Reading a Fixed-Fee Proposal Against Break-Even
A nine-person firm (six licensed architects, two interns, one administrator) is negotiating a fixed fee to renovate 28,000 sf of occupied office space. The principal's estimate is 1,150 direct labor hours at a blended direct labor cost of $70 per hour. Overhead runs 1.75 times direct labor and the firm targets profit of 10 percent of direct labor, so 2.85 is the target net multiplier. Reimbursables (large-format printing, travel, courier) are projected at $16,000 and are normally marked up 10 percent. The owner's RFP states a total budget of $240,000, "all inclusive, no additional reimbursables," and asks for three extra site visits plus full construction administration, which are not in the 1,150-hour estimate. The principal estimates CA at roughly 20 percent of design hours. About 40 percent of professional staff has no committed work for the next two quarters.
1. Does the $240,000 all-inclusive figure cover the work as scoped? Run the numbers and state the gap.
Read the worked answer
Scope hours. Design: 1,150 h. CA at 20 percent: 230 h. Total 1,380 h, or 1,380 × $70 = $96,600 of direct labor.
Full-cost fee. Break-even-plus-profit multiplier 2.85 → $96,600 × 2.85 = $275,310. Add reimbursables at cost plus 10 percent: $17,600. Required total: $292,910.
What the owner offers. $240,000 all-in, which already contains the reimbursables. Labor revenue is therefore $240,000 − $17,600 = $222,400, a net multiplier of $222,400 ÷ $96,600 = 2.30 against 2.85 - a shortfall of about $52,900, or 18 percent.
Sanity check at the original scope. Even without the added CA (1,150 h, $80,500 of labor), $222,400 yields 2.76 - barely above the 2.75 full-cost floor and nowhere near the target. The added CA scope is what pushes the deal from thin to clearly unprofitable.
Conclusion. The offer does not cover the work. The firm would be buying the project at roughly 82 cents on the dollar while absorbing all of the existing-conditions risk inherent in an occupied renovation.
2. The principal wants to keep the relationship. What does the firm put in front of the owner, and is there any defensible reason to take the job anyway?
Read the worked answer
Restructure, don't discount. (1) Quote labor at 2.85 on 1,380 h: $275,310. (2) Carry reimbursables as a separate not-to-exceed allowance of $17,600, reconciled monthly - never inside the fee. (3) Define CA numerically: a stated number of site visits, one shop-drawing review cycle per specification section, hourly rates beyond that. (4) Attach an existing-conditions rate schedule for concealed damage, hazardous material, and after-hours work, so surprises are time-and-materials rather than fee erosion. (5) Offer a phased release - programming and schematic design at a firm fixed fee, with authority to stop at design development.
When a below-target fee can still be rational. Overhead is largely fixed. If roughly 40 percent of staff hours would otherwise go unbilled, the relevant test becomes incremental: incremental labor plus variable overhead against revenue. At a 2.30 multiplier the job still contributes above its variable cost, so a case exists - but only if the work does not displace better work, the fee is never published as the firm's rate, and the scope is hard-capped.
The professional risk. An occupied renovation with undefined existing conditions is the wrong project on which to buy market share; the firm is most likely to lose money exactly where it has the least control.
Recommendation. Present $292,910 with the scope list attached. If the owner's budget is genuinely $240,000, cut the CA scope and site visits to fit - do not cut the multiplier.