PRACTICE MANAGEMENT Flashcards
(124 cards)
1
Q
What are the levels of a Corporation?
A
Stakeholders
Directors
Officers
2
Q
AIA B101 requires which insurances? And for what?
A
1 – General Liability – Covers the physical office space
2 – Professional Liability – Covers errors and omissions
3 – Workers’ Compensation Insurance – Covers the physical project site
4 – Auto Liability – Covers company vehicles and personal cars used for business purposes
3
Q
Standard of Care
A
Expected quality of service for architect by area. The standard of care often decides whether architect is at fault when Architect made an error or omission.
4
Q
Format types for specifications
A
MasterFormat: classifies by material: concrete, masonry, metals, etc. (older format, more commonly used)
Uniformat: classifies by system: substructure, shell interiors, etc. (newer format, better for BIM)
5
Q
Employment Practice Liability Insurance
Intellectual Property Insurance
A
Employment Practice Liability Insurance = Insurance to protect from wrongful termination
Intellectual Property Insurance = Insurance to cover claims based on copyright/intellectual property infringement
6
Q
The Owner is responsible for…
A
Pre-existing site conditions (geological, hazardous materials, surveying)
Paying Contractor
Paying Owner’s subs
Change orders
With or without cause hiring and firing of Architect
7
Q
Aggregate Limit, Premium, Deductible, Claim
A
Aggregate Limit – Total coverage amount
Premium – Monthly/yearly bill
Deductible – Maximum paid by you, prior to coverage kicking in and paying
Claim – You think you experinced a covered event and demand payment from the insurance company
8
Q
Tail insurance
A
Covers project after architect’s retirement
9
Q
What is the process to file an ethical complaint against an architect?
A
1 – File the complaint through AIA National
2 – Advisory Board and Chair will be chosen
3 – Pre-hearing, Hearing, Start, Claim, Defense, End, Judgement*
*Confidential, No Counter-Claims, Can’t Fine or Enforce Behavior, but Can Admonish/Suspend
10
Q
Who are the most common ethics complainants?
A
Other architects
Homeowners
11
Q
Does the architect have a fiduciary duty to the client: a legal obligation to act in the owner’s best financial interest?
A
No, architects do not serve as an owner’s fiduciary.
Fiduciary duty: The obligation a professional has to act in the best interests of their client
Generally, the term is used for professions who protect the financial interest of the people they represent. Certified financial planners (CFPs) can’t recommend a particular investment if they do so because the CFP gets a higher commission from the brokerage if that particular investment is purchased; lawyers or accountants can’t advise their client to move forward with a deal because the lawyer or accountant owns the property to be sold; and a corporate director can’t steer the company to sign a worse deal because the person on the other side of that deal is her brother-in-law. (Of course, if the brother-in-law really has the best corporate travel agency and charges the company the lowest fees, it is probably not a breach of fiduciary duty.)
If you, as a fiduciary, breach your duty, you are liable in court, though as you would imagine, proving a breach is difficult in practice. The concept of fiduciary was set up because professions like attorneys, accountants and physicians are granted a monopoly to practice their craft, and hold power or knowledge asymmetries over their clients. While architects are granted a monopoly to practice by the state and do hold knowledge asymmetries, they are not fiduciaries.
Clients often assume a professional is bound by fiduciary duty, when in fact she is not. For instance, a stock broker is not a fiduciary. She can legally steer you to a particular stock only because she gets the largest commission for selling that stock–even if purchasing that stock is not in your financial best interest.
Fiduciary duty is the highest standard of care level that can be imposed under law, and thus it far exceeds the “standard of care” threshold for architects’ performance established in the AIA contracts. Owner-generated contracts sometime sneak in a clause binding the architect to fiduciary duty, but because your professional liability insurance almost certainly won’t cover that level of expectation, you will need to strike that fiduciary clause out of the contract. If the owner generates her own non-standard contract, you might even want to go out of your way to include a clause that establishes that the architect is not held to a fiduciary standard.
Why isn’t an architect held to a fiduciary standard? Perhaps because we protect the health, safety, and welfare of the public. Have a story where doing financially right by the owner conflicted with doing right by the public? Share it with me at ermann@amber-book.com and perhaps I’ll add it to the bottom of this flash card (anonymized). Or maybe architects aren’t held to the higher standard because the AIA, with an obligation to protect the architects, is the entity writing the industry-standard contracts.
12
Q
Retainer
A
Retainer: Regular services for a fixed fee, more efficient than hourly over the long term. . . like if a university is regularly updating rooms as small projects (adding A/V equipment, accessibility ramps, upgrading outdated bathrooms) the university might hire an architect on retainer. The architect then can bill the university for the work completed, without having to create a new contract for each door that is replaced.
13
Q
Agency
A
The agent creates a legally binding relationship between third party and principal, for instance in a CM as Agent project, the principal is the client and the Contractor is the third party
14
Q
Who contracts directly under the Architect and who contracts under the Owner?
A
Architect: MEP, Lighting Consultant, Civil Engineer (utilities, land contouring, and all things related to the improvement to the land with the new building), Landscape Architect/Engineer, Cost Estimator, Code Consultant
Owner: Zoning, Traffic, Site, Geotechnical (underground), Surveyor, Civil Engineer (for duties related to permitting, and documenting the existing condition of the site)
15
Q
The contractor is responsible for…
A
“Perfection” in construction Nothing outside the contract Paying and coordinating sub-Contractors Providing Owner with operation manuals Some design of specific systems (delegated design) for things like curtain wall details, concrete formwork, and steel fabricator shop drawings
16
Q
The Architect is responsible for…
A
The project being on time and on budget
The instruments of service
The standard of care and protecting the health, safety, and wellness of the public
Coordination and administration of project team and processes
Enforcement of contract terms (as able)
Adherence to applicable codes
NOT means and methods of construction, existing site conditions, safety on the job site, anything outside the contract (additional services)
17
Q
Fair Labor Standards Act
Davis Bacon Act
A
Fair Labor Standards Act: regulates minimum wage, overtime pay, and child labor
Davis Bacon Act: Contractors working on federal construction projects in excess of $2,000 must pay subcontractors no less than the locally prevailing wages.
18
Q
General liability insurance
A
Covers the physical property of the firm, usually has a limit to total claims
*Landlords can require
19
Q
Professional liability insurance
A
Covers the cost of mistakes made by the Architect, as well as disciplinary, regulatory, and administrative expenses (e.g. if OSHA is violated in the Architect’s office)
*Also called “errors and omissions” insurance
20
Q
Mechanic’s lien
A
Mechanic’s lien: A claim placed against owner’s property due to unpaid debts. Used when the contractor fails to pay sub-contractors but can also be used when the owner does not pay the Architect. The land and building can be sold to settle the debts if the owner can’t pay cash.
If the owner owes money to the contractor, or the owner owes money to the architect, and the owner can’t or won’t pay her debts, a court can order the property to be sold to raise to cash to pay the debts. But the property can also be used to make unpaid subcontractors whole. If the contractor owes money to subcontractors, and the contractor skips town, the subs can go after the owner. If the owner can’t pay, a “lien” is put on the project and a court can force the owner to sell to square up with the subs. This is one of the reasons that the owner confirms that the contractor pays their subcontractors throughout the process. . . the owner doesn’t want to be on the hook later for the contractor’s unpaid bills.
21
Q
OSHA
A
Occupational Safety and Health Administration (OSHA): enforces workplace safety regulations for things like construction falls, exposure to dangerous construction solvents, potentially dangerous power tools, and requirements for neon safety vests, glasses, & hardhats on site. OSHA considers office workplaces, like architects’ offices, to be low-hazard but requires reporting of workplace deaths or multiple simultaneous workplace hospitalizations, even in offices.
22
Q
Common types of small business taxes
A
Federal and state income tax
Self-employment tax
Personal property tax
23
Q
Post-occupancy evaluation
A
Post-occupancy evaluation: Surveys used to see how well a building is performing, usually administered at least a year after occupancy
*Very important! Employees are the major expense for any business, so knowing how design affects their performance is key.
24
Q
Contractual liability insurance
A
Contractual liability insurance: Covers you when something goes wrong and you, by virtue of a contract you signed, are held responsible for it. Contractual liability coverage typically is included in your general liability insurance (the one that covers your business for non-professional incidents, like a slip-and-fall or dog bite at the office).
Architects sign many kinds of contracts in the course of day-to-day business: leases, purchase orders, agreements to engage an accountant, etc. (professional liability protection from errors and omissions claims falls in a separate category of insurance). Contractual liability insurance covers you when one of those signed contracts puts the burden of a problem on the architect.
For example, Lauren, an employee of your firm, tours a quarry with a client to select stone for an office building courtyard. In order to tour the quarry, Lauren signed a common release form, the type you sign all the time, indemnifying the quarry should something go wrong. Something did go wrong on the tour and Lauren was injured. Because she signed the release form holding the quarry harmless, your firm, rather than the quarry, is held responsible. And because you have contractual liability insurance as part of your general liability insurance policy, you’re covered for Lauren’s injury. (You’re probably covered. . . with insurance, it’s always hard to say for sure without knowing the specifics of the incident and the contract . . and even knowing that, the lawyers may need to hash it out because of a difference of interpretation.)
25
Subrogation
Subrogation: Process of the insurance company assuming agency for an insured party in order to sue another party.
For example, an electrical subcontractor error triggers a fire. The contractor’s insurance company, Amber Insurance, pays the contractor promptly for the damage, which is the type of prompt service the contractor has been paying for over the years in its monthly premiums.
In the policy, the contractor has given permission ahead of time for Amber Insurance to pursue reimbursement from the electrical subcontractor (or the sub’s insurance policy). Amber can then “stand in your shoes” and chase down reimbursement as your agent, as if you were suing. You also give up your right to sue the subcontractor to collect damages. It happened, the insurance company already paid you to make you whole, and now they alone have the right to make themselves whole by filing a claim against the party at fault.
26
Utilization Rate
| Revenue Factor
Utilization Rate=Direct Salary Expense/Base Salary (also known as the billable or chargeable rate). If an employee, Amber, earns $100,000 per year, and 70% of her hours are charged to the client, we say that she has a utilization rate of 70% (which is a healthy, but realistically healthy, rate)
Revenue Factor= Utilization Rate x Direct Salary Expense Ratio
If your firm charges the client $3 for each dollar it pays Amber for her time, then we have charged the client $210,000 for Amber’s time. We say our firm’s Direct Salary Expense Ratio is 3.0.
By multiplying Amber’s utilization rate (70%) by the firm’s Direct Salary Expense ratio (3.0) we get a revenue factor of 2.1. That means that for our $100,000 investment in Amber’s salary, we earned the firm $210,000 in revenue.
This is your yield on total payroll, which measures productivity, profitability, and efficiency. Think about it: if we halve Amber’s utilization rate to 35%, we’ve reduced our revenue by half. Likewise, if we halve our firm’s Direct Salary Expense Ratio to 1.5, we have also cut revenue by half.
27
How do you decide how much to charge a client?
Value Pricing – Based on quality
Effort Pricing – Based on time spent (this is the ARE’s assumption in the exams)
% Cost Pricing – Based on percentage of total construction cost
Fixed fee pricing – Fixed cost to client typically derived based on triangulating estimates of the other three models
28
Risky contract language
```
Warrantee
Guarantee
Indemnify/Indemnification
“Highest” standard of care
As required/as necessary
Hold harmless
*Anything that passes liability to the Architect
```
29
AIA Documents: A701; C401; A305; G701; G702; G704
A701 – Instructions to Bidders
C401 – Architect-Consultant Agreement
A305 – Contractor’s Qualification Statement
G701 – Change Order
G702 – Application and Certificate of Payment
G704– Certificate of Substantial Completion
While it is worth becoming familiar with these because concepts like change orders, paying the contractor, bidding, and declaring substantial completion are HIGHLY prescribed and VERY important in this exam, I don’t think it’s worth your time memorizing the numbers of these AIA documents.
30
1 – Net Profit
2 – Net Billing
3 – Profit Earnings Ratio
4 – Prospect/Suspect
1 – Net Profit: Profit before tax and distributions to firm owners, but after paying wages and bills
2 – Net Billing: Billing that only covers fees for architect’s labor
3 – Profit Earnings Ratio=Profit/Net Operating Revenue (defines the health of the business). If our firm brings in $100,000 (after paying our consultants, but before we pay our salaries or rent), and our expenses (salaries and rent) are $80,000, then our profit is the $20,000 left over. We divide the 20k in profit by the 100k in net operating revenue to derive a profit earnings ratio of 0.20. That means that for every dollar we take in, 20 cents is available to our firm owners and investors as profit.
4 – Prospect and Suspect: Potential projects with a >51% (prospect) or
31
What types of damages can be pursued in litigation? Which are called for in AIA B101?
Consequential vs liquidated vs direct damages
Consequential damages – Estimated cost of lost business due to project delays (planned potential profit had my lemonade stand been open in time for the summer rush)
Liquidated damages – Actual cost of project delays (extra cost incurred by the owner paying back the bank loan she took out to build the project). *B101 allows for compensation based on liquidated damages.
Direct damages – Actual cost of fixing unacceptable work (maximum allowed is = the Architect’s fee)
32
Current Earnings
Current Earnings: profit left over after taxes and expenses are deducted from income
33
Base vs direct vs indirect salary
Base salary: Total annual compensation (Base Salary in $/year = Hourly rate * 40hrs/week*52 weeks/yr)
Direct salary: Salary derived from billable hours (cost of employee’s time charged to client for, say, code analysis)
Indirect salary: Salary from non-billable hours (cost of employee’s time spent fighting with a jammed copier for 30 minutes)
34
Balance Sheets
At the scale of an individual, your paycheck tells you how much you are making (your income) and your bank account describes what you’ve saved (your wealth).
Similarly, at the scale of your firm, its profit-loss statement lays out what the firm is making in profit (its income) and the balance sheet describes what the firm owns (its wealth)
The balance sheet includes
Solvency = current assets/current liabilities
Liquidity = expected assets/expected liabilities
Leverage = liabilities/equity
Return on Equity = profit/equity
*remember that
Assets = things your company owns (computers, plotters, office furniture, dollar value of intellectual property your company has generated, dollar value of your company’s reputation in the community, cash in the bank). Ask yourself, “How much do I have?”. . . if it has value, it’s an asset.
Liabilities = what your company owes (total owed in business loans, total owed in mortgage payments for the office building your purchased, total owed on a company car purchased last year, total owed to your employees for the last week’s worth of work because we are in between paydays). Ask yourself, “How much do I owe?” . . . if you’ve promised to pay someone else, but haven’t yet done so, that’s a liability.
Equity = the net worth of the business, were it to be sold today; Tally up all your firm’s assets and subtract all of your firm’s liabilities . . . that’s your firm’s equity.
Profit=How much money your firm is making this month or year. This is different than equity, which describes how much money your firm is worth.
If you’re still not sure of the difference between profit and equity, try this analogy: Madison earns $100,000 a year at her job and over her life she’s saved up $200,000 in a bank account. Think of her profit as $100,000 and her equity as $200,000. These kind of flow vs quantity relationships are all over these six exams (power vs electricity, peak cooling load vs annual cooling load, linear feet of foundation vs total cubic yards of concrete, water runoff rate vs detention pond size).
*For this exam, it is WAY more important to understand all of these concepts than to memorize all of these terms and definitions.
35
Profit-loss statements include:
Utilization rate, Overhead rate, Break-even rate, Net multiplier, and Profit-t0-earnings ratio
What are each of these metrics?
Utilization rate: If 65% of a firm’s hours are billable to a client for design services, and the remaining 35% accounts for unbillable time and registration fees spent on things like attending AIA conferences, than it’s utilization rate is 65% (which is a typical value for a healthy firm).
For ease of visualizing, let’s assume that our firm pays its architect a generous $100 per hour.
Overhead rate: If our firm spends $150 on non-billable expenses (like AIA conferences) for every $100 it spends on staff salaries for billable client work, than we say that our overhead rate is 1.5 (also typical)
Break-even rate: In the example above, for every $100 we pay in direct (billable time) salary, we need to charge the client $250 to cover both the $100 staff salary and the $150 overhead. We then derive a break even rate of 2.5. That means that for every salary dollar we pay for our architect’s billable time, we have to charge 2.5 dollars just to break-even (this is still before we add more to the client bill to account for profit). Break-even rate always equals Overhead rate + 1.0.
Net multiplier: If we charge the client $300 for the $100 we paid our architect, our net multiplier is 3.0 (also typical for a firm). This allows for us to pay our architect $100 for the work, to pay the $150 for overhead (things like AIA conference attendance), and leaves us with $50 left over for profit.
Profit-to-earnings ratio: Our profit is $50 for every $300 we charge the client. 50/300=17% (this is the low end of typical. . . generally, the higher this number is, the better off our firm is)
36
AIA A201 General Conditions
Outlines the site and project specific conditions that modify the project from the typical. See a sample here.
*Includes legal modifications
37
Cash basis accounting vs accrual basis accounting
Cash basis accounting – You have $1,000 in the bank. In cash-basis, it makes no difference that tomorrow you will receive a large check from a client, nor that the next day you will pay your structural engineer with another large check. Account only for the $1,000.
Accrual basis accounting –You have $1,000 in the bank, but now you account for the $100,000 check you will receive tomorrow from your client, as well as the $10,000 check you will pay your engineer the day after. From an accrual basis point-of-view, there are separate lines for the money you have, the money you’re about to get, and the money you’re about to pay out, but you have a total of $1,000+$100,000-$10,000=$91,000 accounted for on the spreadsheet.
For obvious reasons, the accrual basis accounting method allows you to make intelligent decisions in guiding your business in a way that cash basis doesn’t. If you’re weighing whether to hire a new intern for the summer, and need to start the interview process, it’s better to think about the $91,000 that you’ll almost certainly have in the bank the day after tomorrow, than to make that hiring decision based on the $1,000 you have in the bank today.
Cash basis is what you will use to calculate your taxes. If today is December 31, you pay taxes on the profit that you made this calendar year. . . that $100,000 that will be deposited tomorrow from your client and the $10,000 you’ll pay the day after to your engineer: those go into figuring out next year’s tax liabilities and don’t show up on this year’s “cash basis” books.
38
Net revenue per employee
Net revenue per employee: If we charged our clients $300,000 this year and we had three total employees, our net revenue per employee would be $100,000 (a good goal for a healthy firm). The higher this number is, the healthier the firm is because a high number means that it is bringing in a lot of money from clients but has few employees to pay.
39
Aged accounts receivable
Aged accounts receivable: How many days, on average, between when our firm sends a bill to its client and when we receive the payment from that same client. If it’s more than 90 days, you’re waiting too long to get paid.
40
Surety bond, bid bond, and performance bond
Surety bond: A type of insurance policy that the owner requires the contractor to purchase to be eligible to bid for, or work on, the project. It pays the owner to complete the project if the contractor walks off the job. Surety bonds come in two common flavors, bid bonds and performance bonds.
Bid bond: Contractor A wins the project by bidding $500,000, which is far lower than any of the others. Contractor B submitted the next-lowest bid, but his bid was much higher at $800,000. As Contractor A learns more about the project in preparation to build it, she discovers that she missed a passage in the specs stipulating that the ice cream factory must remain open, making product, during the entirety of the factory renovation. No wonder the next-lowest bid was so much higher! Realizing that she is contractually bound to conduct the renovation for only $500,000 while still maintaining a clean enough environment for food, she’s sure this project will bankrupt her construction company. She thusly walks away from the project, leaving the owner–who just completed an onerous, expensive, and time-consuming bidding process–to find a new contractor. In this case, the bid bond that the owner required all the bidders to purchase will pay the owner the difference: the extra $300,000 needed to hire Contractor B at $800,000. The owner is made whole because he gets his building, as laid out in the bidding documents, for $500,00 out-of-pocket plus the $300,000 that the bid bond insurance policy pays out.
Performance bond: Contractor B, who was required by the owner to purchase a performance bond when he signed the contract, is 90% through the ice cream factory renovation when the construction company owner dies. His children engage in a bitter struggle with one another to take control of the company that dad left behind. This leaves Contractor B unable to complete the project in a reasonable time frame; brothers take sisters to court to hash out succession plans in the construction business while the cranes on site languish. The performance bond, insurance required by the owner before the contract was signed, and purchased by the builder, then pays the owner $80,000 to complete the final 10% of the project, ensuring that the owner gets the ice cream factory renovation that he was promised, for the price that he was promised.
41
1 – Assets
2 – Liabilities
3 – Balance
4 – Equity
1 – Assets: Everything owned by a business that is cash or easily converted to cash
2 – Liabilities: Everything owed by a business
3 – Balance= Assets-Liabilities
4 – Equity: Same as balance (also known as net worth
42
Contractor License Bond
A surety bond (insurance) that protects against contractor breaking construction laws
43
How long does a Contractor’s warrantee last?
Contractor’s warrantee typically extends one year, but can contract for longer*
*Or until statute of limitations/repose runs out (for work that doesn’t conform to the contract)
44
Net Operating Revenue
Net Operating Revenue: All the money we’ve taken in from clients, minus what we’ve paid out to consultants (engineers) and what we’ve paid out for reimbursables (our cost for travel to the site, which was charged to the client, but now we have to pay for that travel from the money we collected)
Net Operating Revenue is the money (net revenue) we have left over to
1. pay our architects to draw (direct expenses),
2. pay our utilities (indirect expenses)
3. pay our partners (profit)
45
Who pays for the bid bond
Like insurance an policy that pays the owner the difference between the winning bid and the next lowest if the winning bidder walks away before signing the contract, the owner requires the bidders to purchase their own bid bonds (if she chooses to require bid bonds at all). When the contractor bids, he is bound to build what’s laid out in the bidding documents for the winning bid price. If a contractor has a history that includes walking out, it will be difficult for him to even obtain a bid bond because no insurer will want to cover a high risk “runaway bride.”
46
1 – Chargeable Rate
2 – Billable Revenue
3 – Direct Salary Expense Multiplier
1 – Chargeable Rate= what the client pays the firm for an hour of your time
2 -Billable Revenue= payment from the client for billable hours
3 – Direct Salary Expense Multiplier=
A number that typically falls between 3.0 and 4.0.
If you earn $100,000 for a 50 week year (assuming two weeks paid vacation to simplify the numbers), that works out to $50 per hour. If your firm uses a direct salary expense multiplier of 4.0, they will charge the client $200 for each hour you’ve devoted to the project to cover your salary, benefits, overhead and profit.
47
What building typology carries the most risk?
Condo projects and single family residential projects
Why?
The condo board is an organized entity with high expectations, a bored lawyer living somewhere in the building, and a propensity to sue architects for the noisy floor assembly above, harsh afternoon sun, or wilting landscaping. Be sure to tell your professional liability insurance company before taking on such a job.
Residential projects feature inexperienced clients with high expectations and a personal stake in the design.
48
Schedule Performance Index
Schedule Performance Index= Earned Value/Planned Value
This metric returns information about project schedule and efficiency
For example:
A project has a budgeted design cost of $100,000. That’s how much the owner plans on paying the architect for the entire project, in total.
According to the schedule you’ve created, 20% of the project should have been completed after two months. 20% of 100,000 is $20,000. . . that is the “planned value.” Ideally, your firm has worked $20,000 worth of time on this project after two months, and if it has, ideally your firm has invoiced and been paid $20,000 (or will be paid that soon).
But after two months, your firm has put $30,000 worth of time into the project. This kind of schematic design creep is not uncommon, and it means some hard choice are ahead: put less time in at the end (CD or CA) because you’ve run out of hours to devote to this project, or put more time into the project than you budgeted (and will be paid for), which endangers the financial health of the firm because you’re donating unbilled extra design hours to the client. Alternatively, you may charge the client for the extra hours, but they won’t be happy with a blown design budget.
Because you planned on $20,000 worth of work at this point, and you’ve put in $30,000 worth of work, the
Schedule Performance Index= Earned Value/Planned Value
So Schedule Performance Index= 30k/20k = 1.5
A Schedule Performance Index greater than 1.0 means you’ve put too many hours in, relative to where you are in the project timeline.
A Schedule Performance Index less than 1.0 is also a problem. If you’ve only put $10,000 worth of hours into the project, your
Schedule Performance Index= 10k/20k = 0.5
So you’re either behind schedule because you haven’t devoted enough hours to the project or low on quality for not putting enough design muscle behind this project as it moves forward.
Your target, therefore, is a Schedule Performance Index equal to 1.0, where the earned value = the planned value. Planning correctly, keeping track of this in real time, and adjusting staff responsibilities as needed to stay at 1.0, is tedious but necessary.
49
Municipal bonds
Municipal bonds are loans, made by investors, to a government.
If your city wants to build a new firehouse, they will need to issue a bond, which is basically like borrowing money at the governmental level. If the building needs $20M the city will issue $20M in promises to pay back investors, with interest. Hedge funds, pension funds, sovereign funds, and other investors will invest their capital into these bonds–they will purchase the bonds from the city. The city will then pay the bond holders back the principal, plus interest, for a fixed period of time. So if I purchase a bond for $100, the city promises to pay me back, say, $8 per year for 20 years. I don’t have to keep that bond for the whole 20 years. . . I can sell it to another investor for some market value after five years if I want to unload it, and they’ll reap the $8 annual payment instead of me.
Why not borrow from a bank? Banks don’t like to lend that much money for one project (too much concentrated risk) so issuing a bond allows hundred or thousands of investors to each take a small part of the risk.
U.S. town, city, county, and state governments issue hundreds of billions of dollars worth of municipal bonds every year. National governments issue bonds too.
50
Revenue bonds
are municipal bonds issued to finance facilities for revenue-producing public enterprises (Also known as rate-supported bonds). For example, a government issues a bond for something that makes money on its own, like a stadium or toll bridge.
51
Corporate bonds
Private companies also issue bonds to borrow money for building projects (or to finance ongoing operations, hire employees, pay down debt, or support R&D).
The value of a bond is based on the credit-worthiness of the issuer, the length of the bond, and the interest rate of the bond relative to the going bank interest rate at the time.
52
Tort Claim
Claim made due to injury
53
Expertise vs experience vs efficiency firm structures
Expertise: exceptional talent or deep knowledge. i.e. Pritzker Prize winners.
Experience: Special programmatic areas, routine but complex, challenge to match task to experience level. i.e. data centers.
Efficiency: Inexpensive, repeatable, routine, lots of junior staff. I suspect most of the work done by these “efficiency” firms will be outsourced abroad over the next decades because if you plan to win projects based on your low fees, it will be difficult to compete with overseas labor costs.
54
Strategic alliance
The temporary sharing of technology, resources, and risk to get and build a project. This uses a teaming agreement to lay out credit, copyrights, non-competition clauses, roles, etc..
For instance, an architect and engineer work well together and wish to formalize their relationship with a proper agreement. They decide to join forces to pursue projects, and with input from their respective insurance companies and lawyers, they establish a repeatable contract so that they don’t have to involve the insurance companies and lawyers each time they respond to an RFP. Each entity feels that they are more likely to be awarded the project by teaming with the other; each feels that they enjoy a competitive advantage by avoiding the costly legal hurdles associated with negotiating a new architect-consultant contract for each RFP; and each delights in making great buildings with a trusted partner who cares about the quality of the drawings as much as the other one does.
Unlike a joint venture, two companies didn’t establish a new, third, company. And unlike a partnership, they two companies haven’t merged into a single company. They went into the strategic alliance as two companies and came out of it as two companies.
Had they entered a partnership, the two firms would have permanently become one single firm. Had they created a joint venture, the two firms would have each taken ownership of a new third firm.
55
Overlay district vs planned use development
Overlay district: additional zoning requirements for a defined area of town, regardless of the underlying base zoning classification. For instance, for fear of mudslides, the buildings along a bluff, whether zoned for residential, commercial, or industrial, are required to obtain a geotechnical soil report before permission to build is granted. Overlay districts might utilize additional zoning rules to establish historic districts in older parts of the city, protect wildlife in eco-corridors, or promote density along a light rail transit line.
Planned use development (PUD): Change in the zoning/code for a specific plot in exchange for other good building practices or public amenities (the city council must approve the PUD). This often grants the developer more zoning flexibility in large-scale, mixed-use land development. For example, a developer interested in purchasing 175 acres currently zoned only for single-family detached homes hires your firm to design a walkable neighborhood replete with shops, schools, street trees, parks, and sidewalks. You then present the proposal to city council to allow the shops in what is currently residential-only zoning. If approved, the municipal government will allow the shops in exchange for the street trees, parks, and sidewalks. They sign off on your plan and will draw up a contract ensuring that you abide by the spirit of it, in exchange for the new zoning flexibility.
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What rules to you, as an employer, need to follow? Name everything you can before you flip the card (you’ll be surprised by how many rules you missed).
With more employees, your firm is subject to additional regulatory hurdles to protect workers.
0-15 employees: FLSA, I-9, HIPAA, ERISA, Equal Pay Act, OSHA, Worker’s Compensation, Minimum Wage
16-50: add COBRA*, ADEA, ADA, Civil Rights* (*20+)
50+: add FMLA, Obamacare, EEO Reporting, Affirmative Action
FSLA=Fair Labor Standards Act. Minimum wage, overtime pay, child labor laws.
I-9=Employment eligibility verification. Are your employees legally permitted to work in the US?
HIPPA=Health Insurance Portability and Accountability Act. Protects privacy of employee health information. You can’t tell one employee that another employee is suffering from gout.
ERISA=Employee Retirement Income Security Act. Sets minimum standards for retirement and health plans. For instance, the person who manages the retirement plan must act as a fiduciary (puts the best interest of the plan above their own self-interest).
Equal Pay Act=Prohibits wage discrimination by gender
OSHA=Occupational Safety and Health Administration. Protects employees from workplace injury
Workers compensation=Gives those injured at work wage replacement and medical treatment
COBRA=You lost your job that came with health insurance? You divorced your spouse or your spouse died and you were covered on her health insurance plan? COBRA allows you to temporarily pay out-of-pocket to stay with your old health insurance until you can find a new plan.
ADEA=Age Discrimination in Employment Act. Prohibits age discrimination against those 40 and older. You may discriminate against someone for being too young! Why? Young people don’t vote so congress doesn’t pass laws to protect them.
Civil rights=Civil Rights Act. Protects workers against discrimination on the basis of race, color, religion, gender, and national origin. As of 2020, this also includes sexual orientation. Most people don’t know that you can often legally fire someone for any other reason not included above: if you don’t like the color of an employee’s shoelaces, you may be able to legally fire them for that. And the first amendment protects citizens from government punishment based on speech, but not from employment action. So you can fire someone for saying something offensive or stupid (unless you work for the government). I have found that smart people I work with like to feign legal expertise when it comes to labor law. . . and I’ve found them to be wrong almost every time I check with the university lawyer to clarify. Obviously, consult a labor lawyer first.
FMLA=Family Medical Leave Act. Allows employees to take unpaid, job-protected leave for family and medical reasons (birth, adoption, military deployment).
Obamacare=Affordable Care Act (ACA). Large employers must offer affordable health care insurance as an option to those working 30+ hours per week.
EEO Reporting=Equal Employment Opportunity. Employer reports hires by race and gender. For 100+ employees.
Affirmative Action=Employers must recruit and advance qualified minorities, women, veterans, and persons with disabilities.
57
Mediation vs arbitration vs lawsuit
Laid out in B101, either:
Mediation -> Arbitration (not always cheaper, often ends in 50/50 settlements)
-or-
Mediation -> Court System (can be cheaper, fairer, and faster, but is also public)
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Owner wants a new architect
The owner can fire architect without cause (for convenience), though has to pay work-to-date, including overhead and profit
The architect can’t transfer the project to another architect because first architect got too busy to finish.
Each party is responsible for sharing concerns as soon as possible
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LLC
Limited liability company
– Separates personal assets from company assets; protects personal assets from client lawsuits
– Small to medium sized company
– File with state (for this and any corporation)
Filing as an LLC is a good option for a new architecture firm.
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S-Corporation
C-Corporation
B-Corporation
S-Corporation: Small or large company without public stocks (“closely held”) – singly taxed. Personal property protected from client lawsuits. Good option for an architecture firm.
C-Corporation: Large company with public stocks – double taxed
B-Corporation: Company with goals beyond profit-seeking: environmental or social mission, as well as making money.
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Common project delivery methods
Design-Bid-Build: Unless told otherwise, assume that the ARE is asking you based on this “vanilla” option.
Design-Build: A single contract between thee owner and a design-build firm employing architects and contractors (or joint-venture entity owned by architect and contractor)
IPD: Integrated project delivery. Catch-all category for one-off teamwork-focused contracts where owner, contractor, and architect share the financial risks and rewards of a completed building.
Construction Manager: A powerful entity, hired by the owner and answering directly to her, who may serve as a consultant in an advisory role, a legal representative of the owner who hires the architect and contractor, or a one-stop-shop for both advising the owner and then constructing the building.
It may seem like the project delivery options are both prescribed and limited in choices. . . because they kind of are prescribed and limited. . . If that feels strange to you, read on (but you have my permission to move onto the next card if the selection of contracts available feels “normal” to you.)
By constricting the legal formats available to a small number of options, the AIA contracts can legally protect everyone with a relatively small number of owner-architect-builder agreements, updated regularly to account for new developments in the field (BIM, LEED) as they arise. If every possible legal structure were on the table for every project, basic contract templates could not possibly cover all the options and expensive lawyers would reinvent the wheel for each project, negotiating over little details, while the parties schemed to unscrupulously take advantage of unforeseen loopholes in the fine print.
With a limited number of contracts, when disputes arise, there is established case law tied to that particular contract flavor and a process of revising the next iteration of that contract template to address the most common disputes so that they won’t need to be settled in the courts going forward. Who gets to decide when there is a new project delivery method available? Generally, the owners do through their collective market power.
If you were making an upright-walking species from scratch, you would design it with two spines instead of one, and human frames would be more the shape of a capital H. But because we evolved from beasts that walked on four legs, we were stuck with the single spine that worked best for them. Now many of us suffer from back pain because of that start-from-what-we-already-have process. It’s similar evolutionary expediency with the AIA contracts, where what is available is as much a reaction to what was available before than what would be absolutely optimal now. Design-bid-build held a position as the default for a time, but construction took too long and involved too many adversarial parties so the design-build contract option was born. Buildings got complicated and owners were taking too much risk with too little information, so contracts with a construction manager were invented. The owners were happy to give the construction managers more risk for more profit upside so the AIA invented new contracts, each giving the construction manager more responsibility. Finally, BIM allowed all the parties to make a change to a living-breathing digital drawing set, a new generation of entrepreneurial architects emerged who didn’t see being a developer as selling out, and some grew tired of the adversarial relationship that the existing contracts fostered between architect, contractor, and owner. . . so the AIA developed IPD contracts. Each contract type evolved from what came before it, but each retained the evolutionary baggage associated with incremental change. And each existing contract type, by virtue of its legacy status, is updated and maintained in perpetuity so as not to waste a lot of past effort and settled case law (and not to waste a marketplace of owners with inertia, content to use the contract type that worked out well last time).
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Add alternate vs unit pricing vs allowance
Add alternate: The owner may want an outdoor pool as part of his hotel project, so he’s curious about the extra cost. Once he’s defined the extra cost, he’ll put that in his spreadsheet to confirm that the pool will pay for itself in extra nights booked. You will design a hotel and add a pool to the drawings; in the bidding documents, you’ll make clear that the pool is an add alternate and that bidders will offer two cost numbers: one for a pool-less hotel option, and a second that includes the add alternate pool.
Unit pricing: The owner will be building a hotel, but has not yet decided on its size. He needs a solid price for the hotel (without the rooms. . . just the lobby, restaurant, laundry facilities, etc.) plus a unit price for each hotel room. That way, the owner an analyze market data and effectively study feasibility against the cost of building to a certain number of rooms. After the schematic design phase, you, as the architect, can give him a cost estimate of $4.2 million for the base hotel with 40 rooms, plus a unit price of $290,000 additional for each hotel room. Now he can talk to his investors and market research people to decide the optimal size for his hotel armed with specific knowledge about the unit price of each extra room. Unit pricing works best for repetitive elements in a project (street lights, an array of barns for aging whiskey) where the owner wants to buy time before committing (to gather financing for extra landscaping that isn’t yet in the budget, to determine if the public’s interest in consuming bourbon is permanent or just a passing fad). It also works for elements that are easily quantifiable (earth excavation, linear feet of site-cast concrete retaining wall), also when the owner wants to buy time before committing to an amount of something. Unit pricing does not work well with complex elements of projects (for instance, if an owner would like to buy time before committing to a building form.
Allowance: Options for TV model availability change rapidly with advancing technology, so you don’t yet select a specific television model for the hotel rooms, knowing that the hotel won’t be completed for another 2.5 years. You’d rather wait and pick out a TV model then. But leaving the televisions out of the drawings invites the contractor to fleece the owner in a future change order for all those TV wall mounts. You need to get the mounts into the contract up front, while the owner has negotiating leverage, so you ask for an allowance for TV mounts. The contractors’ bids then come back to the owner with the TV mounts accounted for, even though model numbers aren’t in your specifications. The winning bid includes an allowance for $40,000 for all TV wall mounts, provided the television weighs less than 55 pounds and there is no special wiring required. Now, with the allowance already in the contract, as long as a “normal” TV is selected by the owner, the contractor can’t jack up the price later when the owner is desperate to complete the campus-adjacent hotel before college football season begins. The allowance must always include all costs: parts, labor, taxes, delivery to the site, etc., so the owner won’t be surprised by a bill for taxes, labor, and delivery charges during construction, and the owner can properly evaluate all the contractors’ bids on equal footing. If one contractor’s bid included he cost of the mounts but didn’t include taxes, labor, or shipping–but the other bids did include those elements– it would be difficult to compare different bids as “apples-to-apples.” Just for the TV mounts the difference between the bids that are all-inclusive and the bids that are for parts-only could easily be tens of thousands of dollars!
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Contractor’s “Cost of Work” includes…
Materials
Labor
Profit
Overhead
This is especially important to define up front if the architect’s fee is based on a percentage of Cost of Work.
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Rules for unpaid interns
1 – Similar experience to education
2 – Must benefit intern
3 – Intern doesn’t replace anyone and is monitored closely
4 – No advantage or some disadvantage to firm
5 – No guarantee of job afterwards
6 – Intern and firm are explicit that there is no salary
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Basic services
Basic services in the standard AIA contract include
```
Instruments of Design
SD, DD, Bid, CD, and CA, cost estimation, and coordination
Budget and schedule management
Codes and utilities
Mechanical, electrical, and plumbing
```
Everything else (programming, acoustical consultant, marketing materials, etc.) is considered an additional service. . . with an additional up-charge fee
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Construction Manager-as-Agent
The owner contracts with the Construction Manager who acts as his agent and contracts with the Architect, and Contractor.
*This option is less risky for the Owner than the CM as Advisor route, gives more authority to the CM, and greater completion speed with a greater cost.
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Types of project delivery contract structures
```
1 – Design-Bid-Build
2 – Design-Build
3 – Integrated Project Delivery
4 – Construction Manager as Agent
5 – Construction Manager as Advisor
6 – Construction Manager as Constructor
7 – Bridged Design-Build
```
Explain each of these to yourself now.
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How do you choose whom to staff to a project?
1 – Utilization rate (low rate means they have time to give to the project; high rate means they are already busy with another billable project)
2 – Experience/expertise/role
3 – Does the Architect have a license in the state?
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Negotiated select team
Owner hires the contractor she likes from the beginning of the project, before drawings are completed (or even started). This project style is a subset of Design-Bid-Build.
*This option allows fabrication to start early on complex parts of a project (i.e. special curtain walls) by including the contractor from the beginning. It also ensures a quality project: the contractor was selected because of her craftsmanship, integrity, professionalism, etc, not because she had the lowest price.
Offers greater speed and quality than basic Design-Bid-Build, but is obviously more expensive because there’s no bidding.
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Base design-bid-build contracts
AIA B101 – Owner-Architect Contract: https://content.aia.org/sites/default/files/2017-04/B101_2017%20sample.pdf
AIA A201 – Owner-Contractor Contract:http://content.aia.org/sites/default/files/2017-04/A101_2017%20sample.pdf
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Phasing
Phasing: construction can be planned as a series of stages, rather than as one continuous effort.
Helps with complex systems: Especially common if the owner needs to stay open during construction. (“We’ll move our operations to the west side of the building while you work on the east side.”)
Helps with uncertain funding: to make sure that a portion of the project is occupiable, even if funding dries up before the whole thing is completed. (“Start with Building A, and if our IPO turns out to be a boon for the company, we’ll complete the already-designed corporate campus with construction of Buildings B and C.”)
Pros: lower initial investment so less initial risk; income can be generated by the portion of the restaurant that is open during construction
Cons: the total project will take longer to complete; more expensive to bring cranes to the site twice, route construction deliveries out of sight of diners, etc.; must maintain security, cleanliness, and worksite safety to meet both the needs of the construction site and the restaurant operation.
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Who owns the drawings for a project?
The architect owns the instruments of service – at all phases; The architect grants the owner and contractor a “limited license” to build the project. Unless the architect agrees (and typically is paid for it), the owner can’t simply re-use the drawings for her next new Pilates studioo.*
*The architect can sell the rights, if the new architect indemnifies the old. The owner can also get the right to use the drawings if the architect is terminated for cause.
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Types of bids
Competitive: Lowest immediate cost
Negotiated: Owner selects a (single) trusted contractor and they negotiate a price to build the museum. Greater speed and quality, but obviously more expensive because the owner has given up the option to benefit from competitive pricing.
Invited: Competitive bid with specifically qualified contractors
Proposed: The owner negotiates for best quality out of the lowest four bids
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AIA agreement types by letter prefix
A series: Owner-Contractor; Contractor-Subcontractor; Sureties
B series: Owner-Architect
C series: Architect-Consultant; IPD
D series: Miscellaneous
E series: Specialty Projects, Services, and Processes
G series: Project Management and Administration
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When is a project late: After the substantial completion date or after the final completion date?
Substantial: Ready for move-in, sets the deadline for a late project, start of the warrantee period
Final: Punch list is fully complete
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Name common causes for construction delays? Who is at fault for each?
Unexpectedly bad weather (normal weather days are built into the schedule, no one at fault if that number is exceeded)
Change orders caused by the owner or architect (who are at fault)
Contractor behind schedule because they are building too slow (the owner can require overtime at contractor’s expense to catch up)
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What kinds of employee hours apply toward utilization rate?
Utilization rate includes only billable labor (time spent on the project and billed to the owner):
– Red-lining
– Drawing
– Design meetings
– Site visits
– Coordination/CA
Excludes all firm management and marketing labor
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Public project process and
| Qualities of winning bids
RFP -> Kickoff -> Contractor questions and answers -> Sealed bids -> All bids are opened at once -> Choice is made
1 – Lowest responsive bid (bidder followed the bidding rules and accounted for everything in the drawings/specs when bidding a price)
2 – Lowest responsible bid (bidder has the financial and technical wherewithal to build the project to a minimum quality, on time)
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Life-Cycle Cost Analysis
Includes and excludes…
And differs from Life Cycle Assessment because…
Life-Cycle Cost Analysis (LCCA): The evaluation of the cost of, for instance, boiler systems in a building from installation to replacement
Includes the cost to install, plus the predicted costs: fuel to run, cost to maintain, salvage value after the useful life has concluded, and considers how long one system is expected to last as compared to another. Boiler A costs less to install but more to operate; Boiler B costs more to install but less to operate. LCCA attempts to identify which boiler choice offers a better value, accounting for inflation.
Useful for a fuller accounting of value beyond simple installation cost comparisons
LCCA excludes land costs and other sunk costs
*Not to be confused with Life-Cycle Assessment (LCA), which also compares building design options–but whereas LCCA serves as an accounting tool, LCA serves as a sustainability tool. LCA measures the cradle-to-grave environmental benefits and liabilities from raw material extraction through production, transportation, use, and disposal of a good. In Life-Cycle Assessment two roofing membranes may be compared for everything from the water and petroleum used in their manufacturing, to the thermal building loads and heat-island-effect associated with their use, to their usable life and recyclability upon replacement.
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What is quality management in architecture?
Quality Management (QM): Intentional and formal process of developing and revising the instruments of service and internal firm systems. For instance, establishing how many cycles of redlining and revising drawings each project will have, or how many times per month the project architect will check in with the client by phone during design. (Also called Quality Control (QC).)
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Stipulated lump sum
Fixed fee + expenses
Percentage of construction cost
Hourly to a maximum + expenses
Hourly—open-ended (no established maximum) + expenses
Fee per unit/sf + expenses
These are the most common way that architects will be paid. Which flavor used is usually determined by what the owner wants.
Stipulated lump sum: fixed price for owner and fixed fee for architect. Don’t use if scope, responsibilities, or task assignments aren’t clearly defined. If architect works too many hours, she loses money on the job; if she works too few, she makes more profit and owner is fleeced. Everyone must trust one another.
Fixed fee + expenses: with or without a cap limit on expenses
Percentage of construction cost: If labor or materials were donated to build the project, their value should be included in calculating construction cost
Hourly to a maximum + expenses: just what it sounds like
Hourly—open-ended (no established maximum) + expenses: just what it sounds like
Fee per unit (or fee per square foot) + expenses: typically only used in residential design
* Public sector projects will almost always be stipulated lump sum or percentage of construction cost
* Private sector will use any of these
* Some of these terms are also used to describe options for how the owner pays the contractor
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Examples of Additional Services
These go beyond the standard owner-architect contract, so charge an additional design feee
```
Offering more than one design option
Certified designs (LEED, etc)
Fast-track
BIM coordination
Interior design, or furniture, fixtures & equipment (FFE)
Post occupancy evaluations
Existing facilities survey
A/V or security design
```
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Design-Bid-Build
Owner contracts with the Architect to draw, and then the Contractor who bids a fixed price based on those drawings.
*This project type is linear and clearly defined, with the lowest immediate cost, a longer schedule, and a higher chance of large change orders. Due to the change order risk, the drawings need to more complete earlier in the process.
*This was, for a long time, the most common type of contract and serves as the default option assumed in the ARE unless otherwise specified
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Bridged Design-Build
Owner contracts with a design architect (“bridging consultant”) to design the project through SD, then a “production architect-contractor team” bids to develop the documents and build the project. This contract retains some of the (good for the owner) adversarial relationship between the architect and contractor because the bridging consultant (design architect) works for the owner and has her best interest in mind; and it retains some of the (good for the owner) speed and expediency associated with design-build projects because the production architect and contractor work for a single entity and ostensibly trust one another without the blame-shifting (“It was the architects fault!”) or cover-your-ass culture (“We can fix this design flaw ourselves, but send an RFI and wait for an answer anyway”) associated with design-bid-build. The bridging consultant (design architect) continues to review the production architect’s drawings after the hand-off, on behalf of the owner, to ensure that the design architect’s intent was followed through to detailing and technical specs.
*This type of project increases quality, lowers risk, and offers greater speed than design-bid-build (but less speed than design-build). Not good if the owner needs to have the architect “on her side” throughout the whole process.
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Integrated Project Delivery
Integrated Project Delivery (IPD): Owner, Architect, and Contractor each take ownership in a fourth business as an integrated team, pooling resources and sharing risks and benefits. For instance, a hospital system teams with a builder and you, the architect, to design and construct a new hospital building adjacent to a new parking garage. All three parties give up the right to sue one another and adopt a “what’s good for the project” mentality. If the hospital is completed on time, this fourth company that you have partial ownership in earns a bonus. If it finishes under budget. . . another bonus. If nurses’ surveys show a minimum level of satisfaction. . . another bonus. If energy use after the first year is below a target level. . . yet another bonus rolls in one year after substantial completion. The fourth company will own and run the parking garage and earn recurring revenue as receipts for parking garage fees roll in over time. If the garage does poorly because the team didn’t anticipate the widespread use of ridesharing technologies like Uber, the team will lose money on that segment of the project. In this way, you take on more of the project’s risk, and earn more of the upside benefit, than you would in a legacy contract structure. IPD is not simply an evolution of a new type AIA agreement, but serves as a difference in kind of contract.
The goal is not only to act collaboratively and share ownership, but also to reduce waste. A federal government analysis demonstrated that, since 1964, all non-farm industries increased productivity by at least 200%–except one. The US construction industry over that same time window was the lone loser, actually decreasing productivity over time! A third goal of the IPD contract is to reduce inefficiencies. By opening up communication and incentivizing collaboration, less time will ostensibly be spent hunkering down, and more time can be spent huddling up.
*This type of project is usually used for large and complex projects and works especially well with BIM. IPD is, above all else, flexible. Each project sets its own system of rewards and penalties, its own financial structure, and its own teams (in the example above, perhaps a health insurance company, a health care charity, and the MEP engineer are also stakeholders in the new hospital-building company).
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Construction Manager as Constructor
Owner contracts with Architect and CM (who also acts as the builder) at the same time.
*This type of project is the least risky for the Owner, most risky for the CM, and has higher speed and cost. The final price (GMP) is known by the end of SD. Because of the speed and increased authority of the CM, the Architect must maintain a stricter process of quality control.
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Construction Manager as Advisor
Owner contracts with Architect, Contractor, and CM.
*This type of project brings the CM on early as a consultant for the Owner, typically a CM with expertise in a specific market (like performing arts centers). This allows for greater speed.
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Design-Build
Design-Build: Owner contracts with an Architect-Contractor team.
*This project type lowers risk and cost to owner, while increasing speed, but has the potential for lower quality, as the Owner has no agent. For instance, the light fixtures that were specified are no longer available from the manufacturer. The builder wants to replace the light fixtures with those of comparable material expense, but (slightly) inferior ones that require less labor to install because the replacement fixtures don’t hide the low voltage transformers in the basement the way that the original ones had. The owner may not have the wherewithal to recognize the new fixtures as inferior. If the architect and contractor are a team hired together by the owner, there is less incentive for the architect to call out the contractor’s replacement fixture as inferior.
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What are the instruments of service?
Instruments of service include pretty much everything the architect created for the project, including the final CD set and specifications. . . but also the site analysis, notes, study models, environmental review documents, cost estimates, sketches, early versions of the design that were abandoned. . . all the creative work, tangible and intangible.
90
An architecture billings index (ABI) of 48 in “inquiries” means _______.
An ABI of 48 means that, in aggregate, the financial future outlook for architects ticked down last month by some very small amount. The architecture billings index (ABI) is a running monthly number: an economic indicator for construction activity. A number more than 50 means the financial outlook improved over last month; a number below 50 means the financial outlook declined relative to last month. There are separate ABI numbers for billings, new design contracts, and inquiries. . . for residential, industrial, public, and commercial sectors. . . and for the Midwest, Northeast, South and West regions of the US. The ABI has successfully predicted the last two recessions 11 months before each one started.
To see the ABI right now, go here and scroll down a bit. To see it graphically over the last five years, go here and scroll down a bit (note the Covid plunge in 2020)
91
If the owner-architect contract stipulates that the architect’s fee will be 7% of construction costs, and the project is abandoned after CDs (and therefore has a construction cost of $0), is the architect entitled to payment?
The architect is paid, even if the project isn’t constructed, because the contract is based on the “Owner’s budget for the Cost of the Work,” not the “Cost of the Work.”
From the contract: “The Architect shall be entitled to compensation in accordance with this Agreement for all services performed whether or not the Construction Phase is commenced.”
92
You own a firm and provide life insurance to your staff as a benefit of employment. Is that benefit taxable?
The premiums (monthly cost) of the first $50,000 of life insurance is not-taxable, but after that, the rest is subject to tax. The employee will then pay some tax on large life insurance plans. Wages, salaries, and bonuses are considered taxable income. Many benefits, like child care and contributions employees make to health insurance plans may not be subject to taxes
93
What do you do if an exam question asks you which firm employee to assign to a project?
Look at the table with the employees’ names and information about each employee
Look for a staff member who has experience in the building program type. For instance, if the assignment is to design a school, look for an employee who has experience in education projects. Now you’ve perhaps narrowed it down to three employees out of the original twelve.
Then, from those three, find the ones with the lowest utilization rates. A 90% utilization rate means that 90% of that employee’s time is billable to a client, so best not to assign it to that busy team member and find one with more availability. When you look at the other two, you may find one education-experienced person with 30% utilization rate and one with a 50% rate. That means they each have time available to dedicate to a new project.
From the final two, pick the one that makes the most sense for the task. One maybe a lower-level intern with 1 year experience and a commensurate low hourly wage and the other may be a senior project manager with decades of experience and a high hourly rate. If the task is updating the drawings to reflect redlines, the rookie is your best pick. If the task is making the redline edits for a complex school design, better pick the veteran.
94
The building structure fails. Why doesn’t the owner sue the structural engineer?
The owner doesn’t have a contract with the structural engineer. The owner has a contract with the architect and the architect, in turn, has a contract with the structural engineer. There is a “chain of command” for liability, accountability, and communication. In this case, the owner sues the architect for damages and the architect then sues the structural engineer to recover those damages.
95
Do business as a sole proprietor or as a limited liability corporation?
For someone with the liability exposure of an architect, and LLC or S-Corporation is almost certainly the best option for operating a business. If the building you design burns and people are hurt, the aggrieved will find it difficult to take your family’s house in a settlement. If doing business as a sole proprietor or partnership, it is much easier for the winner in a case to take your personal house– and the money you’ve put away for your child’s college expenses.
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What is “responsible control”
As the licensed architect, you can stamp the work if you achieved responsible control; and you have achieved “responsible control” over a drawing set (including specs, reports, etc.) if you possess a knowledge of, or maintain supervision over, that set consistent with the standard of care. In other words, you can stamp plans that you didn’t create, but you can’t stamp plans you know little about. How much do you have to know about the set before you can ethically stamp them? Enough to be consistent with what other architects in your area are doing for similar projects (that’s the “standard of care” part).
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Can you, as the architect, stamp the work of consultants?
You may stamp the work of a licensed consultant, if you have, “reviewed it, coordinated its preparation, or intend to be responsible for its adequacy.”
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AIA Code of Ethics
If you have time before the PcM exam, you may wish to review the AIA Code of Ethics (it’s not that long). https://aianova.org/pdf/codeofethics.pdf
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it unethical for an architect to offer free services?
It is not unethical for an architect to offer free services. The AIA used to be in the business of establishing fees, outlawing discounts, and regulating when an architect could submit a bid to undercut the fee established by another firm. They took this role to protect the profession from a “race to the bottom,” whereby architects would undercut one another on price ad infinitum–but those protectionist policies ran afoul of antitrust laws. The federal government deemed that practice to be too much like a cartel, and contrary to the free-market tradition of competitive bidding.
100
How many times does an architect need to goof before they are disciplined by the profession
As you might imagine, there is no hard minimum number of lapses, beyond which the architect is disciplined by the profession. Instead, trouble arises after failing to “demonstrate a consistent pattern of reasonable care and competence,” and like so much else in an architects liability portfolio, that bar to clear is established by “standard of care” norms: other architects practicing in the same locality at the same time.
101
Can you fire an employee because you don’t like the color of their shoelaces?
Yes, surprisingly, you can legally dismiss an employee for nearly any reason, provided it is not the employee’s race, gender, national origin, disability, religion, or genetic information. In 2020 the supreme court ruled that sexual orientation is also protected, and some states offer other additional protections to employees. You cannot fire someone for their age, but that rule only applies if they are over the age of 40, so you can fire a young person because of their age. Why? Because those under 40 are less likely to vote, so congress doesn’t pass laws to protect them. Harassment is both illegal and subject to discipline within the profession, and includes (but is not limited to) offensive slurs, offensive jokes, unwanted physical contact, insults, petty slights, and interference with work performance. Isolated incidents, unless extremely serious violations, do not rise to the level of AIA discipline–it’s a pattern that the profession is looking for when meting out punishment.
102
Can an architect contribute to a campaign of a local politician in the hope of winning a contract to design a new firehouse, should that politician become elected?
This one is a tough call, but an architect can probably contribute to a campaign in the hopes of winning a contract later. Architects are prohibited from offering payments or gifts to public officials with the intent of influencing the official’s judgement related to a juicy building project. But that rule does not apply when making legal campaign contributions!
103
Is an architect who is working with a developer allowed to stand up in a city council meeting and speak in support of the developer’s project?
Architects can make public statements on architectural issues but must disclose that they have an economic interest in the outcome.
104
Is it ethical for an architect with no knowledge, background, or experience in oil refinery design to take responsibility for the architecture of an oil refinery?
An architect may provide professional services in an area beyond their technical qualifications, provided they engage relevant consultants to guide them (or seek the appropriate education/training on their own).
105
The Code of Ethics states, “Professional Recognition: Members should build their professional reputation on the merits of their own service and performance and should recognize and give credit to others for the professional work they have performed.”
Ha! Insert your own example of this ethics code being broken here _______.
Please do better at sharing credit than your predecessors have.
106
You leave your firm. Are you entitled to take up to three drawings or reports with you?
Of course you may not take drawings with you when you leave your firm without permission. Those drawings belong to the firm, even if you were the one who created them through your hard work. That’s what they paid you for.
If however you served the firm as an independent contractor (IRS form 1099 instead of W-2 at the end of the year), and you didn’t sign a form handing over rights to your work, you may have ownership of the work, just as an architect hired by an owner has rights to their work. Check with a lawyer.
But there’s a twist! While it is unethical to take work when you leave without permission, the ethics code stipulates that the employer may not unreasonably withhold permission from a departing employee requesting to take copies of non-confidential work.
107
Your boss is slow to approve your work experience hours through NCARB. Is that ethical?
No, it is not ethical to foot-drag on experience reporting. Rule 5.201 stipulates that, “Members who have agreed to work with individuals engaged in an architectural internship program or an experience requirement for licensure shall reasonably assist in proper and timely documentation in accordance with that program.”
108
Your boss, who is not licensed, and did not have to be because the firm historically has limited its work to single-family residential projects, has asked you to get licensed because they wish to expand to commercial work. Is it legal/ethical/safe for you to stamp drawings for your unlicensed boss?
This is a complicated question, with a complicated answer. It is one, believe it or not, that I’ve been asked often.
First, stamping a drawing based on your judgement is kind of like your right as a licensed professional, so you can legally stamp a drawing if you had responsible control over it. This deference is what licensure earns you and it is what you are working toward with all of the studying you are currently engaged in. It may not be legal in certain states because of laws that, for instance, require that a firm owner or equity partner be licensed. So it is often, but not always legal to stamp drawings for your boss if you choose to.
The second question is ethics, and to that, I can find nothing from the AIA Code of Ethics or online sources that prohibits an employee without firm ownership from stamping a drawing set. Of course, one may have personal qualms with the ethics of asking someone to accept the risk and liability of using their seal without offering them the upside of firm equity in return.
The final concern is liability, and on this count you almost certainly should not stamp the drawings for your boss without consulting an attorney of your own. While the firm’s errors and omissions policy may (or may not) cover you through litigation, you’d need to confirm in writing that it covers you if you leave the firm before the ten year statute of limitations runs out–otherwise you’d be personally on the hook for being sued after the parapet leak is discovered, even though you were laid off three years ago! In this case, you may need to purchase liability insurance on your own when you leave the firm to protect yourself!
109
What is “payroll burden?”
Payroll burden (also called labor burden) is the cost to the firm for employing you, not including your salary: costs from employer-provided health insurance; paid time off/paid sick leave; payroll taxes due from the employer such as social security, medicare, and unemployment tax (termed “FICA taxes”); pensions and matching contributions to a 401k fund.
Payroll burden is typically expressed as an aggregate percentage of salaries, so if your firm has a payroll burden of 10%, it means that for every $100 of salary paid to employees, the firm must account for an additional $10 toward these extras.
110
LLC vs S-Corporation
The two are similar:
Each protects your personal assets, so if the building you design burns down, the victims will have a difficult time winning your children’s college fund when they sue you in court. Sole proprietorships, or just starting a business without filing with the state as a business entity. . . those paths don’t offer this protection.
Neither LLCs or S-corporations are double-taxed the way that C-corporations are. GE, Microsoft, Coca-Cola and other large entities file as C-corporations because once a company gets big enough, it is almost required to become a C-corp. If your C-corporation makes a profit this year, the government first taxes it at the corporate level. Then if it uses that profit to pay dividends to its owners (shareholders), those shareholders are taxed again at the individual level–we say that C-corps are “double-taxed.”
So what’s the difference between an LLC and an S-corporation? S-corporations take a bit more effort (though not much) to set up and have a few more rules (though not many more). . . The meaningful difference is that if you have a very profitable year, S-corporations can be taxed at a lower rate than LLCs. I’ll explain. The federal government taxes income at a higher rate than it taxes investments, so someone who makes the same amount of money as you do this year, but makes it by earning bank account interest and stock dividends instead of salary, will pay a meaningfully lower rate than you will as a working person. Remember that when you read the next paragraph.
If at the end of the year, an LLC has $500,000 left over in profit, the owner will be taxed as if they earned that $500,000 working. This means a higher base rate, plus more in FICA taxes (social security, Medicare). If however the owner had filed as an S-corp, they are required to pay themselves a “reasonable” salary, tied to industry standards, but their profit above that salary can be taxed as if they were an investor in their own company, and their company paid them a dividend for their shares of stock. So, maybe the first $100,000 is taxed as a reasonable salary for the principal of a small architecture firm, but the next $400,000 in a S-corporation can be defined as a “distribution,” and taxed the same way that any other investment would be taxed: at a lower rate than salary earnings.
111
Fill in the empty box
| owner>(design fee + reimbursable)>architect office>1.direct expense, 2.indirect expense, 3.reimbursable expense, 4?
Direct expenses: paying the employee who is working on the project for the hours that they dedicate to the project
Indirect expenses: paying the office manager, conference travel expenses, and the employee efforts not tied to a specific project
Reimbursable expenses: paying for the plotter and architect’s travel to the construction site, then charged (with a modest extra percentage) to the client
Profit: Firms typically charge 3x to 4x the direct expenses for the employee’s time to account for indirect expenses and profit
112
Which of the following is most associated with an architecture firm quality management (QM) strategy? (select four of the six)
Assess risk
Eliminate waste in processes
Track employee time in smaller increments
Treat your consultants as customers
Utilize checksheets
Utilize scorecards
Answer: architecture firm quality management (QM) strategy:
Eliminate waste in processes
Treat your consultants as customers
Utilize checksheets
Utilize scorecards
113
Which of the following is associated with an architecture firm quality management (QM) strategy? (select four of the six)
ASTM 9
ISO 9001
Lean Systems
Project audits
Six Sigma
Separate quality management into its own department
Answer: architecture firm quality management (QM) strategy? (select four of the six)
ISO 9001
Lean Systems
Project audits
Six Sigma
114
Six Sigma vs ISO 9001 vs Lean Systems
All three are recognized and long-established quality management programs, all three are customer focused, all three involve a firm’s commitment to continuous improvement, all three take common-sense ideas and make them an intentional part of the organization, and all three are implemented firm-wide.
Six Sigma: Standardizes results and eliminates variation. Can be third-party certified, but not always.
ISO 9001: involves lengthy (up to three years) third-party certification process for accountability; more appropriate for large firms with multiple offices; and measures teamwork, leadership, purpose, decision making, consistency, and communication with a focus on mutually beneficial relationships. If you’re curious to learn more, see this.
Lean Systems: more of a philosophy than a formal program with certification; all about eliminating waste in the firm’s processes. Do we really need to plot out a third copy of this drawing set? Do we really need a third visit to the site? Do we really need 10 days to turn around an RFI?
115
Examine the profit-loss statement of your friend. Did she have a realistic budget? One that could be met?
Yes, her budget was reasonable. At this point in the year she was expecting to have spent $14,500 and to have earned $15,200. In reality, she earned nearly that at $15,070.
This is similar to the kind of firm P-L statement that you will be responsible for deciphering in the exams, so if this is difficult or unintuitive for you to follow, take great care on this series of flash cards (and watch the answer explanation videos). If this comes easy to you, breeze through it and treat it as review.
116
Break-even multiplier vs direct salary expense multiplier
You pay an architect $25/hour and charge the client $100/hour for the architects billable time.
The break even multiplier is 2.0, which means that for every $25 you pay the architect on your staff, there is another $25 to cover the architect’s health insurance, retirement, AIA membership, office furniture, and rent for the firm’s office.
The direct salary expense multiplier is 4.0, which is how we came up with the $100/hour we charge the client. The direct salary expense multiplier is similar to the break even multiplier, but the direct salary expense multiplier also includes profit for the firm. Obviously, then, if the break even multiplier is larger than direct salary expense multiplier, our firm loses money on each job it takes.
117
Examine the profit-loss statement of your friend. What kind of things can she do to get back on budget? Where is she farthest from her budget as a percentage and where is the “low-hanging fruit” where an adjustment in her behavior to align more closely with her budget will have the biggest dollar impact
Stop helping her brother out financially
Stop going out for coffee
Get rid of her car
Stop paying for guitar lessons and learn from YouTube
Adjust her budget to allow for one or more of these things, but cut instead from somewhere else.
118
Spearin Doctrine
Spearin Doctrine: The contractor has the right to expect accurate and proper plans/specifications, and isn’t liable for errors in them. Based on a 100-year-old landmark Supreme Court construction law case, US vs Spearin.
Big projects are expensive and establishing risk–who’s responsible when things go wrong– is a big deal, especially to owners and insurance companies.
119
The architect hires a civil engineer to design a church parking lot. Required to address stormwater runoff, the engineer selects an off-the-shelf under-pavement tank to hold the runoff and slowly release rainwater back into the ground. The engineer relies on the manufacturer’s literature (not written by an engineer, though the civil engineer didn’t know that) to write the prescriptive specifications for the buried tank. The contractor, who bid on the project and by doing so agreed to build it both perfectly and to build it as-drawn, expressed concern that the tank would not preform properly because it sat above the water table. The contractor submitted an RFI expressing the concern, through the architect to the civil engineer (as is required), and the civil engineer responded through the architect to the contractor (as is required) with a dismissive, “It’s fine. . . install it as it was drawn, despite your water table concerns.” The tank was installed as-drawn and it caused a parking lot collapse that delayed the church’s opening by 16 months. Choose who is at fault:
The manufacturer (because the tank was not adequate)
The architect (because the drawings were not adequate)
The civil engineer (because the drawings were not adequate)
The owner (because the Spearin Doctrine holds that the contractor isn’t responsible for faulty drawings)
The contractor (because he warantees that his work won’t collapse)
Don’t kick your pet out of frustration if you didn’t know the correct answer. This is based on a actual Virginia case from 2011, so the parties involved, and their respective insurance companies, also couldn’t agree on blame. I include it here not because the exams will present cases quite this challenging, but because you might have intuited that there is a hole in the responsibility outlined by (1) the architect’s Standard of Care threshold, (2) the contractor’s warantee and promise to adhere to the contract documents, and (3) the Spearin Doctrine that protects the contractor from bad drawings. The edge cases then remain fuzzy, open to interpretation, not able to account for every eventuality, and likely to leave the owner on the hook if a problem falls in the gap between these concepts. Your intuition and doubt are well-founded.
This may have avoided court or arbitration with a change order–signed by the architect, owner, and contractor–that outlined some compromise solution, likely involving a bunch of money moving from one party to another, a change in schedule, and new drawings. . . but no change order was agreed upon, so the case went to court. Judges and juries don’t have the technical wherewithal to sort this out, so often the side with the most convincing expert witness wins.
The architect is held to a “Standard of Care” in the AIA contract, so she is not responsible if she can prove that she behaved consistent with other architects practicing in her locality under her circumstances. It is a low bar to clear, indeed, and owners will try to convince the architect to operate at a higher standard (guarantee that the building earns LEED certification, drawings are warnanteed, etc.), but were she to sign a contract holding her to a higher bar, her liability insurance likely wouldn’t have covered her in this case! Because the standard AIA owner-architect agreement was signed, the architect need only meet the quality expected of her peers and her expert witness testified that she meet that threshold.
The civil engineer is also held to a “Standard of Care.” Her expert witness testified that relying on manufacturer literature was normal at the time and location of the work.
The owner has a right to the work that they paid for, without a parking lot collapse. Litigation like this often unfolds when the owner lacks deep experience in construction, and has (unreasonably?) high expectations. The church’s expert witnesses argued that the engineer was at fault.
The contractor held that the Spearin Doctrine protects him from liability–that although contractors must warantee their work, the drawings and specs were not sufficient to build the project properly (and that they said as much in real time with an RFI).
Who did the courts find culpable? They ruled that the engineer didn’t meet the Standard of Care because she relied on the non-engineers working for the manufacturer, and that other civil engineers working in Northern Virginia at that time wouldn’t have done so. And because the engineer works for the architect, who works for the owner, the architect pays the owner, then the engineer pays the architect back. Or more specifically, because the owner and engineer don’t have a mutual contract, the architect’s insurance pays the owner and the engineer’s insurance reimburses the architect’s insurance.
120
Building coverage ratio (BCR) vs floor area ratio (FAR)
BCR=(BUILDING AREA/SITE AREA)*100
| FAR=(TOTAL FLOOR AREA/SITE AREA)*100
121
Privity vs indemnity
Privity: A concept where, if we have no legal contract together, you have no legal recourse to file a claim against me.
For instance, I, as the architect, don’t have a contract with you, the construction worker, and therefore you, as a third party, can’t sue me if you are injured. Beginning in the 1950s, many states no longer adhere to this concept for the architect where my negligence and your personal injury overlap. You, the construction worker can win a suit if you prove me negligent and you were injured (or even suffered property damage because something from the building fell on your truck). Architects’ liability extends beyond construction workers to building occupants and even to passersby. In practice, when someone is injured, they take everyone to court, because if they don’t, the defendants will often blame the party that is not present as their defense.
In seeking economic damages (instead of personal injury or property damages) from an architect, i.e. economic losses from a delay in construction, the claimant must actually have a contract with the architect to sue: they must have “privity of contract.” But even that protection is waning in many state courts. For this reason, a flag should go up in your head if someone gives you a contract to sign that implies a relationship or warantee between you and a third party.
Indemnity: I’m signing a contract that frees you of liability and puts the blame back on me.
So when you rent a jet ski, the proprietor may ask you to sign a waiver of liability: a form that indemnifies the proprietor of liability if you ram a swimmer with their jet ski. Because in construction the risks are significant and the stakes are high, everyone is looking for indemnity. They want to pass the risk of a claim onto you. Don’t let them do that.
In insurance contracts the concepts of privity and indemnity dance together. If you are the landlord for my firm’s office, I can sign something that indemnifies you: you’re not responsible for the fire I set that spreads to other tenants’ offices. I can also make you an additional insured: you are now on my insurance policy with privity of contract so my insurance coverage will pay for the fire. Which is better for you, the landlord, to be given indemnity or privity? The answer is you want both. That way, after the fire, you can go after me in court because unlike the insurance policy, there is no limit to the dollar value of my liability. . . and you can go after my insurance policy to pay up because they likely have deeper pockets than I do.
122
In your own words, what is most important to the contractor? To the owner? To the architect? What parts of the process does each party want to control?
The contractor wants to win the job, period. She knows that bid price will often be the deciding factor determining whether she lands the contract. She may have to pad her revenue with change orders later to make a profit because she under-bid to get the job. She wants clarity in the drawings and a fast turn-around on decisions (RFIs, applications for payment, submittal approvals) so that she can stay on-schedule.
The owner wants the lowest bid price and no change orders. He seeks the earliest possible project completion. He loves negotiating opaque contracts because he wins most negotiations and has more lawyers.
The architecture firm wants to win the job, period. It may underbid to get the contract and then see no path to profitability. The architecture firm has the least risk and is likely least comfortable with (and least insured for) risk. It wants to be in control of most small and medium-sized decisions and for the contractor to build exactly what is drawn.
If it’s done right, all three parties want a high-quality building, though how they define quality will vary. It’s not even close. . . the architect’s definition of quality is better!
The standard contracts try to give each party what it wants most. When in doubt, assume that the contracts . . .
Require the architecture firm to design something that meets the construction budget
Set up absurdly strict rules for bidding to lock in a price
Establish deadlines for quick architecture firm decision-making
Penalize contractors for delays
Protect the architect from claims (standard of care)
Limit the scope of the architecture firm’s base services, but encourage the architect to add an upcharge for expanded services that architects secretly want to do anyway so much that they are dying to give away these services for free
Require the contractor to build exactly what the architect drew and specified
Ensure that all changes come in written form, and that most changes after the bid is accepted require signatures
Stipulate that the path of communication and culpability travel from subs to the contractor first, and from consultants to the architect first. That way the architect, contractor, and owner can sit around a table and make decisions without fear that a steel fabricator short-circuited the process by taking a concern straight to a structural engineer (who doesn’t know where the ducts will be routed)
123
Profit-loss statement vs balance sheet
Profit-loss statement: flow of money (income). How much came in this month in revenue? How much went out in expenses.
Balance sheet: snapshot of equity (wealth). How much was in the bank before the month began and again after the month ended?
A great (and very short) Kahn Academy video here can help you if you still get mixed up between the two. Know that he uses the term “income statement” instead of “profiit-loss statement;” the two terms are synonymous.
There are flow vs quantity relationships that parallel the income-wealth relationship all over these exams: peak heating load vs annual heating; flow vs quantity of water; power vs electricity; pounds per linear foot on a beam vs pounds per square foot on a floor
124
Time is money.
Owners don’t typically pay for buildings with cash–they pay with loans. Delays in the project for any reason have a cost beyond the obvious construction costs like crane rental fees.
There is a cost to capital. Owners must pay interest on the loans they take out. The corporate tenants were scheduled to be in the completed building, paying rent, by January. The developer has to begin paying the bank back the mortgage payment beginning in February. Where does the cash come from to pay the bank if there’s no rent to collect. A month’s delay could mean the difference between the owner making a profit and taking a loss on the entire project, declaring bankruptcy because of a cash shortage.
From the contractor’s point of view, the cost of materials and labor increases slowly over time with inflation, so if there’s a delay, the project’s economics may no longer work. Inflation may seem like a rounding error, but on large projects, the numbers associated with inflation can be staggering. At only 2% annual inflation, a 180 million dollar project, will lose $300,000 per month in inflationary costs!
