This media page offers reviewers a quick and exciting look at our newly-released Fees and Pricing Benchmark Report: Architecture, Engineering, and Construction Industry 2008. We’ve highlighted a few story ideas for you that we think are interesting and have provided materials to support these. Feel free to use whatever information that you may find to be interesting and thought-provoking.
You should find these links helpful in finding more information about the report and the contents:
• View the report landing page and order information here: Fees and Pricing Benchmark Report: Architecture, Engineering, and Construction Industry 2008.
• Email Kelly Kerr – kkerr@raintoday.com to arrange an interview with one of the report authors.
• Read on for story ideas from the report and to view related charts and graphs, including –
1. Does Brand Really Make a Difference?
2. Discounting: Highly Criticized Yet Highly Used
3. Client Value (and communicating it) is the Biggest Pricing Challenge to Overcome
4. Prices on the Rise Despite Threats of a Recession
5. Brand, Market Conditions, and Overhead Costs are Driving the Price Increases
6. Premium-price firms: What do they do Differently?
• After the story ideas, you’ll find 5 analyst comments from the report authors Mike Schultz and John Doerr, and verbatim comments from survey respondents.
Story Ideas
1. Discounting: Highly Criticized, Yet Highly Used
While most architecture, engineering, and construction firms criticize the use of discounting, 67% of architecture, engineering, and construction firms report that they do indeed discount their fees.
The average discount level: 8.2%.
Typical or Average Level of Discount vs. Published/Initially Mentioned Rates
Comment from report authors, Mike Schultz and John Doerr, “With the average discount level being 8.2%, 67% of firms could be missing out on an additional 8.2% in fees that goes straight to the bottom line. And for many firms, this could be the difference between being profitable or not.
If price is an objection (and it always is) don't jump straight to cutting price - cut the deliverables and promised outcomes first and the decrease in price will follow (without forfeiting project profitability).
2. Client Value (and communicating it) is the Biggest Pricing Challenge to Overcome
The top 3 challenges of architecture, engineering, and construction firms when it comes to pricing are:
1. Pressure to compete on price - clients (47% rated as “extremely/very challenging”)
2. Pressure to compete on price - competition (47% rated as “extremely/very challenging”)
3. Uncertainty about price client will accept ( 40% rated as "extremely/very challenging")
Top 3 Challenges in Pricing Decisions (rated as at least “somewhat challenging”)
All of these challenges fall under the general category of client value, whereas other lesser challenges are focused internal – focused on the firm.
Comment from report authors, Mike Schultz and John Doerr, “Should a firm be able to increase its perceived and real value to clients, then:
• Clients will likely be willing to accept higher fees (though, granted, with each client you may never know the exact fees they will actually be willing to accept).
• You will be less worried about your competition because you will be more confident in the fees you are charging.
• Clients will pressure the firm less because they will have confidence in that firm’s ability to deliver additional value.
Focusing on value you provide for clients, and strengthening the overall value proposition of your firm, can decrease some of the top challenges we found in pricing services.”
3. Prices on the Rise Despite Threats of a Recession
The majority (80%) of architecture, engineering, and construction firms have seen their fees-for-services increase at least somewhat in the past two years and another 67% of firms expect their fees to increase at least somewhat in the next one to two years.
Predictions of How Fees Will Change in Next 1-2 Years
Comment from report authors, Mike Schultz and John Doerr, “Right now, the United States economy is uncertain at best. Yet, even though the economy has slowed, the data suggests that most architecture, engineering, and construction firms have either not felt an economy-induced pinch or are not adversely affected by downturns. It will be interesting to see how the next several quarters of U.S. economic growth (or lack thereof) will actually affect fees for AEC services.”
4. Costs, Market Conditions, and Brand are Driving the Price Increases
We asked architecture, engineering, and construction firms to write-in the top three factors that influenced their fee increase and found the top factors to be:
1. Costs/Overhead
2. Competition/Market Conditions
3. Company Improvement/Experience/Reputation
Don’t take our word for it, the respondents themselves said:
“(1) Labor costs (rising salaries), (2) Overhead costs (office space, utilities, etc.), (3) Benchmarking with similar firms.”
“(1) Increased costs of operations (travel, reproduction, etc.), (2) Increased costs of
salaries, (3) Better positioning of the firm.”
“Experience of personnel, inflation, and desired profitability.”
“Inflation of hourly wages in our region, increase in costs of raw materials we consume in serving our client, gasoline prices.”
5. Profit Leaders: What Do They do Differently?
Most architecture, engineering, and construction firms (77%) earned a profit (EBITDA) of some sort for their most recent fiscal year, with 13% reporting a profit of 20% or more.
Profitability In Most Recent Fiscal Year
Two decision factors emerge as being slightly more important to the more profitable
firms:
• the relationship with the prospective client; and
• how interesting the work is for the firm.
Additionally, the profit leaders are slightly less likely to consider their firm’s experience to be an “extremely” or “very important” pricing decision factor, versus the less-profitable firms (91% less-profitable firms vs. 77% profit leaders).
Analysis & Commentary from Mike Schultz and John Doerr:
Break Out of the Going Rates Spiral
While many see using the going rates strategy as a necessary evil of getting new clients in a competitive marketplace, it also feeds into the lament “We are becoming a commodity.” If you cannot articulate the distinctness of what you offer, of course you are forced to charge what everyone else is charging.
AEC firms are caught in this spiral more often than other professional services firms due to the dynamics of the oh-so-common RFP process. Responding to RFPs in the traditional way — answering the prospects’ questions one by one, providing examples of similar work, and putting down a price that is similar to your competition’s — results in the no distinction, commodity, going rates spiral.
If you can be innovative and approach the RFP process in a way that builds a relationship, you demonstrate your distinctiveness and break free from the going rates spiral (and you will find that you can charge and receive higher fees).
The "Billable Hour" vs. "Value-Based Pricing"
There is much talk about value-based pricing and the idea that this will replace the old thinking of billing by the hour for services. According to this survey, the billable hour is still the preferred method of pricing among AEC firms – with 97% of firms using this tactic and 45% using it “most of the time” compared to 76% of firms using value-based pricing, with only 18% using it “most of the time.”
In our field of work, we’ve found that those firms who have figured out a way to move away from the billable hour towards value-based pricing have been able to actually deliver more value to their clients, which in turn has lead to greater ability to articulate value and less pressure to compete on price. How to employ value-based pricing can be the subject of its own research and analysis. But as a start, a firm not using this strategy should answer these questions:
• Can we employ the strategy? (Selling to government and in regulated markets sometimes hinders a firms’ ability to do this, but then again, in many cases it doesn’t.)
• For which services do we deliver stronger value than the competition?
• In what areas do we deliver strong value in the eyes of our clients?
Once you have meaningful answers to these questions, you can then define a strategy for employing value-based pricing.
It's All About the Relationship
Seemingly subtle but very important differences can be found in the data. One of the least important factors was whether a client has worked with the firm in the past (32% “very” or “extremely” important), whereas the firm’s relationship with the prospective client was at least “very important” to more than twice as many firms (72% “very” or “extremely” important). While these two factors may seem similar on their face, they’re not.
For most firms, it’s less important that it worked with a client in the past, and it’s more important how well the engagement went and where it is now in the relationship. Perhaps the prospect has never worked with the firm in the past, but has been an amazing referral source for years. This may be essential to how the firm wants to deal with them going forward as a client. In another instance, a client has worked with you in the past, but since then your firm has evolved and is no longer focused on that particular type of company or need.
How and When to Engage in Price Research
Ask and you shall receive. Time and again we’re asked, “Do you think I should ask the prospect what other firms have proposed to do, and for what fees?” While the specific dynamics of the situation warrant whether or not you should ask, if you do ask what other firms have put forth for fees, they’ll often tell you. Indeed 77% of firms surveyed find out about competitor pricing and fees from clients and prospects.
Competitive pricing research is common. AEC is a competitive business— four out of ten firms engage in proactive research to uncover and understand their competitors’ fee structures.
The top challenges noted regarding pricing were “Pressure to compete on price” from clients and competitors. If your firm feels these pressures, you would be wise to engage in competitive pricing research. You may not learn what a particular client might have accepted as a price, but you’ll learn much about what the market will bear regarding your services pricing.
Does Value-Pricing Mean Higher Pricing?
Many firms make the mistake of equating “value pricing” with simply “charging more.” This is largely not true.
Service providers in architecture, engineering, and construction lament “my service has become a commodity” yet, in the same fields, other service providers garner higher fees for the “same” service.
Both of the above statements are based on the fact that these companies often actually do provide more value and thus, the service itself isn’t the same. Treatises have been written about how to deliver more value. From the data in this report, it’s simply worthwhile to note that the premium-price firms are more likely than other firms to take advantage of the opportunity that value-pricing provides.
Verbatim Comments From Survey Respondents:
Pricing Strategies:
“Learning the right prices to charge will always be a trial-and error process; but it gets easier as you work toward a standardized fee structure. You also learn where you can afford to be flexible in pricing, in order to squeeze the most value out of a job, for both you AND the client.”
“Don't be afraid — if you offer value, you are worth it. And, sometimes, raising your price is the best approach to take.”
“You get what you pay for. It is perceived that if you pay a bit more, you will get a better product. We don't care to have clients who are satisfied with 'OK'. We expect and produce the best.”
What Respondents Say About Hourly Rates:
“The rate that we can charge is as defined by insurance industry schedules.”
“Architects are notoriously bad about judging how much time a project will take, and often the worry about overpricing combines with an optimistic estimate of time needed such that we consistently under-price projects.”
“We structure our fees as hourly up to a percentage of construction costs. The billable time (within the percentage agreed upon) vs. time actually involved in the project sometimes varies.”
“Design firms do not always load the hourly rates charged by the professional staff with their administrative or research staff costs. We had an attorney client once who purchased our services on an hourly basis and then refused to pay for the hours of the administrative person who was assisting the principal architect with the work. We had to bill the architect out at more hours to recoup the admin time.”
Retainer Fees:
“We charge a retainer for prototype designs for franchisee clients -- because our ‘client’ is different for every project, but the project is the same.”
“While the formulas vary widely, the calculation tends to be based on ‘projected ours to be worked’ rather than ‘value delivered."
Why Respondents Say They Do Not Contingent/Incentive Fees:
“It is not accepted within our industry (consulting engineering) which prices based on person-hours.”
“So much of our work can be directly tied to the client and their meeting milestones and objectives. They may not meet theirs but expect us to meet ours. Not a fair game and we won't play it.”
“We base our fees on an hourly rate structure, with an agreement that the final costs of our services will fall within a percentage range of construction costs.”
“We simply ask that if we spend an hour on our client's project that they pay us for that hour. If the client is not happy with the results or quality during or after the engagement we expect them to communicate this to our Firm the moment these concerns are realized and give us an opportunity to fix the issue(s) and respond to their concerns as a responsible organization.”
Pricing Tactics:
“The biggest challenge in our industry is low-price buying. As our clients are municipal government entities, the leadership is pressured by citizenry to use dollars wisely. This typically results in choosing the very lowest or one of the lowest bids.
This can be the case even with clients for which our firm has been the sole consultant for many years. Some firms will submit an extremely low price on a job, just to have work to sustain the staff level, or in hopes of gaining a foothold for future work with a new client.”
“We will play with our highest hourly rates where possible, but stand firm on lower-paid individuals in order to maintain some form of profit margin. We do
have some room, but not much as we keep them as close to 95% billable as possible.”
Firm Characteristics: Implications for Pricing:
What Are the Top Three Factors that Have Allowed You to Increase Your Fees?
Respondents Say:
Prices Increased 11 - 15%:
“(1) Increasing staff salaries; (2) Increased corporate overhead; (3) Increased profit margin.”
“Attract new staff, higher operations costs, staying with competition.”
“Increased demand for our products/services.”
“Market demand, market acceptance, firm visibility.”
Prices Increased 16%+:
“(1) Value of service, i.e., measured benefit to client, (2) Level of quality / service, (3)
Differentiation of service from our competitors.”
“Excellent market conditions (in real estate, and hence architecture). More and better
tools for architects - software, etc. Better staffing and management.”
“Increased demand for services. Increased cost of doing business-salaries, insurance, rent, etc. Increased taxes.”
“Labor costs, work load, reputation.”
Feel free to use any data, charts, or analysis laid out on this page for your own publication. If you would like to schedule an interview with one of the report authors, contact Kelly Kerr - kkerr@raintoday.com.