UNDERSTANDING DESIGN FEES

Post 713 -by Gautam Shah

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Designers often help their clients to acquire or dispose off entities in their completely prepared form. When the transaction originates at producers’ end, it is little above the cost, at a price. Price, reflects the value a producer attaches to an entity. Later transactions may not in any manner relate to an entity’s cost.

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For a thing to have a value, it must be transferable. A latent value becomes potent when it is perceived that someone needs the entity in some time and space, for a utilitarian or hypothetical purpose. A demand for a perishable commodity, if it, does not occur within the life span, is irrelevant. Similarly demand for something in a far off place cannot be satisfied, due to transportation hazards and handling problems. Air has a lot of utility but is not scarce. Rotten eggs may be scarce, but hardly have any utility. Friendship is very useful and scarce, but is not transferable or marketable.

Historic cost of creating a painting may be few drops of colour, a canvas and artists’ few moments. But once the fact is accomplished, the painting gains a very high value due to its extra ordinarily high relevance to the society. Relevance of a product in terms of its utility is (more) likely to degenerate over a period of time, but its value may appreciate or depreciate depending on its relevance to the owner or the society.

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Prices are effected in money. Prices go up or down depending on the fall or rise in the (universal) value of the money. Any change in money (monetary value) affects the prices of all things across the board. Value of a thing, however, is specific. There cannot be a general fall or rise in value of all things. Value of a thing goes up, when we can acquire or aspire for more or superior things in exchange. Value of a thing goes down, when we can acquire or hope for less or inferior things in exchange. Value is relative, referred in terms of something else.

Value of a thing, cannot be always measured in money. Value has many different connotations, typically, it has relevance in terms of, emotions, remembrances, associations, ageing, maturity, heritage, rarity, ecological, environmental, social, etc.

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Valuation, in functional sense, is done to determine what one would gain by acquiring, or forgo by disposing the item, but not necessarily doing so. Value of a product means an addition or deduction to wealth, Cost at the moment of transfer may or may not reflect the value of an item, but it helps in a better judgement of the value.

A rare painting or an antique may have an indeterminable cost, but will have a probable value. Value could be several times more or less than the actual cost of the item. Value is considered to be the true worth of an item, more lasting, but not necessarily reliable. Cost and price are very realistic and reliable, but not always representative of the true worth of the item. Both, perhaps, are required to gain a full insight of the situation.

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Monetary versus Non-Monetary Valuations

Valuations are of two types: Monetary and Non-Monetary. Monetary valuations are not very different from costing exercises. Value of a thing, cannot be always measured in money. Though here utility, desirability, scarcity, availability and marketability etc. of an item are assessed in monetary terms rather than market equivalent costs of such items.

Valuations of non-monetary type are made to check adherence to values, customs, traditions, ethos, rules regulations, laws, etc. Greater adherence to these issues results into higher value realization for the product. Often negative or repulsive aspects of an entity, such as Hitler’s memorabilia, black magic tools, due to their rarity, invite a connoisseur’s favour. Non-monetary valuations have a relevance only to people who are concerned with it in some way. Non-monetary valuations based on one aspect or few concerns are not very useful, desirable, or even reliable. Non-monetary valuations based on too many aspects are not comparable, so must be scaled into some economic or monetary component. These makes, a valuation, very complicated process.

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Costing versus Valuation

Costing is a logical (mathematical) process, and any technically proficient person can carry it out. Costing process must always remain justifiable, and requires many exact inputs, including latest market costs etc. Valuations, however, involve many hypothetical judgments, are very subjective, and so may not seem rational. It is the experience of the valuer that imparts some degree of objectivity and also reliability to the valuation. Valuation on the other hand is a subjective judgment, and no explanations may be asked for.

Costing helps a designer in planning, budgeting and auditing the expenditures. Valuation is used to confirm or justify expenditures, indicate non monetary savings, and to convince a client for quandary options.

 

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Design Practice and Cost Determination Methods

Designers choose entities, increase or decrease their usage by predicting the costs. Designers develop their own cost determination methods, appropriate for the jobs they handle, and for types of items specified in their projects. Input data like market rates for materials, parts, components, labour etc. are continuously updated or sought as and when estimates are to be prepared. Updating feedback is also available through the historic estimates conducted on completion of a project.

In design offices predictive cost analysis is made through Rate analysis. Average prices of all commonly used materials, operations, etc., are collected routinely, reformatted and stored. These are presumed as standard rates, and form the basis for the cost analysis. To simplify the process of cost analysis, number of items and their individual rates or prices are reduced by approximation (through definition of a factor for variation) in quantity and quality.

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Routine jobs and jobs with substantial intellectual effort

Routine jobs have a determinable cost (and by adding a customary margin of profit, etc. one can derive the price). However, jobs with substantial intellectual effort accomplish more than the cost of implementation. So, dilemmas occur, should one charge a professional fee on the total cost of the job, or value accruing out of the job? Authors of creative efforts must know how to value their accomplishments, and thereby demand a fair compensation for it. Designers need to know both the cost and value of their professional services.

Cost versus Value for Designers

The understanding of Cost versus Value of an entity helps a designer at TWO distinct levels:

1 Determination of Fees: Cost-based and Value-based

2 Helping a client for the value-assessment of their possessions.

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Cost-based Fees

Design practice follows age-old traditions of Architectural practice. Jobs are generally executed by appointed contractors or selected vendors. These third party (away from the Architect and the Client) business entities present an invoice, which reflects the nearly true cost of the job. Architects base their fees on this foundation after adding certain percentage amount to account for miscellaneous expenses, (such as on power, water, etc.). Substantial part of Designer’s work follows a similar path.

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Value-based Fees

Value-based Fees are charged for jobs like renovation, extension, addition, conservation, etc. that make substantial change to the existing environment, upgrading the commercial value, or advantages deriving out of it. A unique concept that costs very little to implement, provides a substantial benefit to the client. Should one charge a fee on the cost of a job or on the value of the completed job? Here determining an appropriate cost base for fees is very difficult.

Value Assessment of Possessions

On some sites there are pre-existing structures which are to be only reformed or reused. The design cost of continuing or protecting such structures is difficult to compute, and so must be value-based. Cost of works or supplies by third party vendors and contractors are accountable, but items supplied by the Clients from the existing stock are difficult to document. Cost of Retained Structures, Antiques, Curios, used in a project are often indeterminable, instead their values, if available need to be used. On sites where several Professionals operate simultaneously, exclusive authorship to a creation is disputable, so cost of a patent idea is disputable.

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Cost Plus Fees

Fees for very complex jobs, or jobs that are unique, and without any precedents are very difficult to predefine. A Client wishes to see the job properly done, and the Professional wants a guaranteed, but a fair amount of income. Such jobs are executed on Cost Plus Basis.

The office work of the professional and the site work of the project, both are executed in a very transparent setup. All the expenses at the Processional’s Office (salaries, stationary, conveyance, rents, service charges for equipments, etc.) and at the Project Site (on raw materials (stationary), wages, and salaries, rents for equipments, conveyance, postal and telecommunication charges, taxes, etc.) are well monitored, documented and audited. The Professional is then allowed a percentage over the Audited Costs.

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