Design Fees: Self-Inflicted Losses

Via ARCHITECT
By: Ernest Beck

The second installment of our series on architectural fees finds that increased competition for even the smallest of projects is leading firms to slash rates. But have things gone too far?

When a major New York financial institution asked three architecture firms to submit bids for a high-end office renovation last year, it was a relatively small project, but one that was eagerly sought by the bidders to keep revenue flowing in tough times. What transpired reflects the cutthroat nature of the industry these days: Two firms came in at around $175,000, while the third offered a bargain-basement price of $100,000, according to one of the participants, who asked to remain anonymous to protect client confidentiality.

Not surprisingly, the low bidder won, prompting an angry response from one of the other bidders. “If we went in at $160,000, it would have been low-balling—and dangerously low—but not impossible,” says this person, principal of a small New York design boutique that specializes in interior renovations. “But bidding $100,000 is impossible. … [T]hey won’t make any money.”

The recession has wreaked havoc on the architecture industry in many ways, from a rollback in projects to staff layoffs to declining revenue. One of the most devastating aftershocks, however, has been the practice of fee-cutting, as firms struggle to survive by meeting client demands to save money and tighten budgets.

While no exact numbers are available, architects say fee-cutting is widespread. Scott Kuehn, partner at Denver-based H+L Architecture, an 85-person firm that specializes in healthcare, education, science, and technology, had one long-term client ask for a 10 percent cut on all future work. This client, Kuehn says, “indicated that economic pressure and uncertainties … were driving similar requests to all business partners, suppliers, and vendors.”

For complete article click here.

Instant View: July housing starts rise less than expected

NEW YORK | Tue Aug 17, 2010 9:06am EDT

(Reuters) – U.S. housing starts rose but to a much weaker rate than expected in July, while permits for future home construction fell to their lowest level in more than a year, according to a government report on Tuesday that pointed to a weak housing market.

U.S. producer prices rose in July for the first time in four months, pulled by higher prices for food and consumer goods, a U.S. government report showed on Tuesday.

KEY POINTS:

HOUSING STARTS: * The Commerce Department said housing starts rose 1.7 percent to a seasonally adjusted annual rate of 546,000 units. * June’s housing starts were revised to show an 8.7 percent fall, which was previously reported as a 5 percent drop. * Analysts polled by Reuters had expected housing starts to rise to 560,000 units. * Compared to July last year, groundbreaking activity was down 7 percent. * New building permits, which give a sense of future home construction, dropped 3.1 percent to a 565,000-unit pace last month, the lowest level since May 2009. * That followed a 1.6 percent rise in June and compared to analysts’ forecasts for a slip to 580,000 units.

PRODUCER PRICE INDEX: * The Labor Department said the seasonally adjusted index for prices paid at the farm and factory gate rose 0.2 percent, in line with Wall Street analyst expectations, after dipping 0.5 percent in June. * In the 12 months to July, producer prices increased 4.2 percent after rising 2.8 percent in May. * The year-on-year increase was also in line with forecasts.

COMMENTS:

JOHN CANALLY, INVESTMENT STRATEGIST, ECONOMIST, LPL FINANCIAL, BOSTON:

“The market’s looking for some inflation and we got some on both the core and overall (PPI), which should ease some deflation fears.

“But on the other side of the coin, we had the housing starts data which got a bounce from the prior month, which was expected, but the bounce was a little softer than we thought.

“We’re still getting data post-housing credit that is still weak and not indicative of a market that can sustain itself.

“That ties into a lot of other data recently that has the market worried about a double dip. We still think it’s slow growth rather than a double dip, but each week that passes you tend to get a little more concerned if you don’t get better activity indicators.”

CAMILLA SUTTON, CURRENCY STRATEGIST, SCOTIA CAPITAL, TORONTO:

“It’s a mixed set of data, with a disappointing reading on housing starts and building permits and a slightly stronger PPI report. Actually, at this point some signs of inflation would be soothing to markets amid fears of deflation. But ongoing problems with the housing markets are so great that it will likely offset any positive effect from an increase in prices.” “Forex markets are just taking a breather after the violent swings of last week in euro/dollar and dollar/yen. Traders are still looking for a catalyst to take the dollar in one direction or the other.”

MARK VITNER, SENIOR ECONOMIST, WELLS FARGO SECURITIES, CHARLOTTE, NORTH CAROLINA:

“This is more of a payback from the end of the tax credit. It is not that surprising given the NAHB numbers that were out yesterday which showed really abysmal buyer traffic and expectations for future sales are about as low as they were back before the tax credit was even passed.

 “We had the previous month’s number revised down a little, and we had a nice pop in multi-family, which people kind of forget about because it is so low right now, without that the drop would have been worse.”

BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:

“Both these indicators are languishing. It’s nothing new to see the housing market stuck in a rut. On PPI, the core inflation is up a little more than expected year-over-year, which might cause some moderation in U.S. yields. That would help the dollar recover a bit against the yen. But the sentiment out there is there are still problems to come, and with the 10-year yield at 2.60 percent, there’s absolutely no reason for the dollar to rally against the yen right now. We expect another run at 85 yen and then a move to the 84.70-80 area.”

JIM BARRETT, SENIOR MARKET STRATEGIST, LIND-WALDOCK, CHICAGO:

“The slow growth will continue. It perfectly reflects the mood we are in with the under-utilization. We are barely moving forward.”

MARKET REACTION: STOCKS: U.S. stock index futures pare gains after housing, PPI data. BONDS: U.S. Treasury debt prices hold losses. DOLLAR: U.S. dollar remains lower versus euro.

Architects cut hiring

By CHRISTOPHER S. RUGABER (AP)

WASHINGTON — Industries driving job growth this year added fewer workers in June, a sign that the overall hiring picture could get worse.

Manufacturers, for example, added only 9,000 jobs last month, the Labor Department said Friday in its latest monthly employment report. That’s the fewest for the sector this year and below its average monthly gain of 25,400 over the previous five months.

Temporary help firms, meanwhile, added 20,500 positions. That was the smallest gain in nine months.

The two industries have added more than 330,000 jobs so far this year. That’s slightly more than half the total gain in private payrolls of 593,000. As a result, a slowdown in those two sectors could shrink overall job gains in the months ahead.

The declines could be temporary. But in manufacturing, the growth in factory production earlier this year was partly a result of companies restocking their warehouses, after cutting them to the bone in the recession. Many economists worry that production will slow now that the need to replenish inventories is not as great.

Private employers created a net total of 83,000 new jobs in June. That was up from May but not nearly enough to speed the recovery.

Total payrolls fell 125,000, dragged down by the end of 225,000 temporary census jobs. The jobless rate fell to 9.5 percent from 9.7 percent.

Retailers cut 6,600 jobs, the second straight month of losses. That’s a reversal from earlier this year, when stores began hiring again after a strong winter holiday shopping season.

The renewed job losses are a sign that merchants aren’t seeing a strong rebound in consumer spending.

Other industries that are hurting could get worse. Jobs in architecture declined, a sign that fewer commercial building will be designed, said Ken Simonson, chief economist at the Associated General Contractors of America.

That could lead to more job cuts in construction. The industry lost another 22,000 positions in June. That leaves about 5.6 million people employed in the construction industry, the lowest level in almost 14 years, Simonson said.

These and other details can be found in the government’s latest jobs report.

Slump in Demand for U.S. Architects May Be Near End

Our company began to experienc a slight uptick in hiring during May to present.  This article by Prashant Gopal in Bloomberg Business seems to confirm what we are reporting:

May 19 (Bloomberg) — A leading indicator for U.S. commercial property construction showed signs of improvement in April, indicating a rebound in building may be near, the American Institute of Architects said.

The Architecture Billings Index climbed to 48.5 from 46.1 in March, the third straight monthly increase, the Washington- based group said today. While any score of less than 50 indicates a drop in demand from the previous month, April’s decline was the smallest since January 2008.

“It appears that the design and construction industry may be nearing an actual recovery phase,” Kermit Baker, the group’s chief economist, said in a statement. “The economic landscape is improving.”

The index is an indicator of future building of offices, warehouses, apartments and retail properties. There is typically a lag of about nine to 12 months between the time architects bill clients and when developers start spending on construction, according to the AIA.

Overall construction spending in the U.S. increased 0.2 percent in March, fueled by federal stimulus spending on power plants, hospitals and transportation projects, the Commerce Department said May 3. Private construction spending for non- residential projects fell 0.7 percent in March from the previous month and 26 percent from a year earlier.

Commercial Property Values

The Moody’s/REAL Commercial Property Price Index fell 0.5 percent from February, the second straight monthly decline, Moody’s said today in a report. Prices slid 25 percent from a year earlier and are down 42 percent from the peak reached in October 2007.

RNL, a Denver-based company that provides architectural work for mixed-use projects in the western U.S. and overseas, has added five employees over the past three months. It trimmed its workforce to about 150 from 250 during the past two years, said Richard von Luhrte, the firm’s president.

Foreign investors, public-private partnerships and landlords seeking to renovate distressed properties are driving von Luhrte’s business, he said in an interview.

“We’ve seen the bottom and we’re stable,” he said. “Obviously the last year has been challenging, but there are some opportunities out there.”

The Northeast was the strongest of the four regions measured by the American Institute of Architects index, registering 51 and showing growth in demand for commercial architects. It was followed by the Midwest at 49.2, the South at 46.5, and the West at 44.7.

The Architecture Billings Index is based on a survey of firms owned by AIA members. Participants are asked each month whether their billings increased, decreased or stayed the same.

Architects, Congress and the “S Corp.” tax hike

Very good article in THE HILL by George H. Miller, FAIA – 06/07/10 10:03 AM ET

When Congress returns this week, one of the first items on its agenda will be finding a way to pay for extending unemployment benefits to the millions of Americans who find themselves jobless even as the economy begins a slow and fitful recovery. The Senate hopes to begin work on the “tax extenders package” that was approved by the House of Representatives on May 28, just as lawmakers left for the Memorial Day Recess.

We sympathize with Congress as it looks for ways to pay for extending jobless benefits. Indeed, roughly 25 percent of my professional colleagues are unemployed – in some states the percentage is even higher – and would benefit from any extension, as well as from other provisions in the legislation, such as Build America Bonds. And yet, as world markets tremble from global debt anxiety, Congress is rightly pre-occupied with finding ways to fund the extension without adding to the ballooning deficit.

Bad decisions usually result when two such countervailing forces are at work. None is worse than the effort to help fund the extension by raising taxes on individuals and small businesses that form S Corporations. So-called S Corporations help to create jobs and economic growth by reinvesting hard-earned capital back into their enterprises. S-Corporation owners often pay themselves a salary, to which Social Security and Medicare taxes apply. But profits that are paid to the owner as a shareholder are not subject to payroll taxes. They will be for many S corporations, however, if this short-sighted provision passes and is signed into law by the President.

This type of tax hike comes at a time when many people – out of necessity due to layoffs and restructurings throughout the economy – are forming their own home-based consultancies, web design firms, landscaping enterprises and the like. If they structure themselves as an S Corporation – and many of them do – they would be caught up in this new tax just as they are planning to set up shop, hire staffers and buy the equipment they need to get started.

That is certainly the case in the architecture profession. We are struggling to find ways to restructure and resuscitate our careers and livelihoods after the collapse of the real estate market. Many of us operate as S Corporations, because it allows us the flexibility to compete in world markets and retain and attract the talent that has kept American architecture the envy of the world. We may be forced to lay off staff or stop hiring new staff to pay the new tax – even though this provision is in a “jobs” bill. The provision is particularly troubling in that it specifically calls out S corporations with three or fewer key employees.

We applaud Congress’s effort to find a way to extend unemployment benefits for individuals who need them. But as the economy begins to recover, now is the worst time to raise taxes on a sector that is a catalyst for job growth in the design and construction industry. After 27 consecutive months of contracting, the American Institute of Architects in May reported that architectural billings have trended upward for the third consecutive month. That’s an indication that new construction could be on the rise in nine to 12 months, which would create more jobs and advance our nation’s economic recovery.

Rather than hike taxes, Congress should enact legislation that generates revenue with little or no cost to the Treasury. One such bill is H.R. 5249, the Capital Access for Main Street Act of 2010, introduced by Reps. Ed Perlmutter (D-CO) and Mike Coffman (R-CO). This legislation would change accounting rules for community banks with less than $10 billion in assets as they work with borrowers to renegotiate loan terms, avoid large sums of commercial foreclosures, and free up credit that can be used more constructively.

Unscrupulous businesses do use S corporation status to avoid paying their proper share of taxes and they should be caught and punished. But the Internal Revenue Service is already empowered to address that issue. This tax hike lumps together the good and the bad, penalizing thousands of honest small businesses that follow the rules. We strongly urge Congress not to support this inappropriate tax increase.

George H. Miller is president of the American Institute of Architects, based in Washington, D.C.

NYC Firms and Unions Will Cut Costs To Boost AEC Work

The following deal was announced on May 29th in NYC.  Two months have passed by and there has been no quantifiable increase in announcements of the projects mention herein nor any recently issued Building Permits.  The idea for this deal and subsequent cost cutting agreements are quite an achievement and should begin to payoff for the local economy and AEC professionals.  I will continue to monitor the situation for you.

Here’s the announcement from New York Construction News:

In an effort to jump start building projects in New York City and put idle union construction workers back on the job, the leaders of more than 40 different building trades and union employer groups announced on May 29 what they termed a “historic compact” to cut wages of both labor and management and end expensive work rules. Proponents claim the citywide project-labor agreement will cut costs by as much as 21% on the first 12 high-rise and other commercial projects that it covers, representing $2 billion of construction and 10,000 jobs. But some are less enthusiastic about the cost savings, some unions are declining to participate and some developers may have to rethink profit margins in a changed city economy.

The agreement was reached between the Building and Construction Trades Council (BCTC) of Greater New York, which represents 100,000 union workers and the Building Trades Employers’ Association (BTEA), which includes 28 contractor groups and 1,700 union firms. The groups have been negotiating since last October, said Louis J. Coletti, BTEA president. “Contractors would have liked more, unions less, but we’re trying to save jobs in New York City,” he says.

Building trades agreed to no strikes or work stoppages on projects included under the pact, as well as standard workdays and other work rule changes and enforcement. Contractors agreed to cut wages and benefits for management employees, reduce profit margins and strive for “improved project management and efficiency,” among other changes.

Several unions, which were not specified, have also agreed to one-year wage freezes and benefit cuts, according to BTEA. The pact is set to generate project cost reductions averaging 16% to 21%, based on a study conducted for BTEA by Hill International Inc., a Marlton, N.J., project and risk management firm. That figure does not include union wage-freeze cost savings, says the group.

“We have two problems in New York: the financial crisis and creeping nonunionism. This will help both,” said John A. Cavanagh, a former building contractor executive and chairman emeritus of the Contractors’ Association of Greater New York, a BTEA member group. He credited BCTC President Gary LaBarbera, a former teamsters’ union official. “Everyone had to do what they didn’t want to do, especially on the union side.”

The pact won praise from New York Mayor Michael R. Bloomberg (R). “Labor and management are not content merely to wait for a national rebound,” he said on May 29.“Their agreement is an important step to get stalled projects going again.”

But Stephen Spinola, president of the Real Estate Board of New York, said, “It doesn’t go far enough.” He also says savings may be only between 3% and 8%, according to published reports. “We will be talking to our partners to bring costs down further,” he said.

But the pact press release coincided with the May 29 announcement by New York City-based Forest City Ratner Cos. that it plans to resume work on Beekman Tower, a planned 76-story mixed use project halted two months ago at the 37th floor. Reportedly set to be capped at 40 floors, the structure now will be built to its full planned height, says the developer, noting the new labor pact and cost reductions in materials and finishes. Kreisler Borg Florman is project contractor. Others among the first 12 projects that could restart include those being built by Bovis Lend Lease, Turner Construction, Tishman Construction, F.J. Sciame Co. and Plaza Construction. But Coletti acknowledged that not all may restart.

Even so, Coletti thinks the labor agreement is “more the end of the beginning,” noting that trades and employers are still discussing pact details and inclusion of new projects. The AFL-CIO’s Building and Construction Trades Dept. is set to review an additional 12 to 15 projects and the local labor-management committee will review up to nine more in the next week, he said.

One footnote, the city approved the master plan for the Coney Island Revitalization & Development Project yesterday.

Architecture Billings Index flat in May, according to AIA

June 24, 2009
Building Design and Construction

After a slight decline in April, the Architecture Billings Index was up a tenth of a point to 42.9 in May. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. Any score above 50 indicates an increase in billings.   

The U.S. architecture industry has now experienced flat or lower billings for 16 straight months, dating back to January 2008. The low point was January 2009, when the ABI bottomed out at 33.3.

Of the four geographic regions tracked by AIA for the index, the Northeast fared the best, with a 48.3 index score in May, followed by the Midwest (41.5), South (41.3), and West (39.4). When broken down by sector, multifamily residential scored the highest (45.5), followed by mixed practice (44.5), commercial/industrial (43.1), institutional (38.0).

About the AIA Architecture Billings Index
The Architecture Billings Index is derived from a monthly “Work-on-the-Boards” survey and produced by the AIA Economics & Market Research Group. Based on a comparison of data compiled since the survey’s inception in 1995 with figures from the Department of Commerce on Construction Put in Place, the findings amount to a leading economic indicator that provides an approximately nine to twelve month glimpse into the future of nonresidential construction activity. The diffusion indexes contained in the full report are derived from a monthly survey sent to a panel of AIA member-owned firms. Participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended. According to the proportion of respondents choosing each option, a score is generated, which represents an index value for each month.
 
About The American Institute of Architects
For over 150 years, members of the American Institute of Architects have worked with each other and their communities to create more valuable, healthy, secure, and sustainable buildings and cityscapes. By using sustainable design practices, materials, and techniques, AIA architects are uniquely poised to provide the leadership and guidance needed to provide solutions to address climate change. AIA architects walk the walk on sustainable design. Visit www.aia.org/walkthewalk.

Stimulate Your Business

 
These organizations can help match your business with stimulus projects.

By Jennifer Wang
Entrepreneur.com

Wed., May 20, 2009

There’s $787 billion in the economic stimulus pot, but it can’t help you if you don’t know how or where to get it. Data on stimulus money is publicly available, but pinpointing what’s relevant to your business is a daunting task: $400 billion-plus is being distributed at the local and state levels, and there are more than 89,000 of these agencies around the country.

That’s where organizations like National Strategies, Inc., Onvia and Business Matchmaking come in.

Full article via MSNBC

Related links via Architectural Record