Illustration: Stuart Miles via FreeDigitalPhotos.net
The price, cost, and value of design services are explored in a recent Design Intelligence article authored by Scott Simpson, a senior fellow of the Design Futures Council.
Value, he explains, represents the difference between “price” (what we agree to pay for specific goods or services) and “cost” (what it takes to produce those same goods or services).
“Traditionally, the AEC industry has been relatively ineffective in articulating the basic value proposition that is inherent to the construction of buildings,” he writes.
“By and large, most clients view construction as a sunk cost, not a generator of value,” he continues. “Real estate developers are acutely aware of the income streams that buildings can produce — they figure very prominently in the financial pro formas — but even they still tend to view design and construction as a commodity business, focusing much more on up-front cost than long-term value.”
Yet, Simpson explains, investing in a building is much like investing in a bond in that a client spends money up front to reap the benefit of a long-term income stream.
“The economy has developed a sophisticated ways of assessing investment values in the bond market, enabling top bond traders on Wall St. to routinely earn millions of dollars each year,” he writes. “However, no such metrics have yet been developed for buildings. In fact, the financial aspects of buildings are judged by two simplistic criteria: how much they cost to construct in the first place and how much they sell for when ownership changes hands.”
Missing from that mindset is what Simpson considers the most important metric of all: long term operations and maintenance (O&M) cost, which can dwarf initial capital cost by a factor of 10:1.
“Logic would suggest that during the design process, it would make a great deal of sense to pay attention not only to the traditional architectural issues of siting, form, massing and materials selection, but also analysis of long-term O&M costs, since that’s where most of the owner’s dollars will actually go,” he writes. “Educating owners about the true implications of their decision-making during design will go a long way toward changing the essential value propositions for all involved, including architects, engineers and contractors.”
In the piece, Simpson argues it is both feasible and responsible to justify higher professional fees as long as there are corresponding savings to owners of either capital cost or O&M cost. He also thinks architects can create additional value by maximizing allowable zoning square footage or generating higher utilization ratios.
“This begs the question of whether or not the traditional system of compensation (fixed fees based on a percentage of the projected construction value) makes any sense in the new economy,” he continues. “For example, what would happen if an architect’s compensation was pegged instead to the number of occupants using the building each day”?