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Business of Design

Fixed-Fee Design Projects: Charging Fairly and Profitably

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I think it’s fair to say that among the various ways designers charge clients, the fixed-fee (or “flat fee”) basis (at least as residential designers are concerned) is not as popular as others—e.g., presented price, cost-plus, etc. That’s unfortunate, particularly today, when projects are fewer in number, budgets are down, and prospective clients are more reluctant to start a project without having a real understanding of ultimate costs. Interestingly, over the past 12 to 15 months in my practice counseling designers, I notice more and more are being asked by their prospective clients to work on a fixed-fee basis.

When asked, your response should be, “Of course, I would be happy to accommodate you.”

“I can’t charge that way—I’ll lose my shirt!” Not so!

And if properly thought-out, with appropriate contract protection, you will not lose your shirt. You will secure a project, secure monthly cash flow, and more likely than not, actually make a profit! It doesn’t get better than that, does it?

The fixed fee is not a number you pull out of thin air. It’s a number you arrive at after carefully analyzing, at a minimum, the following factors:

  1. The scope of the project—in terms of project areas and services.
  2. Your client’s intended budget.
  3. The expected duration of the project.
  4. The staff support you need to provide the design services to support the project.
  5. Your past profitability on similar-sized design projects.

I offer the following (though rather simplified) hypothetical illustration of how I might approximate a fixed fee:

  • Your new client wants you to design three bedrooms, the living room, dining room, and library.
  • You understand from your client his initial budget is approximately $400,000, not including sales tax or reimbursable expenses but inclusive of your design fees.
  • All merchandise and third-party services will be billed by you or service providers at designer’s net cost.
  • The estimated duration of the project is 12 months.
  • You have successfully and profitably performed similar-sized projects in the past—but your typical fee arrangement was always cost plus 35 percent.

With this very basic information, I can begin to arrive at what the fixed fee might be. I first need to extrapolate two numbers from the $400,000 budget:

  1. The estimated fee I would have earned if I undertook the project on a cost plus 35 percent basis, and
  2. The estimated available purchasing dollars. Here’s how I do that—I take the budget and divide it by 1.35.

The sum of $296,296.29 represents the available purchasing dollars when the budget is $400,000 and the designer’s fee is cost plus 35 percent. The designer’s fee in that instance is determined by subtracting from the $400,000 budget the available purchasing dollars of $296,296.29; thus a fee of $103,703.71. Accordingly, if you were to quote a fixed fee on the basis of the above hypothetical, you now know the approximate fees you would have otherwise earned on your traditional cost plus 35 percent basis.

Pretty simple, isn’t it? Not so fast!

We now need to think about what could happen on any project that might jeopardize your profitability on a fixed fee. Well, what if, among other things:

  1. The project takes longer than 12 months.
  2. Your client can’t make up his mind and you have to constantly redraw your plans.
  3. The scope of the project changes.
  4. Your client decides to increase his budget to $650,000.

Recognizing, as we must, that we cannot protect against every threat to profitability in a fixed-fee arrangement, at a minimum your design agreement should include:

  • An Additional Services provision, and
  • A provision that allows you to increase the fixed fee, if your client spends more for purchasing merchandise and services than initially budgeted ("Subject to" Provision).

An Additional Services provision would provide that in addition to the fixed fee, you would charge for time expended under certain circumstances. Such circumstances may include (among others) where the scope of the project, the project time schedule, or the client’s design requirements materially change, or where the client requests more than a certain number of revisions to your concepts or proposals.

A Subject to Provision qualifies the fixed fee by allowing for cost plus compensation on project costs which exceed a predefined threshold amount.

Obviously the exact language you will use must take into consideration all of the other provisions of your design agreement, as well as the facts and circumstances of the particular project. But with the proper legal protection, a fixed-fee agreement can be very profitable while reducing the stress between you and your client.



Alan M. Siegel is a partner in the law firm of Levy Sonet & Siegel, LLP, 630 Third Avenue, New York, New York, 10017; telephone number ; email address: and serves as national legal counsel to the American Society of Interior Designers, Inc. He is the co-author of A Guide to Business Principles and Practices for Interior Designers, published by Whitney Library of Design. He represents the legal and business interests of interior designers, architects, design trade sources and owners, concentrating in the areas of contract law, commercial law, construction law, corporate law, licensing, intellectual property rights and general business law.

James T. Nerangis, a partner in the firm, assisted with the preparation of this article.

Reposted here with permission. Originally appeared as “I Can’t Charge That Way — I’ll Lose My Shirt! Not So!” in ASID New York Metro View, Spring 2009.

  

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