Monday, July 25, 2011

Starting Your Own Architectural Practice - notes from panel discussion

These re-constructed notes are from a few of my comments as a member of a three-architect panel presentation at the AIA/SCV on July 22, 2011 for the members of the Young Architects Forum that are considering starting their own architectural firms.

Question:  What is the most important advice you can give us regarding starting our own architectural practices.

EB:  Cutting straight to the chase, I would say that starting out, the most important thing is to keep your overhead low.   Business is a simple equation of cash-in and cash-out.  It’s called cash flow, and it’s like breathing for your business.  It’s always “cash in and cash out”.  If you can learn to manage cash flow and you can continue to get work, you can maintain your business.  That doesn’t mean that you will be successful, or get wealthy, it just means that you can usually stay in business if you can maintain the cash flow.  Now the other part of that equation is that you need to continue to get work.  But if you have really low overhead, you can survive lean times and times when you don’t have much work.  You have probably heard stories about businesses that start up anticipating a steady or increasing revenue stream.  So there is a tendency to establish a steady and increasing rate at which they take on monthly fixed overhead expenses.   Things like leased office equipment, office rent, monthly advertising costs like yellow pages ads, company cars, insurance, telephone and internet are all fixed monthly overhead that you are under contract to pay whether you have any income or not.   Now, if and when you are ready to get employees, you will really be crossing over into a whole other level of fixed expenses.

Question:  Some of those things you might be required to have like telephone and rent, would you not?

EB:  You might need to pay for a telephone and internet line, but let’s say you’ve been laid off and are out of work and have one or two small projects under contract starting out, then I would advise you to work out of your house.  Basically, starting out on small projects clients don’t really care if you have a fancy office, they know that you are just starting out and are probably hiring you because they either know you or because they consider you a bargain.  But in any case they believe that you can solve their problem and that’s the important thing.

Question:  You said that the other part of the equation was continuing to get work.   What advice can you give the group on getting new business?  What are the best sources, and do you use advertising?

EB:  If indeed you are going to maintain monthly expenses, then you are going to need a pretty steady source of work to support the cash flow needed to meet those monthly expenses.  Balancing cash flow is always important.  But balancing workflow when you have employees becomes critical.

So, the sources for getting work vary with each individual and by the type of work you are seeking.  If your expertise is in multifamily, then your clients are going to be largely developers.  If your expertise and focus is in single-family homes, then you are dealing with a broader audience.  In any case, I have found that word of mouth referrals is far and away the best and most commonly used way of finding new clients.  As far as advertising, it doesn’t work in my experience.  Don’t get locked into expensive yellow pages advertising.  It might work for attorneys, but you can probably tell by the lack of ads placed by architects that their main use of the yellow pages is just to provide a way for people to find them.

Question:  Is there a type of client or project that you would advise to stay clear of?

EB:  I would say that you should only take on projects that you know that you can handle.  Don’t get in over your head.  If you cannot provide good service, then your client will not be happy and your reputation will suffer.  It’s when the they expect more than they are getting that problems arise, so you need to manage expectations.  Make sure that they are realistic.  It can take a lifetime to build up a good reputation, and only one disgruntled client to tear it all down.

Choosing good clients and not settling for bad ones is probably as important as any other thing you could do for your business success.  Good clients expect to pay a fair price for a good product, and are not interested in combative or litigious relationships.  Bad clients can be tough to deal with and can sometimes be slow payers, or not pay at all.  Most commonly it’s the last payment that they will dispute.  It’s because the project is to the point that they don’t need you anymore and you no longer have leverage.  Don’t wait until the end to send large invoices.  As a professor of mine said, “bill early and often”.  It’s a lot easier for the client to make many small payments and it keeps even out the cash flow.  

Beware of those clients who want to use you.  Let me preface that by saying that everyone in the building industry, and even private clients, know that we are all hungry right now.  So sometimes people will be looking for the cheapest service they can get.  Or they will be looking for someone that they can intimidate and extract more services from than the scope of work in the contract.  These types of people seem to come out of the woodwork during economic down times.  In real estate they are called bottom feeders, and they are looking to leverage you or use you to their advantage.  The other thing to be aware of is the carrot on the stick deal.  If a potential client asks you to give them a deal on your fees for their first project, hinting or promising, that they will use you on their following projects, then you should probably run the other way.  But being hungry and hopeful, which we all are, I know that sometimes it’s irresistible. 

As far as liability is concerned in all situations, you need to learn to practice defensively.  Learn to sense and know the things that might incur a liability risk and deal with them.  Most of that will be gained by experience, but you should educate yourself about what issues come up the most.  For instance return construction submittals within the time specified in the contract or you could be blamed for a construction delay.  Know the AIA contracts, especially the General Conditions for Construction, or the contracts that are being used on your project.

Question:   Are there tools that you recommend to track cash flow? 

EB:  I use QuickBooks Pro, but in any case you need to be using some form of computerized accounting system.

Question:    As far as the actual project itself what is the most important thing to starting and maintaining a practice?

EB:  Make the client happy.   Make sure that they have realistic expectations.  If their expectations match what their perception of their experience is, they will be happy.  Whatever you do don’t make promises that you don’t deliver on, and even if you have so say you are behind schedule or are having issues return all calls promptly.  It lets the client know that you respect their time and their concerns and gives them an opportunity to adjust their expectations.  Happy clients will refer you.  For me, I look for repeat clients.  I like to find a good client and keep them happy for life.

Question:  What should my budget be for starting a new business?

EB:  It depends.  The basic concept of the Profit and Loss Statement is income minus expenses leaves net income, or what you get to keep.  If you know and can realistically anticipate the income, and you know what you need to live, you can work the equation to show you what expenses you can justify.  Likewise, if you know how much you need to make and know what your expenses are then you can project how much you will need as gross income to get to where you want to be.  

Wednesday, July 13, 2011

Bidding vs. Design Build

Design/ Build for most small projects is where the general contractor is providing the design, engineering and permit submittal drawings.  It is marketed as an expedited way through a construction process.  The claim is that communication is simpler, there is one point of responsibility, and the whole process is faster and more streamlined.   This is true to some extent.  However in my 34 years of experience, I have found that for most small to medium sized projects, the advantages of design/build are substantially more beneficial to the contractor rather than to the owner.  Here is why.  In most small to medium construction companies, there is no full time dedicated architect or even a drafter; that is too much overhead to maintain.  They may market themselves as a design/build general contractor.  But what you will find is that they offer design build services because they have a deal with an architect, engineer, designer or draftsman to work with them for the design phase of their work.  And, in most cases they will have the subcontractors produce the mechanical electrical and plumbing drawings.  I have experienced disasters in trying to submit sketchy sub-contractor drawings that the building department rejected.  So if the design/build contractor says he’ll save you the cost of the design, be assured that somewhere, he will be building it into the cost of construction.  Nobody works for free, and if they do you’ll be getting what you pay for.  So, typically the designer, working with the design/build contractor, will come up with some designs to review with the owner.  

This is where the design process gets short circuited; the designer will not be learning the owner’s needs and suggesting creative options.  Instead the emphasis will be to expedite the process, come up with a design quickly that the owner will accept and the contractor feels that they can build economically and with speed.  The contractor will have factored into his price a fixed amount for the design.  Remember, a contractor will have given the owner a price for the construction and will be under contract with the owner before he starts spending money for his designer to start work.  The contract may have a range of prices or have a base price plus some options.  But lets say for example, the owner wants to build a mezzanine in his warehouse.  He’s not used to thinking about the details of construction, he’s looking at the big picture and is anxious to start business in this space.  The contractor gives the owner a very appealing number to start but there is never any discussion regarding the mezzanine railings.  The contractor figures for a wood stud and sheetrock railing that is 42” minimum height to meet code.  However, during construction the owner realizes that the railings will be solid and says that he had always anticipated open railings, so he could see better into the space below.  The contractor says, “this is the way it’s always done” and that he just figured that was the way the owner wanted it, the cheapest possible.  Now what does the owner do?  The contractor says that if the owner wants wrought iron railings it will be an extra to the contract but he offers to get a quote from his wrought iron company.  The quote comes back and it seems awfully high to the owner.  The owner doesn’t know if the number is fair or not.  He certainly doesn’t want to stop the construction process; he’s too deep into his contractor to fire him and start over, so he agrees to the extra cost.   Believe me, when a contractor has your building or house torn up, you are largely at their mercy.  The owner always feels like they have power and leverage until after the contract is signed and construction starts.

In the case of the railings above, if the owner has a design professional who is working for their best interests, they would immediately request or help you get comparative quotes for the steel railing.  Even if a change order were justified, would the owner have thought to have the contractor subtract out the cost of the wood stud railings he had originally budgeted for?  He’s not going to do that work now, so the materials and labor for the original railing system needs to be subtracted from the additional cost of the steel railings. 

There is a reason that the architect’s drawings, specifications, and the 8 ½ x 11 written agreement with the general contractor are called the contract documents.  They form the contract between the owner and general contractor.  Those big sheets of paper that the architect produces are part of the contract.  It just happens to use drawings more than words.  The more clear and detailed those drawings are, the tighter the contract is and the less the owner has to rely on the word of the contractor.  With a design/build contract you will be signing the contract prepared, executed and interpreted by the design/build contractor.  In the case of a disagreement, there is nobody to stand between you and your contractor.

In a design/build scenario the less detail that is included in the drawings the more it can work in favor of the contractor.  It leaves it open to interpretation and the contractor will be the one interpreting them.

In a design/build scenario for instance, if the contractor has billed and been paid for three quarters of the work and only half of the work is done, then if anything should happen to him, including insolvency, injury, abandonment, or death, the owner is out of luck.  In traditional design/ bid/ build contracts where the architect is doing construction observation, payments will not go out to the contractor until after the work is done and the architect has certified payment based on the percentage of work complete minus a 10% retainage.

Questions the owner might ask when offered a design/build contract to sign: does the contract include a date for completion, and a per day penalty if that time is exceeded?  Okay maybe the contractor told you that those contract clauses were not enforceable in this state.  True, but if there is a commensurate amount of reward incentive for everyday he is early, then it is enforceable.  Does the contract call for a 10% retainage to make sure that the project gets completed as the traditional AIA contracts do?  Does the contract include a schedule of values and a payments schedule?

I advise owners that the traditional way is almost always the best way for our small projects.  Owners will be well served to start by defining the contract as clearly and as completely as you can through a quality set of construction documents from someone that is your agent and works for you.  There will be less uncertainty and the bids that you do receive will be more competitive.  I tell clients that the amount of money you spend on upfront design fees you should save by getting more competitive bids.  You will also have more control of the project and another seasoned professional to represent your interests.

Certainly I’m not suggesting here that all design/build contracts or contractors are bad; I just think it’s not in the owner’s interest in most cases for small to mid sized projects.  There are some owners who have an in-house development team, a construction manager, or who are repeating a familiar building type, and are seasoned construction professionals for whom design/ build can work well.  But for those owners who are embarking on their first construction and development project, this advice applies. 

Be savvy when it comes to bid allowances.  If the contractor puts an allowance number in the contract, say $2,000 for light fixtures, you should have some realistic idea of how much light fixtures will actually cost and the quality that you will be getting.  If the actual fixtures cost $10,000 then the allowance may have been used to make the design/build contract price seem less than a competitors’.  But in any case, it gives the owner a budgeting shock.

And one last word of warning, don’t be seduced by a low initial design/build contract price.  You need to look at all of the ways that cost increases can be built into the contract.  Usually, the first price number is the lowest one you will see.

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