Fee Proposal on an Occupied Renovation
A nine-person firm is shortlisted for a 14,000 sf renovation of an occupied 1970s office building for a nonprofit. The owner's stated A/E budget is $118,000, fixed fee, covering all phases including construction administration. Your estimator projects 780 hours: 520 hours of licensed staff at $62/hr direct labor cost and 260 hours of technical staff at $48/hr. Approved billing rates average $152/hr. Your last three occupied renovations each ran about 15% over projected hours. The firm's overhead rate is 142% of direct labor and the annual profit target is 12%. The client wants a lump-sum proposal with no additional-services provisions, and wants an answer within four days.
1. Is $118,000 an adequate fee? Show the arithmetic the firm should actually use, and state how many hours the fee really buys.
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Build the fee from cost, not from the published billing rate.
- Direct labor cost: (520 x $62) + (260 x $48) = $32,240 + $12,480 = $44,720; blended $57.33/hr.
- Required net multiplier: (1 + 1.42 overhead) x 1.12 profit = 2.71.
- Required fee: $44,720 x 2.71 = about $121,200.
- Hours the fee actually buys: $118,000 / 2.71 = $43,536 of labor / $57.33 = 759 hours, which is 21 hours fewer than planned before any overrun.
At $118,000 the effective multiplier is 2.64 and profit lands near 8% of revenue instead of 12%. Working from the $152 billing rate ($118,000 / $152 = 776 hours) hides the same shortfall.
Risk-adjusted, it is worse. A 15% overrun means 897 hours and $51,400 of labor, requiring $139,400; at $118,000 the project loses roughly $6,500. The fee is not adequate on either basis.
2. The client says $118,000 is absolute and insists on a lump sum with no additional-services language. What do you put in the proposal?
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Since the price is fixed, the scope has to move. Convert the risk into definitions, not optimism.
- Define what $118,000 buys: SD through CD, weekly site visits during CA, one submittal review per section, one punch walk. Excluded: FF&E, signage, post-occupancy services, additional CA visits, redesign for scope changes.
- Phase the authorization: firm fee for SD and DD; CDs and CA authorized at the end of DD, re-priced against actual DD hours. This turns an unknown into a decision point without weakening the lump sum for the early phases.
- Cap hours and state rates beyond the cap: $152/hr licensed, $118/hr technical, reimbursables at cost.
- State schedule assumptions: one owner review cycle of 10 business days per phase; each additional cycle is additional service.
- Put the choice to the client: 759 hours of scope at $118,000, or the full scope at $121,000-$139,000.
Removing the additional-services clause is a fee cut, not a wording change. If the client cannot accept either option, declining is a legitimate business decision.
3. Your marketing principal argues the project should be taken at a loss for portfolio value. How do you evaluate that argument?
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Compare the fee to the firm's cost of delivering the hours, then to what those hours would earn elsewhere.
- Revenue per hour at the expected 897 hours: $118,000 / 897 = $131.60/hr.
- Revenue per hour needed to cover overhead and hit the profit target: $57.33 x 2.71 = $155.40/hr.
- Deficit: about $23.80/hr x 897 hours = $21,300 the rest of the firm subsidizes, roughly 140 hours of profitable work.
A strategic project can still be rational, but only with explicit conditions: (1) the 897 hours would otherwise be non-billable, in which case the correct comparison is marginal cost, not full overhead; (2) the client is a genuine gateway with a specific follow-on project and a realistic probability, not a hoped-for one; (3) the downside is capped by the phase authorization above; (4) the loss is booked as a marketing expense with the principal's name on it, not buried in the project budget.