Architect’s Compensation Based On A Percentage Basis: The New AIA Documents

By: Werner Sabo, Of Counsel

In late April 2017, the AIA released new versions of its flagship documents, including several owner-architect agreements. One provision found in the new 2017 version of various owner-architect agreements (such as B101 and B103) defines how the architect is to be paid when the fee is based on a percentage, as opposed to a flat or hourly fee. Percentage fees have been used for many years as they provide a rough correlation between the cost of the project and the work required by the architect. There are, however, a number of problems with this type of fee arrangement, some of which can irritate either the owner or the architect. The AIA has tried to address some of these issues.

Issues often arise as to how the architect will bill the client under a percentage fee. Bills are normally sent monthly until completion of the services. How does the architect calculate these interim bills? In ¶11.5 of B101, the architect can fill in percentages for each phase of work. For instance, the schematic design phase might be set at 10% of the total fee. If that fee is a flat $2,000,000, then the architect Is entitled to $100,000 when schematic design is 50% complete and $200,000 at the completion of schematic design. When the fee is a percentage of some other number, such as the owner’s budget, or the Cost of the Work, this calculation becomes more difficult. What is the total fee that the architect will be entitled to?

Prior versions of these AIA documents tied the percentage fee more directly to the “Cost of the Work,” which is the actual construction cost of the bricks and mortar. One problem with this is that the actual cost is not known until at least the time the owner has signed a contract with a contractor. Those versions of the AIA documents used this actual contract amount once bids are received, and used the owner’s budget prior to that time. In the current versions of the AIA documents, the documents use the “Owner’s budget for the Cost of the Work” throughout. Here is the relevant provision:

11.1 For the Architect’s Basic Services described under Article 3, the Owner shall compensate the Architect as follows:

.2            Percentage Basis

(Insert percentage value)

(              )% of the Owner’s budget for the Cost of the Work, as calculated in accordance with Section 11.6.

From this, and ¶11.6, set forth below, an owner might conclude that he can pay the architect based on the last budget, even if the bids come in substantially higher. This would be wrong, as clarified by ¶6.6, discussed below. Here is the new provision:

11.6 When compensation identified in Section 11.1 is on a percentage basis, progress payments for each phase of Basic Services shall be calculated by multiplying the percentages identified in this Article by the Owner’s most recent budget for the Cost of the Work. Compensation paid in previous progress payments shall not be adjusted based on subsequent updates to the Owner’s budget for the Cost of the Work.

Note the last sentence of ¶11.6, which states that the architect cannot adjust prior progress payments if the budget changes. This does not mean, however, that the architect is not entitled to the full percentage fee for the project. For instance, assume that the owner’s budget is $1,000,000 and the fee is 5%. Now assume that the architect has completed 25% of its work and has billed $12,500 (1,000,000 x 5% x 25%). Next assume that the owner’s budget has increased to $2,000,000. The architect will not be able to currently bill another $12,500. But at the end of the project, the architect will be able to invoice the owner for any difference between what had been paid to date and $100,000 (5% of $2,000,000), thus making up for the missing fee. This is a simplified example. In the real world, the cost and corresponding budget will likely change many times during construction due to approved change orders.

11.6.1 When compensation is on a percentage basis and any portions of the Project are deleted or otherwise not constructed, compensation for those portions of the Project shall be payable to the extent services are performed on those portions. The Architect shall be entitled to compensation in accordance with this Agreement for all services performed whether or not the Construction Phase is commenced.

The provisions of ¶11.6.1 address the situation where the owner deletes parts of the project after the architect has expended substantial time and effort on those deleted parts. There have also been cases where the owner abandons the project and argues that the architect is not entitled to any fee because there was no construction cost. This provision makes clear that the architect is entitled to be paid for his work, whether or not construction ever starts.

The owner is not permitted to keep the budget static. It must be adjusted from time to time, based on the status of the project, until the project is complete. Here is the provision that defines the “budget” process:

5.2 The Owner shall establish the Owner’s budget for the Project, including (1) the budget for the Cost of the Work as defined in Section 6.1; (2) the Owner’s other costs; and, (3) reasonable contingencies related to all of these costs. The Owner shall update the Owner’s budget for the Project as necessary throughout the duration of the Project until final completion. If the Owner significantly increases or decreases the Owner’s budget for the Cost of the Work, the Owner shall notify the Architect. The Owner and the Architect shall thereafter agree to a corresponding change in the Project’s scope and quality.

This paragraph references ¶6.1,” which defines the “Cost of the Work:”

6.1 For purposes of this Agreement, the Cost of the Work shall be the total cost to the Owner to construct all elements of the Project designed or specified by the Architect and shall include contractors’ general conditions costs, overhead and profit. The Cost of the Work also includes the reasonable value of labor, materials, and equipment, donated to, or otherwise furnished by, the Owner. The Cost of the Work does not include the compensation of the Architect; the costs of the land, rights-of-way, financing, or contingencies for changes in the Work; or other costs that are the responsibility of the Owner.

Note that the Cost of the Work might be greater than the amounts the contractor is paid. On some projects, such as churches, some of the materials and labor are donated. While the owner does not pay such costs, the reasonable value of these free items are included in the Cost of the Work as well as the owner’s budget. If the fee arrangement is on a percentage basis, the percentage is also calculated based on the value of the free items. This is only fair, as the architect will be designing and specifying that work and those items, no matter whether the owner actually pays for the labor and materials. As stated above, the AIA document provides that the owner’s budget will be updated, as set forth in ¶6.2:

6.2 The Owner’s budget for the Cost of the Work is provided in Initial Information, and shall be adjusted throughout the Project as required under Sections 5.2, 6.4 and 6.5. . . .

This paragraph refers to three other sections of the agreement. ¶5.2, set forth above, states that the owner will update the budget as necessary until final completion. This means that the architect is entitled to the fee based on the owner’s last budget – the one at final completion. During the project, when real numbers from contractors come in, under ¶6.6, the owner will update the budget based on the bids. If the bids come in too high, the owner has several choices, including increasing the budget, redesigning the project to lower the cost, or abandon the project completely. At the time of final completion, the architect’s fee and payments made to the architect will be reconciled, with the architect entitled to bill for any shortfall in prior billings.

The owner’s budget for the Cost of the Work is, therefore, based initially on estimates. Once bids are received, the lowest bona fide bid becomes the new budget unless that bid exceeds the previous budget. If that occurs, the owner can take one of several actions: increase the budget; rebid or renegotiate with the contractors; terminate the project; or revise the scope of the project and have the architect prepare drawings for a lesser scope. See ¶6.6. Assuming the project continues, a new budget will then be established, based on the results of one of these actions. Once construction is underway, the budget will continue to be modified based on all approved changes to the project. At the end of the project, the final budget should equal the amount to which the contractor is entitled to (including amounts paid and to be paid) at final completion (except for “free work,” discussed above).

The 2017 provisions of the AIA documents provide a well-thought-out process whereby the architect will be properly compensated for a percentage-based fee. That fee is based on the owner’s budget, but that budget is not dependent on the whims of the owner. Rather, it is continually updated based on what actually happens on the project. The architect can submit bills based on the current budget and the extent to which the architect has completed its work. At the completion of the project, there is a reconciliation to permit the architect to recover any amounts that were not billed due to changes in the scope of the project or the costs involved.

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