurate, DAILY documentation of time spent on each phase of a building project is the first key to developing a successful pricing strategy.
Without documenting every single hour it actually takes to complete an assignment, we struggle to understand how long each task takes, where training is needed, when feedback is beneficial, and how to effectively use this data when pricing the next job. Comparing budgeted costs to actual is the cornerstone of a successful A/E/C practice. The exercise of estimating time alone builds successful entrepreneurs who learn to run efficient cost centers. And yes, count every hour, whether spent after work hours or on weekends.
2. Continually Monitor What the Market Will Bear and What Your Competition is Charging
Part of setting a successful pricing strategy is understanding what your current and prospective clients will pay and knowing what your competitors are charging (at least your top three). How do you obtain this information? Look up public board meeting minutes, read newspaper articles about awarded projects, debrief with clients, and even ask around during a networking session. Once armed with this information, the choice is up to your firm to decide what your pricing philosophy will be.
3. Proactively Select and Communicate Your Pricing Philosophy, Both Externally and Internally
Like it or not, you will develop a pricing reputation among the industries in which you operate. Your clients may accurately (or unfairly) label you as expensive, a bargain, someone who “nickels and dimes” their clients, etc. While we may differ on which label is worse, there is value in selecting your pricing model and proactively managing your pricing reputation. My personal favorite is NOT being known as the lowest price, rather being known as the higher-priced firm that provides great service and high perceived value for the money expended.
Go a step further and explain your pricing philosophy to your future clients in your business development meetings, brochures, requests for proposal, interviews and contract negotiations. They will discover your pricing tendencies sooner or later, so being forthright is usually appreciated and respected. Additionally, when we communicate our pricing philosophy internally, our team gets the message that our firm’s goal is to make a fair profit. They subsequently learn that their time spent on a project can positively or negatively affect the firm’s profit and success, and in turn their own.
4. Mandate that Two or More Skilled Teammates Develop Each Fee Proposal
Engaging multiple staff in the process of developing time and cost estimates for a fee proposal prevents you from signing a contract that could not possibly cover your labor, material and overhead expenses. (It also helps you build a cost-conscious team.) At minimum, every project should have two skilled professionals performing independent calculations of time and expense. Once these individuals complete their separate estimates, they can share their thought process with one another and make informed decisions before finalizing a fee proposal. It is through the exercise of calculating fees and hearing how someone else understood the scope of work and deliverables, that my own pricing expertise grew, and we began perfecting the skill of pricing jobs with consistency and accuracy.
5. Review Hourly Rates and Fees Annually and Adjust Based on Market Conditions
Of course no client likes to hear that you’ve increased your rates and fees, but they do understand that material and labor costs rise and that you are in business to make a fair profit. Therefore, the best way to increase fees is to review the option annually, based on market conditions, and in appropriate increments. I’ve been met with unhappy faces when trying to keep our fees low for years and then attempting to adjust fees with too large of an increase.
An annual pricing review also affords you the opportunity to consider a reduction in fees when the market dictates. Not all fees need to be changed at once. Establishing different fee increase policies for existing clients versus a new client is one pricing option. Setting a fee with fair profit margin for a new service with a high client-perceived value and rate of return is another option.
6. Consider the Optimal Pricing Model for Each Assignment
While you may not always be able to dictate the pricing format for your assignments, understanding which is optimum under which conditions in a perfect world helps you advocate for this format more convincingly. My least favorite methods are Not Too Exceed pricing and Percentage of the Cost of Construction that does not include variable ranges for project size and scope.
Evaluating what is mutually acceptable and most appropriate for a particular A/E/C consulting service most typically can take the form of a Lump Sum Fee, Hourly Rate or Percentage of the Cost of Construction. If the scope is clearly defined and large, clients often prefer the cost of construction or lump sum fee method. Feasibility studies are well-suited to lump sum fee proposals. Investigatory or retainer work may best suit the owner and consultant under an hourly arrangement.
Technically, any of the pricing formats can be successful and all can fail miserably if you don’t accurately understand the scope of work and your expected time expenditure. While an hourly fee may cover your time, an excessively high bill won’t please your client.
As a businessperson operating in an industry with skilled technical professionals possessing an artistic mind-set, I’ve witnessed respected professionals with all levels of sophistication and comfort regarding the calculation of costs and pricing of fees. My main message with regard to pricing is this – cost cutting is not a marketing strategy to win a job over your competitors. Of course, neither is price gouging. Taking the time to understand the pricing principles above will make a significant difference in your firm’s success. Only a firm earning a fair and respectable profit can effectively use these profits to hire skilled professionals, produce exemplary work, upgrade their systems and technology, and invest in training and professional development, which in turn will secure you more great clients.
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Next month’s topic is Leadership Transitions in Enduring Organizations.