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.”
ONE COMPANY OR TWO? 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.
BREAKING IT DOWN 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.