Landis: How to Create a Profitable Design Department

by Kyle Clapham

If you have a design component to your business and don’t measure your costs for offering the service of design, then it is very difficult for you to know what to charge for design services. You also won’t know what it costs your business as a whole.

Over the years I have seen so many businesses in the construction, design, design-build, and kitchen and bath space not charge or not charge enough for design. Upon further conversation the usual reasons are, “Clients don’t want to pay for design,” or that a nominal fee is charged in the hopes that the client will be signed into construction “where the profit is made,” and some of the design dollars can be recouped.

Head Trash

There are so many reasons to charge for design that it seems somewhat remedial to enumerate them. I relegate not charging as head trash because usually the justifications for not charging are just head trash that needs to be swept away.

One of the most important reasons to charge for design is that your design process sets up the potential project and your company for success. Everything is drawn, discussed and approved, so the rest of your organization knows exactly what to do, and your client knows what to expect.

If you don’t get paid for the process, you and your employees will have a strong tendency to shortchange the process. With the increasing complexity of the built environment, time needs to be spent for permitting, engineering, plumbing, and electrical and mechanical approvals. Cabinets, finishes, doors and windows need to be ordered, none of which can take place without design.

Also, if you are not charging for design, or charging enough for design, what message does that send your design staff? How are they to be measured? What is the discussion at their yearly review when they ask for a raise? Without a fee for design, how will you get the larger more complex and design-intensive projects your firm may aspire to?

What to Charge

Your goal should be to make as much as you do with every other trade, whether self-performed or subcontracted. The recommended goal is 10 percent net profit.

You would not think of not charging for painting. So why on earth would you not charge for design? Look at job costs by division. You’ll notice that plumbing and electrical are each 7 to 9 percent of the job. Painting can easily be 8 percent of the job. A rule of thumb is that you’ll need to charge 8 to 10 percent of the job costs to be profitable in design. If you are at 5 to 6 percent, you’ll be lucky to break even. Anything less and you will be losing money.

We do not include appliances and painting in our design estimates, so the design budget is based on an anticipated construction estimate only. State it clearly in your design agreement: The design contract is based on a percent of the final construction contract. This allows for scope creep.

You may also want to add language in the design agreement that protects you from the client who decides at the end of design to cut the scope in half, lop off a room or not do the attic. In our initial design letter, we give a range for the anticipated construction budget needed for the scope of work the client has outlined.

We base our design fee on a percentage of the mid-point of that range. We also allocate design hours to the design fee and inform the client at each stage of the hours remaining. This helps with very indecisive clients or clients who change their minds once decisions have been made.

If there is a clear addition to the original scope of work requested—“Oh, I would like to add a fireplace to the family room”—then you may need a design change order. At a minimum, inform the client of the additional increase in construction costs and, thus, the increase in the final design fee.

On the measuring side of the equation, you’ll need timesheets for all your designers, with the requisite categories for your designers to accrue their time to—jobs, overhead, marketing, events, education, vacation, etc. If the time of others gets expensed to your design income for a given project—for example, when estimating or construction personnel attend a “trade day” at the jobsite—you’ll need to keep track of their hours too.

For field supervision, we build a few hours each week into our construction contract that gets credited to design to cover all the phone calls and meetings required.

If you want healthy margins in your design department, you’ll also need to mark up the time your specialists and consultants are on a given job. These are structural, geotechnical and survey engineers.

A Simple Formula to Remember

Design Labor Costs + Overhead (burden)

Net Profit = Design Fee

Design should be a profit center for your company. Measure your costs of offering design. It will help you in many ways. And as your firm grows, you’ll be able to add design employees based on these metrics. Measuring costs and creating design as a profit center will ultimately aid your design department as it evolves and grows. QR

Christopher K. Landis, AIA, owns Landis Construction in Washington, D.C. He brings 30 years of remodeling design, construction and management experience to this series of columns for the magazine. You can reach him at chris@landisconstruction.com.

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