Editor's note: The following story originally was part of a series and appeared in the October, 1999 issue of Architectural Record magazine. Kubany is a former staff member and Linn is currently deputy editor.
Architects are looking for the holy grail, the secret of what to charge clients. Our profession's attitude toward fees has rendered this the single most confusing topic for architects, when making money should be a natural reward for hard work, ideas, talent, and knowledge. But to understand why architects have such a problematic attitude toward fees, we have to comprehend the problem.
There are reasons why the topic of fees is shrouded by fear and mystery. Architects did not arrive at their current state of financial anxiety overnight. The question of how to charge clients for value received has plagued them from the early days of the profession. The saga includes a gradual but ever increasing responsibility without commensurate compensation, two Justice Department lawsuits, and a profession whose complexity has grown exponentially over the years.
The profession emerges
A dispute over fees led to the emergence of the modern notion of architecture as a profession. In 1861, Richard Morris Hunt sued a client who refused to pay his fee. During the trial, several architects testified that their customary charge was 5 percent of the project's cost, and the jury agreed, setting 5 percent as the standard accepted minimum compensation. The litigation launched a new era, setting an important precedent for the recognition of architects as professionals -- no longer merely building designers engaged in construction trades -- who are entitled to a fee for design.
Within a few years, on June 4, 1866, the fledgling American Institute of Architects issued its first document, a ''Schedule of Charges,'' which further confirmed 5 percent as the proper charge for architectural services, including preliminary studies, construction documents, and site visits.
The primary accomplishment of the first schedule was to set a fee for a whole service, rather than itemize charges by the drawing or by the hour. This innovation set architects apart from members of the building trades and unions -- a distinction the profession was anxious to make. ''It was an easy way to calculate compensation,'' says Tony Wrenn, who recently retired as the Institute's archivist. ''But the point was really to establish what an architect provided, and what clients were going to get for their money. Without that, there was no rationale for hiring an architect.'' The document's main flaw was that it did not establish how the involvement of architects could produce better buildings than contractors working alone.
|Stagnant Percentage-of-Construction Fees Throw Designers A Curve|
The all-knowing architect
As the 19th century progressed, the growing complexity of building technology vastly increased the knowledge required for architects, but fees did not keep up. Taller structures emerged in response to rising land values and new building materials. The advent of systems such as electricity, indoor plumbing, centralized steam heating, and ventilation made daunting the range of information that an architect had to master.
In a landmark 1888 New York case, Hubert v. Aitken, the courts ruled that technical knowledge is a reasonable requirement of an architect. In that case, the architect had improperly sized a boiler chimney but insisted that the error should have been caught and corrected by the plumber. The judge wrote: ''No one would contend that at this day an architect could shelter himself behind the plumber and excuse his ignorance of the ordinary appliances of sanitary ventilation by saying that he is not an expert in the trade of plumbing . . . why should not the architect be expected to possess the technical learning that is exacted of him with respect to the other and older branches of his professional studies?'' No mention was made of compensating architects for this technical acumen.
As time passed, the increasing need for more detailed construction documents and on-site supervision made the architect's role even more burdensome. In another 1888 landmark decision, the AIA issued its first standard form of agreement between owner and contractor, the forerunner of the AIA's Document A201, which increased the architect's liability even more by making him the owner's agent.
A year later, in 1889, another case, Coombs v. Beede, decided the architect's professional status and consequent duties. The court listed the architect's ''skills, ability, taste, and judgment'' as his hallmarks. In addition to the technical learning cited in Hubert, the architect had to possess the aesthetic sense and capacity to make decisions on the client's behalf -- a role analogous to that of lawyers and doctors.
Again: no mention of money.
Looking back, it is difficult to understand why the AIA's 1888 constitution and bylaws included a 5 percent fee schedule very similar to the one it had published in 1866, despite the increasing scope of the architect's work. More imperatives lay ahead, however.
Licenses, 6 percent, and a code of ethics
In 1897, the architect -- or, more precisely, the person hoping to become an architect -- took on yet another requirement when, after years of debate, Illinois became the first state to enact a licensing law. Although more than 600 architects entered the profession under a grandfather clause, the others could receive licenses only after presenting a diploma from a school of architecture or passing a comprehensive three-day examination that covered construction, strength of materials, sanitary codes, and a one-day sketch problem. Other states soon followed. Finally, after decades of steady changes, architects made one small leap forward in gaining compensation: in 1908, the AIA raised its fee schedule to 6 percent.
This schedule was not mandatory, however. Even then, open competition made firms fight for certain jobs; some firms undercut competitors based on fees, what some might call bottom feeding, today. In his 1918 essay ''How Should an Architect be Paid?'' Charles Harris Whitaker, then the editor of the Journal of the American Institute of Architects, explained that competition developed ''among those who practiced architecture, whether as professionals or as amateur builders. This led to a reduction in the fee charged as a method of obtaining business.''
To combat such competitive bidding, the AIA tried to regulate its members. In 1909, after much discussion, the AIA issued its first Circular of Advice Relative to the Principles of Professional Practice and Canons of Ethics, which imposed rules of conduct on its members. It stipulated the following: members could not advertise, engage in the building trades, offer free services, or compete for work on the basis of professional charges. In short, architects had to answer to a higher authority.
Click here to view chart
An inherent conflict existed between the AIA's schedule of fees and its code of ethics. On one hand, the fee schedule was advisory, not mandatory; on the other, the code of ethics deemed competition between architects on the basis of fees unprofessional. So architects were pricing their services according to a general average, not individual merit, creating the impression that all architects were entitled to the same fee for services rendered. According to Whitaker, this set up several problematic conditions: first, it ''made it possible for the incompetent to creep into the public esteem while demanding equal remuneration; second, it placed a great handicap before the young man who desires to enter the profession by forcing him either to ask a fee to which he is not entitled, (and seldom can obtain) . . . or by treating him as a renegade because in order to establish himself in practice, he works for less [compensation] than established men.''
While some things changed, much remained the same. By the time the 1928 Handbook of Architectural Practice was published, the schedule of proper charges was still 6 percent. The AIA had amended the various means for compensating architects to include a fee-plus-cost method. The Handbook also acknowledged that architects were often hesitant to enumerate their fees, stating, ''The strange timidity that Architects display in informing clients of their charges and their willingness to go forward without any understanding whatever, are disreputable to them as men of affairs. Such conduct leads to misunderstandings, disputes, and litigation.''
Although the Handbook underwent revisions over the next 30 years, the concept remained constant. By the 1951 Handbook, local chapters assumed the responsibility for developing fee schedules, and most came up with complicated multitiered charts that showed what firms should charge for different kinds of work.
The Handbook still advised its members to follow these fee schedules, and there was very little regard for firms that did not. AIA members Clinton Harriman Cowgill and Ben John Small wrote in their 1949 book, Architectural Practice, ''If any firm wishes to go on record as charging less than the others, it should do so . . . the service of some firms is undoubtedly worth less than that of others . . . When fees are cut beyond a certain point, the only way to avoid loss is to reduce the quality of the service, or to resort to dishonest practices. Either of these is distasteful and reprehensible . . . Rather than resort to the latter, it would be more admirable to engage in a bolder, outright criminal career.''
Despite the fact that a majority of firms did adhere to the fee-schedule recommendations, the profession was sliding into economic trouble. In 1966, the AIA commissioned a study, The Economics of Architectural Practice, from Case and Company, a San Francisco management consultant, to examine the actual profits and costs of running architectural practices. Case and Company visited and conducted interviews with 223 firms in 47 states. Among the conclusions, the consultant determined that ''most firms do not understand the significance of costs . . . nor maintain adequate time and cost records.'' Furthermore, ''the average architect loses money on one job out of four.''
The report showed that four-fifths of the firms used the percent-of-construction-cost method for setting fees (averaging $ 6,820 profit per project). Between 1960 and 1966, costs for outside consulting and technical and support staff had soared in comparison to building costs between 1960 and 1966, so architects using this method saw diminishing profit margins . The average salary for principals in firms billing more than $ 2 million per year was $ 29,629. The Case study offered a valuable glimpse under the microscope for the profession. In retrospect, it highlights the fact that a fee schedule, based on a percentage of construction cost, was not a panacea.
Click here to view chart
The percentage method had two major shortcomings. First, there was an ethical issue. Although the architect stood to make more money as building costs rose, as the owner's agent, the architect would try to keep the costs low, but was not compensated for extra work required to do so. Second, there was a distorted equality dilemma. In theory, using the percentage-of-construction-cost method, the fee for a project would be the same no matter which firm was hired to do the work. But each architecture firm provides different levels and kinds of service, as well as radically different results.
The end of fee schedules
Despite clear signs of economic troubles, the profession clung to the belief that architecture was not a product to be priced according to comparative cost. In the July 1966 revisions of AIA Document J330, the Standards of Professional Practice, the Institute still held fast to the notion that architects could not compete with each other based on fees. In the fall of 1970, the AIA reinforced this notion when it adopted new ethical standards stating that the architect should discuss scope and compensation with clients only after they had been selected on the basis of professional qualifications.
Around the same time, government attitudes toward antitrust laws were shifting. Before the late 1960s, Congress took the position that professions were exempt from the Sherman Antitrust Act because they were not involved in trade or commerce. But, the Justice Department began to investigate the ethical standards of many professionals, including lawyers, doctors, accountants, and engineers, on the grounds that their standards incorporated thinly disguised violations of the Sherman Act. The professions continued to maintain that the antitrust laws did not apply to them.
And so it came as no surprise when the Department of Justice advised the AIA's attorneys, on December 7, 1971, of its plans to file suit against the Institute because its ethical standards placed limitations on the Institute's members and amounted to a restraint of trade. Six months later, by the 1972 convention, negotiations resulted in a consent decree, a voluntary agreement accepted in lieu of litigation, which restricted the Institute from imposing any standard or policy prohibiting members from submitting price quotations for architectural services. Delegates on the convention floor voted that the AIA should accept the terms of the consent decree rather than continue to fight the Justice Department.
The consent decree struck fear in the hearts of many architects, who worried that once the floodgates of competitive bidding opened, bidding wars for architectural services would erupt and design quality would erode. The profession's high standards were at stake. The minority opinion asserted that the status quo -- fee schedules and ethical standards -- should be maintained to prevent this scenario.
The minority opinion -- which called for the AIA to fight the Justice Department in court rather than sign the decree -- was most eloquently expressed by Walter Wagner Jr., then editor in chief of Architectural Record, in his May 1972 editorial: ''The whole idea of early emphasis on price takes on the aspects of competitive bidding by architects with very different skills, staffs, and experience -- in the absence of identical documents for an identical end product, which is what contractors bid on the basis of . . . and that equates professional architectural services with buying a used car.''
But the majority argued that it had become increasingly difficult for architects to avoid discussion of compensation prior to their selection for a particular project. On June 19, 1972, the AIA settled this lawsuit with the Department of Justice by signing the consent decree. At the time, those holding the minority opinion considered this the beginning of the end of the profession. But, as John Morris Dixon, faia, editor in chief of Progressive Architecture from 1972-95, points out, the AIA had little choice but to settle the lawsuit: ''The Justice Department had unlimited money and unlimited staff. Going to court would probably have been a losing proposition.''
A move to cost-based compensation
Although the 1972 consent decree did not directly address the fee-schedule issue, a subsequent case against the Virginia Bar Association determined that such schedules were a form of price fixing. In response to this decision, the AIA asked the states to rescind their fee schedules and subsequently issued a series of publications dealing with service-delivery management. One of these documents, Compensation Management Guidelines for Architectural Services: A Manual on Cost-Based Compensation (February 1975), outlined the ideas and methods behind cost-based compensation. The concept was simple: architects would establish what it would cost in labor and overhead to complete a project. They could then increase this figure to allow for profit. The introduction of this new methodology for calculating compensation was an important step forward for the profession, although it also had the unfortunate consequence of reinforcing the notion that what architects have to sell is their time.
A second consent decree
In subsequent years, the American economy sank into recession and the profession struggled economically. In 1984, to help its members deal with their financial difficulties, the AIA's Chicago Chapter issued a compensation and fee policy statement. The AIA's general counsel immediately asked the Chicago Chapter to rescind the statement after distribution, because it violated the 1972 decree. But it was too late. In 1986, the Chicago Chapter was notified that the Justice Department's Antitrust Division was investigating alleged violations of the decree. According to Dixon, ''during this second investigation, the Justice Department essentially terrorized the AIA. Documents were confiscated and members were subpoenaed and required to testify before a grand jury. There was a threat of criminal prosecution.''
From December 1989 to June 1990, the AIA conducted settlement discussions with the Justice Department to work out an agreement on a civil, rather than a criminal, basis. Their dialogue resulted in a new consent decree, the most salient point of which established that the AIA and all its chapters would ''refrain from adopting any policies, rules, bylaws, or resolutions, or issuing official statements, that would restrain AIA members from a) submitting competitive bids or price quotations, including cases where price is the principal consideration in choosing an architect; b) providing discounts; and c) providing free services.''
The consent decree expires in October 2000. While the AIA will no longer be required to follow the decree's compliance requirements, such as holding annual...