ARE - Practice Management

AIA A201

General Conditions of the Contract of Construction

KEYSTONE Document

- incorporated into contract between owner and architect

- set forth the rights, responsibilities, and relationships of the owner, contractor, and architect

- architect participates in the preparation of the contract documents and performs construction phase duties and responsibilities described in detail in the general conditions

Design-Bid-Build

A project delivery method in which the owner holds two separate contracts for design and construction. This method is often referred to as the traditional project delivery method.

PROCESS

- owner hires architect, architect designs & prepares documents for bidding

- bid phase: GCs review & ask any necessary questions, confer with subs, bid with their best price for the project, architect to review and select what best fits the owners needs

- build phase: GCs team gets to work, architect oversees GC and subs

Design-Build

how is it set up?

AIA form?

pros/cons?

The owner contracts with one entity (a person or firm) to provide both design and construction services, that entity then subcontracts portions of the work to others as needed.

A142 Standard Form of Agreement Between Design-Builder and Contractor

- reduces lengthy time period of DBB

- efficient communication, one contact for all questions

- owner loses advantage of having separate party oversee the quality of construction

- can be phased /overlap for faster construction (phase 1 designed, phase 2 designed while phase 1 builds)

Construction Manager at Risk (CMAR)

how is it set up?

process?

pros/cons?

It is a derivative of DBB, but instead of the designer overseeing the design process and construction quality, a construction manager (CM) is hired by the owner to oversee the entire project.

- CM as owner's representative in every step: from preconstruction, to design and bidding, through construction

- ideal for project owners who want an expert's help managing their project or communicating between parties, and sometimes CMAR allows owners to remove themselves from the majority of the construction process altogether

PROCESS

- owner brings CM an initial design, CM consults with designers while also looking to VE items to save money

- halfway through design, CM brings owner GMP

- if under GMP, CM is likely rewarded by owner through cost-sharing agreement BUT if it exceeds CM takes risk of paying difference

- following design phase, CM takes bids from contractors & selects best fit bid for owner while not crossing GMP

- works with contractor to schedule construction phases, oversee quality of work and coordinate any needed change orders

Integrated Project Delivery

what is it?

what AIA form?

pros/cons?

an approach that involves people, systems, and business structures (contractual and legal agreements) and practices. The process harnesses the talents and insights of all participants to improve results, increase value to the owner, reduce waste, and maximize efficiency through all phases of design, fabrication, and construction. (Adapted from American Institute of Architects)

A195 Standard Form of Agreement Between Owner and Contractor for IPD

PROS

- financial alignment of design & construction

- financial performance based on overall project outcome not individual firm performance

- Profit is at risk if project goals are not met around schedule and budget

- Team has "skin in the game" for activities during preconstruction

CONS

- Upfront investment required early in the project (cashflow cannot be delayed)

- There is a diminishing return on preconstruction spend if design/permits take longer than planned

- Without adequate time and complexity on a project, it may not be possible to find savings to cover the upfront investment

- Owner's does not have a firm fixed cap on cost at the start of the project (it is debatable whether they ever really do in any delivery model)

Sole Proprietorship

How do taxes work?

What form?

unincorporated business with no legal distinction between owner and business entity

- entitled to all profits and are liable for all debt, losses and liabilities

- taxes filed using standard 1040 and schedule C

Partnership

How does this differ from corporations?

How do taxes work?

What form must you submit?

single business owned by two or more people, unless defined in partnership agreement - all aspects are divided equally among each partner

- taxes filed by submitting an "annual information return"

- all earnings flow through to the partners' personal tax returns

- all liabilities are SHARED by partners and personal assets are also at risk and can be used to satisfy partners debt

Corporation (C Corp.)

How are taxes handled?

How does this differ from SP/partnerships?

independent legal entity owner by shareholders, who are protected from liabilities for all the actions and debts the business incurs

- offer ability to sell ownership shares in the business through stock offerings

- can be Professional Services Corporation (same advantages & protections) but exclusive to professionals - architects, physicians, attorneys

- receive tax ID number and are required to pay taxes separate from shareholders

- unlike sole proprietors/partnerships, corporations pay income tax on its profits

- complex legal and tax requirements make it better suited for larger companies

S Corporation (S Corp.)

How does this differ from a corporation?

What requirements must be fulfilled to be an s-corp?

How do taxes work?

named for subchapter S, Chapter 1 of IRC, is a special corporation which allows shareholders to avoid double taxation of a corporation

- limited liability of a corporation remains by the profits and losses "pass through" the business to the shareholders personal tax returns like a partnership

- REQUIRE scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and record maintenance

Limited Liability Company (LLC)

How does this differ from corporation, partnership?

How do taxes work?

combines limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership

- not taxed as separate entities like corporations, profits and losses "passed through" business to each member of LLC and reported on personal tax returns (like partnership)

- DISADVANTAGE: members are considered self-employed and are required to pay self-employment tax contributions toward Medicare and Social Security, entire net income is subject to tax

Limited Liability Partnership (LLP)

Who manages affairs?

How do taxes work?

How does this contrast from partnerships and corps/s-corps?

hybrid of corporation and general partnership, LLP offers owners limited liability and pass-through income tax, but can be run with formalities generally required of a corporation

- LLP managed, operated and taxed on income like general partnership

- every LLP partner has equal right to participate in management and affairs - CONTRASTS with corporation which is usually managed by a board of directors elected by shareholders

- NOT REQUIRED to have officers and directors, hold annual meetings, or keep formal records

-must file informational tax return, income is passed through to partners and taxed at individual partner level, without any taxed at LLP entity level - CORPORATIONS taxed at both levels unless S Corp which limits deductibility of certain expenses and may therefore be undesirable

- partners personal assets will generally NOT BE AT RISK for another partner but are for their own errors and omissions

Joint Venture

essentially a partnership but only for a specific and usually limited purpose

- one party assumes responsibility and liability for the other joint venturers as well as themselves

- profits and losses pass through and reported on personal tax returns

Health Insurance Portability & Privacy Act (HIPPA)

specifies privacy of employee health data

Fair Labor Standards Act

covers minimum hourly wage, OT requirements, salaried employee qualifications for OT

Employee Retirement Income Securities Act (ERISA)

covers retirement and benefit plans

Family Medical Leave Act (FMLA)

gives employees 12 weeks unpaid leave in case of serious health problems of employee or spouse or addition of child

Income Taxes

Social Security Taxes

Medicare Taxes

employers must withhold taxes for and contribute to

Internal Revenue Code

Social Security Act

Mandatory Unemployment Insurance

cover employment taxes & payroll withholding

Fair Credit Reporting Act

Drug Free Workplace Act

Employee Polygraph Protection Act

Immigration Reform & Control Act

cover how employee personal information can be obtained and used

OSHA

protection from unsafe working conditions

National Labor Relations Act

right to unionize

Sarbanes-Oxley Act

protects employee whistle-blowers

Jury Service & Selection Act

time off for jury duty and cannot be terminated due to jury time

Consolidated Omnibus Budget Reconciliation Act (COBRA)

addresses health benefits of employees

Professional Liability Insurance

protects architect in case some action causes bodily harm, property damage or other damage (also called malpractice insurance or ERRORS & OMISSIONS insurance)

Statute of Repose

bar actions against architects and engineers after a specified period of time following the completion of services or the substantial completion of construction

WITHOUT a SoR, a designers professional exposure to a claim could theoretically run indefinitely since an injury or the discovery of a deficiency could occur at any time

usually 3-10 years after substantial completion

Statute of Limitations

bar actions against architects and engineers after a specified period of time following an injury or discovery of a deficiency

usually about 10 years

AIA Contract Divisions

A-Series: Owner/Contractor Agreements

B-Series: Owner/Architect Agreements

C-Series: Other Agreements

D-Series: Misc. Documents

E-Series: Exhibits

G-Series: Contract Admin. & PM Forms

Stipulated Sum Contract

AKA lump sum or fixed-price, most basic form of agreement between contractor and owner

A101

scope and schedule are appropriately defined to allow contractor to fully estimate project costs

REQUIRES contractor agree to be responsible for the proper job execution at a set price - owner assigns risk of project costs to contractor

if higher than estimated - contractors profit reduced, if lower - contractors profit increases

Cost Plus Contract

often used when scope hasn't been clearly defined (often when project design isn't fully set and owner wants to begin construction)

owner agrees to pay cost of work (including sub work, materials, labor, equipment) plus an amount for contractors overhead and profit

if actual costs are lower, owner keeps savings; if actual costs are higher, owner must pay additional amount, unless capped at a GMP

ADVANTAGE is that the project will result in what was intended, even if costs run high

DISADVANTAGE harder to track and more supervision needed

Cost Plus FIXED PERCENTAGE

contractor compensation for overhead and profit is based on a percentage of the actual cost

Cost Plus FIXED FEE

Contractor compensation is based on a fixed sum independent of the final project cost

- the customer agrees to reimburse the contractor's actual costs, regardless of amount, and in addition pay a negotiated fee independent of the amount of the actual costs

Cost Plus FIXED FEE WITH GMP

Compensation is based on a fixed sum of money., the total project cost to the owner will not exceed an agreed upper limit

A102

Corporation Member Duties

Stockholders: owners of corporation in proportion to number of shares they own

directors: fiduciary duty to act in best interest of the stockholders and responsible for broad policy decisions

officers: carry out day-to-day management of corporation

Are C Corporations Paid through Dividends?

Are S Corporations paid through dividends?

What are dividends?

Yes

No

a share of profits paid to shareholders by a corporation

Professional Corporation

Similar to other corporations except that liability for malpractice is limited to the person responsible for the act.

Teaming Agreement

Defines the roles, responsibilities and contractual relationships that will be established if the firms are awarded the project and the joint venture is formed. (Aka Memorandum of Understanding)

Moonlighting

How can it be prevented?

Policy of accepting work from outside firms

adding moonlighting to formal employee contract

Employment at Will

used when there is no contract between employee and employer and means firing or leaving can happen with no restrictions

Two Primary Financial Reports

Profit-Loss Statement and Balance Sheet

Two essential components of a financial management system

Annual Budget & Profit Plan

Firm's Accounting System 2 Reports

Accounting Reports: responsibility of a firm's accounting personnel and outside tax consultant

focus primarily on cash-flow management, accounts payable and defining firms quarterly and annual tax liability identified in CASH-BASIS REPORTS

Financial Management Reports: responsibility and realm of the firm's leaders even though others might develop and compile these reports

firm's leaders focus will be on reviewing & monitoring key indicators from financial data provided in ACCRUAL-BASIS REPORTS

Accrual-Basis Accounting (Modified)

revenue earned and billed from fees and expenses, including outside project consultant fees and expenses, plus all other direct and indirect expenses INCURRED.

Revenue based only on invoiced fee and expense amounts sent and/or received

Most firms use for profit-loss statement and balance sheet development

Cash-Basis Accounting

income received and all salaries and expenses paid (a checkbook approach)

most commonly used for filing and paying quarterly and year-end taxes

Net Operating Revenue (NOR)

represents the net dollars remaining after deducting the invoiced consultants fees and expenses, and all reimbursable and non-reimbursable project-related expenses

Direct Labor

represents time CHARGED to projects, whether invoiced or not

Indirect Labor

time charged to non-project related activities

Reimbursable Expenses

Project-related expenses that are invoiced to the client in addition to fees. These would also include a markup percentage on those expenses. The markup dollars are a form of revenue and are included in net operating revenue.

Direct Expense

Project-related expenses for a firm and its outside consultants that are not reimbursable, plus project-related expenses included in all lump sum fee contracts

Indirect Expense

General and administrative non-project-related operating expenses (total indirect expenses includes indirect labor).

Overhead Rate

ratio of total indirect expenses to total direct labor

Break-Even Rate

The overhead rate plus the unit cost of 1.00 for an hour of salary

EX: overhead rate of 1.30 + 1.00 = breakeven rate of 2.30

this means for every 1.00 of salary the firm must recapture $2.30 just to break even

Utilization Rate

Direct labor expressed as a percentage of total labor.

Hourly Billing Rate

The dollar amount charged to a client relative to one hour of direct labor.

Net Multiplier

The ratio of net operating revenue to total direct labor.

The measure of return in every dollar of direct labor.

Target: greater than break-even rate

Net Profit

dollars remaining after deducting all direct and indirect labor and indirect expenses, before any distributions are made or tax is paid

Current Earnings

The net dollar amount after all distributions are made and all applicable taxes have been deducted.

Cash-Basis Profit-Loss Statement

would be used by a sole proprietorship

indicated only the income received and the amounts paid out for expenses to others within a specific accounting period

NO timing correlation but it establishes a firms cash-flow management effectiveness and its tax liability, not net profit

Accrual-Basis Profit-Loss Statement

doesn't consider the actual receipt or payment of any money

reflects the invoices sent to clients for monthly revenue earnings, based on hours worked and expenses incurred to complete that work, in a given accounting period

establishes NET PROFIT for a firm and calculation of 7 RELEVANT KEY FINANCIAL PERFORMANCE INDICATORS

Projected Net Billing & Revenue

Backlog

Outstanding Project Categories

identifying current projects under contract that will carry over into coming year and balance of fees remaining to be billed on those projects in the coming year

Prospect - better than 50% chance of winning, suspect - less than 50% chance of being awarded

2 Primary Financial Reports

Profit-Loss Statement

Balance Sheet

2 Essential Components of a Financial Management System

How closely are they related?

When should they be developed?

Annual Budget

Profit Plan

elements of one component will have an effect on the other, for example, overhead projections made for the profit plan will play a key role in the development of the annual budget

important to develop the two concurrently and since they're being developed for the new coming year, its best to begin before the coming year commences

Accounting Reports vs Financial Management Reports

- who is responsible and what's the focus of each? what reports?

- similarities between the two?

accounting reports and their generated data

- responsibility and realm of a firm's accounting personnel and its outside tax consultant

- focus primarily on cash-flow management, accounts payable, and defining the firms quarterly and annual tax liability, which are identified in CASH BASIS reports

financial management reports

- responsibility and realm of the firm leaders, even though others might develop and compile these reports

- focus is on reviewing and monitoring the key indicators from the financial data provided in the ACCRUAL BASIS REPORTS

basis (timesheets, incoming payments, outgoing invoices) are the same, each report type is formatted differently to suit their respective purposes and use by each party

both facilitate making sound business decisions to enhance firms effectiveness, efficiency, profitability, and achievement of professional goals

Cash-Basis vs Accrual-Basis Reports based on firm size

depending on the size, one or both reports may be used

sole-proprietors (without any paid staff) would be on a check-book like basis (dollars received, dollars paid) and would likely only be on a cash-basis report

almost all other sized firms would use both types of reports

Cash-Basis Profit-Loss Statement

what does it indicate?

what does it establish for a firm's financials?

indicates only the income received and the amounts paid out for expenses to others within a specified accounting period

NO TIMING CORRELATION between income received and expenses paid

establishes a firm's cash-flow management effectiveness and it's tax liability, NOT its net profit

Accrual-Basis Profit-Loss Statement

what does it consider?

what does it establish for a firm's financials?

doesn't consider receipt or payment of money, rather, the invoices sent to clients for monthly revenue earnings, based on hours worked and expenses incurred to complete that work in a given accounting period

establishes the net profit for a firm and the calculation of it's 7 relevant key financial performance indicators

Accrual-Basis Accounting

revenue earned and billed from fees and expenses, including outside project consultant fees and expenses, plus all other direct and indirect expenses INCURRED

revenue based only on invoiced fee and expense amounts sent/received

Cash-Basis Accounting

income received and all salaries and expenses paid (a checkbook approach)

most commonly used for filing and paying quarterly and year-end taxes

Net Operating Revenue (NOR)

AKA "net revenue"

represents the net dollars remaining after deducting the invoiced consultant's fees and expenses, and all reimbursable and non-reimbursable project-related expenses

Direct Labor

"direct salary"

time CHARGED to projects, whether invoiced or not

Indirect Labor

"indirect salary"

time charged to NON-PROJECT RELATED ACTIVITIES

included in total of indirect expenses

Reimbursable Expenses

markup percentage?

project-related expenses that are invoiced to the client in addition to fees

include markup percentage on those expenses which are a form of revenue and are included in NOR

Direct Expense

Project-related expenses for a firm and its outside consultants that are not reimbursable, plus project-related expenses included in all lump sum fee contracts

Indirect Expense

General and administrative non-project-related operating expenses (total indirect expenses includes indirect labor).

Overhead Rate

ratio of total indirect expenses to total direct labor

Break-Even Rate

The overhead rate plus the unit cost of 1.00 for an hour of salary (example: overhead rate of 1.30 + 1.00 = break-even rate of 2.30). This means for every $1.00 of salary the firm must recapture $2.30 just to break even.

Utilization Rate

Direct labor expressed as a percentage of total labor (individual rate = hours, firm rate = dollars)

Hourly Billing Rate

The dollar amount charged to a client relative to one hour of direct labor.

Net Multiplier

ratio of net operating revenue (NOR) to total direct labor

measure of return on every dollar of direct labor

Net Profit

dollars remaining after deducting all direct and indirect labor and indirect expenses, before any distributions are made or tax is paid

Current Earnings

net dollar amount after all distributions are made and applicable taxes have been deducted

Mattox Format

Robert F. Mattox's (FAIA) alternative to conventional accounting formats

profit-loss statement comprises 4 components:

1. revenue

2. direct labor

3. indirect expenses

4. miscellaneous revenue and expenses

these provide a TRUE overhead rate, net profit, and 5 other key financial performance indicators

Financial Performance Goals

- projected net billing & revenue

- project consultant fees (as % of total billing)

- project-related expenses

- staff size & salary expense

- overhead expense and break-even rates (as % of direct labor)

- net profit (as % of net operating revenue)

Backlog

identifying current project under contract that will carry over into the coming year and the balance of fees remaining to be billed on those projects in the coming year

Terms for chances of being awarded a project

"prospect" - better than 50% chance

"suspect" - less than 50% chance

Net Billing & Revenue - what needs to be looked at?

- backlog of projects billed in the coming year

- outstanding project proposals (prospect or suspect)

Project Consultant Fees (as a % of Total Billing)

refer to industry guidelines regarding what percentage can be allocated to fees of their project consultants

prior to submitting a fee proposal for a new prospective project, send a comprehensive RPF to each of the required project consultants to be retained. add those fees to firms calculated net fee & total fee can be established with a % allocated to consultants can be determined

check this number with the industry guidelines

Benefits of expanding a sole proprietorship to a partnership or corporation

- increased flexibility in ability to serve clients

- ability to develop areas of expertise or specialties

- financial stability

- greater capital resources available to firm

- shared responsibility, risk, and reward

- greater growth opportunity for key staff

Studio Organizational Structures

- Shared Studio/Team Based Organization

- Studio organized by Discipline

- Studio organized by Project Type

- Studio Organized by Principal

Shared Studio/Team Based Organizational Structure

- principal/principals may work together or independently to bring work into the firm

- typical of SMALL to MIDSIZE firms that specialize in projects of a specific TYPE

- staff might work freely among principals and across a range of projects, but typically see a project from beginning to end

BENEFITS:

- flexibility to move staff freely to the work as it comes into the office

- cross training staff by working on wide range of projects and wide range of people

- general sense of opportunity, professional freedom, common purpose and shared mentorship

Studios Organized by Discipline

- studios emerge around a discipline like interior or urban design

- allows for variations in organization and business methodologies to emerge around the best practices in each area

- each discipline has its own leadership and staff structure and individual vision for their department

Studios Organized by Project Type

- boundaries can be very fixed or more permeable to allow people to move between studios if they possess the right type of experience

CONS

- possibility staff gets pigeon-holed or too specialized in a subset of the work in the office

- sudden changes in the economic market might affect the studio and lead to uneven distribution of work in the office which causes strained relationships and morale

Studios Organized by Principal

- create studios around one or more principals with a number of staff dedicated to working closely with a particular individual or subset of the firms leadership

- can stimulate a robust mentor and mentee relationship and create well-aligned teams

CONS

- overall office can struggle to develop and maintain office standards that work for everyone and can become competitive if performance expectations aren't even across the board

Performance Appraisal vs Professional Development

PERFORMANCE APPRAISAL

- looks backward at how an employee performed their job

- has two parts: evaluation or judgement, and the feedback provided

PROFESSIONAL DEVELOPMENT

- looks forward at employee's future goals and opportunities to grow along a career path

- can be used to correct minor deficiencies, set new goals, define learning programs and show staff how they might advance and grow in the profession

Regulation of architecture falls under the authority of the 50 states, 3 territories and the District of Columbia

10th Amendment of the US Constitution in the Bill of Rights

Licensing laws assure the public that...

the individual has met these minimal standards and has demonstrated the requisite competence and integrity required of the profession

Demographic Factors for Employee Benefits

- Staff entering prime earning years want strong retirement plans (401K, IRA)

- younger staff looking for more flexible time, work from home, latest technology and equipment, ability to use paid time for pro bono, sustainable or community projects

- staff with children have demands on their time related to athletics, tutoring, school events, etc. need to have comparable options

- all staff want clear career paths and learning opportunities

4 Functions of Compensation Plans

1. Attracts

2. Retains

3. Motivates

4. Rewards

% annual wage to Replace a Staff Member

it costs 150% of a staff member's annual wage to replace him/her

Compensation Balance

must balance external equity to attract candidates and internal equity to retain existing staff