Business Practices Exam 2

Revenue, Pricing, Fees, Etc.

what are some elements that can affect the determination of a fee method?

client’s experience with designer

designer’s experience with the type of project

scope of services to execute the project

amount of research needed to source special items

size of project

residential vs commercial

what are three revenue streams examples

design fees for services (main source)

selling of product

research and planning

fill in the blanks about residential

• frequently — — along with their design services

• often, more client — is required = more hours in — —

• most revenue is generated from a — — on product sold

sells product

support

client indecisiveness

markup %

most common rate for residential design

hourly rate + % product sold (cost plus)

for commercial firms, you are typically not — any products, just —.

• — fee

• square footage

• — isn’t common to start

selling, services

fixed

hourly

typical combo of pricing for commercial

fee + markup of goods if designer is purchasing product

hourly fee definition

comprised of a dollar amount charged for each hour or portion of an hour that the designer works on the project

what are some things to know about hourly fees?

more common in residential

billable hour by quarter hour

clients leery about it bc meter is always running

• can use the term “not to exceed” in contract

who is the hourly rate more advantageous for typically?

designer

• rates must also include benefits, profit, etc of design staff

when are some scenarios a designer may use an hourly fee?

• initial or specific consultation on small projects

• cover travel time to job site or market

• project requires lots of consultation with others

• client will have trouble making up his mind

• too difficult to estimate total amount of time needed

• coordination expected to be burdensome

what are the 3 methods for calculating hourly fee?

1. based on professional level of employees

2. average hourly rate of all employees on project

3. type of service provided

what are other names for a fixed fee

flat fee

lump sum

fixed fee definition

a total dollar value determined by the designer to perform all of the services required on the project regardless of the time spent

what are some things to know about the fixed fee method

• fee is charged whether time estimated is right or not

• should estimate time from previous projects

• vital to accurately calculate overhead expenses

• clients like this method if looking at bottom line

• used more commercially

when does a designer use a fixed fee?

• designer not selling any goods, only services

• easy to determine the time and reqs for project

• scope of the project is straight forward

• limited consultations within the proposal

square foot method definition

designer determines a rate per square foot to complete the design work and multiplies it by the square footage for the project

what are things to know about the square foot method?

• used in corporate, medical, office design when replicating many “typicals” and tenant fit out work'

• different rates charged for different phases

• no standard SF rates, firm should have experience using this method

• SF rate must include benefits profit, etc.

cost plus % markup

a fee method that allows the design firm to add a specific percentage to the net cost of the merchandise being purchased by the client

what to know about cost plus % markup

common in residential because goods are being purchased

50-100% markup above net price for goods

commercially, markup % is lower when quantity is higher

when does cost plus % markup work okay?

• product budget is not cut by the client at the last moment

• client does not use a lot of personal existing product

  client doesn’t decide to hold off purchasing any of the merch until a later time

Percentage of specified goods method

allows the designer to negotiate a % of profit on the cost of all goods specified and installed on the project

• used by firms that do not sell product

the % of specified goods method is:

similar to — % of construction costs fee method

the larger the project the — the negotiated %

client can save money with extra — — to designers

must carefully negotiate — %

architect’s

smaller

trade discounts

discount

true or false: the % of specified goods method is best used in combo with another method

true - with one that accounts for design time and services

• most common as a fee structure where procurement is part of the scope of work

value oriented method

a design firm prices its services based on the value or quality of the services rather than a standard rate to provide those services

what are important things about value-oriented method?

• good solution with inexperienced clients who don’t understand amount of work it takes

• reputation is very important!!

• ability to convince others of your expertise is key

discounting or % off retail

a fee method in which a discount % is pre-determined, and that dollar amount is subtracted from the full retail price of any merchandise sold

important to know about discounting or % off retail method

• often used by office furniture dealerships or lg quantities

• discount benefit not offered to public buyer

• strictly related to the sale of goods to the designer

what to consider with % off retail rate

difference between net price and discounted retail price must be large enough to cover designer’s profit and overhead expenses (hourly rate likely still needed)

combination method

typical, no one method will cover entire project

important to state in proposal which additional methods will be charged

most common methods to combine

hourly fee with a cost plus % markup

fixed fee with a cost plus % markup (procurement)

% of goods sold and hourly rate for services

what are the three ways to calculate billing rate

based on salary

multiplier

DPE (direct personnel expenses)

billing rate

the dollar amount charged for each design professional within a firm

• typ an hourly rate, but can be day

• based on type of service and experience

based on salary method

not as accurate bc it doesn’t cover overhead expenses

assumes everyone working on the project will be charging for every hour worked in a week

not in the best interest of the designer

multiplier method

includes company overhead, expenses, profit each in 3 EQUAL PARTS

(not the most accurate dividing it equally)

DPE method

a more exact multiplier that includes profit, salary, benefits, PTO, overhead, etc)

DPE equation

direct labor/direct labor =

total indirect expenses/direct labor cost =

factor profit margin/direct labor cost = multiplier

add all three together = DPE multiplier

typical billing schedule method in US

monthly

• hourly fee

• purchasing goods

• flat fee

if using a flat fee, what must you do for billing schedule?

allot % to each phase and typically paid upon completion of phase

what is a proposal commonly viewed as

the precursor for preparing the contract, rather than the actual contract

what does a proposal outline? how can it be used?

outlines proposed scope of work based off of client information and some general ideas of how the design firm intends to solve the design problem

it can be a marketing response to RFP and include contract fee

which term sounds less “threatening” to clients?

proposal rather than contract

is a proposal legally binding?

yes, once signed

what are the differences between oral and written agreements

oral is legal in most cases, but not recommended

written shows a contract for services exists and is a safer method of contracting business

3 types of contracts that must be in writing under the UCC (6 total)

• contracts that cannot be completed within a year

• for the sale of goods over $5000

• for the sale of real estate over $1000

letters of agreement

legal, often used in residential design, less formal format, resembles a letter, small scopes of comm work

contract definition

a promise or agreement made between 2 or more parties to perform a specific act. the degree of performance of this act can be enforced by the courts

what are the 6 basic requirements for a contract to be legally enforceable?

1. offer

2. acceptance

3. contractual capacity

4. consideration

5. mutual assent

6. legality

offer

the thing which one party proposes to perform for another party

• offeror - making the offer

• offeree - offer made to

to be binding, what does an offer have to do?

express serious intent

given in clear terms for court to determine if it’s been fulfilled or not

communicated to offeree so they know it exists

ability of the offeror to terminate or offeree to accept

acceptance of the offer

offeree agrees to the offer and is bound exactly by the terms set up in the offer

mirror image rule

where someone accepts a contract proposal and does not make any changes to the contract “good to go”

counter offer

when the client responds to the offer with any kind of modification or request for change

effectively voids the original offer and designer must choose whether to accept or reject the offer

contractual capacity

relates to the full, legal competency of the parties

true or false: the signature of the designer is not required on the contract

true - creation of the contract communicates intent (but encouraged to sign)

consideration for contract

legal term for the “price” that the offeree pays to the offeror to fulfill the promises in the contract, must be for present or future work

examples: money, property, service, anything else legal

mutual assent

the giving of the offer and acceptance of the offer must be done willingly, they must be free to enter into or decline to enter an honest contract

3 reasons there might not be mutual assent

mistake

fraudulent misrepresentation

undue influence or duress (threats)

legality of contracts

contract must exist only to support the performance of some legal act

UCC (uniform commercial code) is the statue through which business transactions that involve any sales contracts are evaluated in the US

seek legal counsel, understand various cultural and legal norms

when can legal termination of the offer occur

before the client accepts the proposal

if the client has violated the agreement by not responding in a timely manner with acceptance

if the client rejects the offer

what are some content formalities

give the DATE

identify the PARTIES involved

detail what SERVICES are to be provided

state how FEES are to be charged and terms of payment

be signed by the parties

content of the contract

dates

client name and address

detailed description of project

detailed scope of services

detailed purchasing agreements

price guarantees

method and payment of compensation

reimbursement

net price

a price representing 50% discount from the list price - given by the manufacturer to the designer, but not all designers get the full discount rate

when is the term net price more commonly used?

by designers when referring to goods that will be specified

wholesale price

special price given to a designer from a supplier at a value lower than what the goods would cost the consumer

when is wholesale price typically used?

when a retailer or designer buys bulk quantities which will be resold in their retail shop (going to market)

Cost price

the cost that the designer must pay for goods - not always 50% off retail

selling price

the actual price that is quoted to the client or end user, dictated by the designer or retailer, used more frequently by residential design firms and housewares shop owners because a residential firm is typically marking up the goods anyway

MSRP

manufacturer’s SUGGESTED retail price by the supplier to the seller, typically double cost or net

list price

generally accepted as being the same as MSRP - a price to the consumer, used more commonly by design firms

retail price

generally the same as MSRP; the price quoted to the public; not firmly set by the manufacturer, rather by the RETAILER - which is generally double the cost of net price

what does the 5/10 discount mean?

$5 off dollar amount, and .10 off cents, frequently seen on tags for higher end residential fabric

multiple discounts

a series of discounts off the suggested retail price, given by manufacturers to designers for placing very large orders (ex: 50/5/2)

stocking dealer discount

a discount for stocking a certain inventory level - usually at least 50% (wholesale discount)

quantity discount

greater than the normal 50% and given because a large quantity of merch has been purchased at one time

cash discounts

an accounting term referring to an extra discount given when a client pays an invoice promptly

what does 2/10 net 30 mean for a cash discount?

an additional 2% can be deducted from the client’s cost if it is paid within 10 days of receipt of the invoice, if not full invoice due in 30 days

trade discounts

given as a courtesy by some vendors to designers and others in the trade - usually a small % off retail but can range form 10-50%; aka “to the trade”

associated with companies that have a strong retail/public sales stream

seasonal discounts

a specific discount given to retailers to purchase certain goods earlier than normal, goods are generally associated with a season or holiday and may or may not be passed down to the customer

advertising allowances

special discount or other incentive given when a designer or retailer uses a manufacturer’s product in promotions or advertising

what is the “markup”

a % amount that is added to the cost of the goods to arrive at the selling price - amount is at the discretion of the retailer

typically at least 100% higher than net or cost

prestige pricing

certain special products can be priced unusually high due to status or special aspects like exceptional quality or materials, associated with the product

markdown from retail

in a retail setting, a discount offered for regular promotions or sales

what are three forms of pre-payment?

deposits

down payments

retainers

deposits

money that is part of the selling price, prepaid by the buyer as security in contracts for the sale of goods. depending on the state, this money usually can be used by the designer to pay for other expenses

down payments

portion of total selling price paid at the time goods are ordered, some states make this be a separate escrow accounts used solely for that down payment

retainers

payments to a professional to cover future service or advice - in ID, retainer is customarily paid at the signing of the contractual agreement

what is freight?

shipping

• transport companies handle large items

• UPS or FedEx ship accessories, wallcoverings, and smaller items

what does freight cover?

the cost and process involved in moving the goods from the manufacturer to the designer

handled by trucking companies that work as a transportation source

freight bill

bill from the shipping company for moving goods from the supplier to the designer’s receiving location - a type of invoice

FOB

freight on board

FOB Factory

BUYER assumes ownership of the goods once they are loaded on the truck, including transportation expenses and all risks - would need to provide insurance on the goods being shipped

this indicated when the ownership of the goods changes hands

FOB Destination

when the manufacturer retains ownership of the goods, pays all shipping expenses, and assumes all risks until the goods reach the destination

manufacturer pays cost of transportation so it’s more expensive, but less hassle for the designer

FOB Factory - Freight prepaid

manufacturer passes ownership of the goods to the buyer as they leave the factory, but the manufacturer pays the freight charges

zone pricing

gives pricing for delivery to different locales based on geographic location

freight factor and how designers charge for it

average of shipping cost that is added to all items

most design firms charge clients actual freight, but some just add on a freight factor to cover typical shipping costs

delivery

moving the goods from showroom or warehouse to the job site and placing them in their correct location, local deliveries often charged on an hourly basis

installation

specialized part of the delivery process that involves assembly, construction or physical attachment of products to the building

door-to-door (delivery and installation)

some design firms bill the client an hourly rate from the time the goods leave the local warehouse until the installers are finished at the location

taxes for freight and delivery

designer is responsible to pay sales tax on some categories of freight and delivery. if it says “handling” you are responsible for taxes

tangible personal property

any item that is MOVEABLE like a sofa, lamp, or drapery