Prelims Module 1 PDF

AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Specific Learning Objectives: 1. Identify basic concepts of Firm Management in the practice of Architecture. Laws, regulations, and codes of conduct govern the profession of architecture and define the obligations of architects to the public. The Registered and Licensed Architect’s comprise a community of practice that additionally agrees to abide by its Code of Ethics and its requirements for continuing education. For prospective architects, the path to licensure is prescribed. For emerging and mature practitioners, professional life includes participation in professional organizations and architectural education. For some architects, professional life at every stage includes engagement in public interest design. ARCHITECTS AND THE LAW Donald W. Doeg, Esq., PE, LEED AP Architects, like other professionals, render their services in a difficult and complex environment. In order to be successful, knowledge of the basic components of the legal requirements that govern their profession is essential LEGAL OVERVIEW Architects, like many other professionals, are confronted with legal issues on a regular basis and thus must have a basic understanding of the law in order to successfully practice architecture in today’s complex world. A wide spectrum of sources creates legal requirements that dictate standards under which an architect must practice. These sources include, but are not limited to: statutes passed by the national legislative bodies under their constitutional authority; administrative rules and regulations; building codes and standards; local ordinances; obligations established by contract between two or more parties; and law established by precedent of prior interpretations by the courts and administrative agencies regarding these requirements. In order to meet the applicable standards, it is the architect’s obligation and duty to practice in compliance with all applicable laws, codes, and regulations. While most of the existing construction related law will apply to architectural practice in some manner, there are laws and other legal obligations that may not be applicable to particular parties, such as the architect. For instance, certain OSHA obligations are directed to the means and methods by which a contractor performs its work on a project. In a very broad sense, issues of law impacting architects can be broken into two general categories: party disputes and administrative proceedings. Party disputes, occur when problems arise on a project, such as delays, failures, or potential failures relating to the work performed, fee controversies, and a long list of other issues. Problems don’t always result in disputes and disputes don’t always result in legal action. However, it is important to understand that the outcome of many of those disputes will rest heavily on whether the parties have met their legal obligations. Administrative issues and proceedings also play a very significant role in an architect’s life. Administrative issues arise from regulations developed to implement civil statutes and other legal requirements, such as the area of professional licensing. Typically, this area of the law is overseen by public officials charged with ensuring compliance with certain laws, standards, and regulations. Under their statutory authority, government registration boards, code officials, and other administrative agencies are given the power to develop, implement, and enforce regulations needed to do their jobs. Individuals and entities subject to regulation typically have opportunities to seek variances or appeal decisions through administrative channels. When administrative avenues have been exhausted, it is possible to seek review of administrative decisions in the courts. COMMON CLAIMS AGAINST ARCHITECTS If formal disputes arise relating to construction projects, attorneys will articulate their clients’ claims in the lawsuits based upon various legal theories. The two legal theories most often alleged in claims against architects are “negligence” and “breach of contract.” Negligence Overview of Negligence The existence of negligence is often more difficult to determine than whether a breach of contract has occurred. Under the law, there are four components that must be proven in order to prevail when asserting a negligence claim. They are as follows: 1 Prelims Module 1 Page 1 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Duty. The architect must owe a legal duty to the person making the claim. In other words, the architect has a legal obligation to do something or refrain from doing something. Breach. The architect fails to perform the duty or does something that should not have been done. Cause. The architect’s breach of duty is the proximate cause of harm to the person making the claim. That is, was the claimant injured or harmed as a consequence of the act and/or omission of the architect without any intervening cause? Damage. Actual harm or damage must have resulted from the breach Standard of Practice In claims against professionals, including architects, it is often difficult or impossible for a layperson to unilaterally determine the duty component of negligence as defined above. As such, the law has established that that duty is to meet a standard of reasonable practice for the performance of the work. The standard of practice for an architect is generally defined as what a reasonably prudent architect would do in the same general locale, in the same time frame, given the same or similar facts and circumstances. The architect’s legal responsibilities to a client are examined in light of what reasonably prudent architects would have known and done at the time services were performed. In order to prove whether the standard of practice has been met in a particular instance, the courts require expert witness testimony. That is, since a layperson judge would not have the requisite knowledge to determine what a reasonably prudent architect would have done under similar circumstances, each of the parties must retain an expert witness to provide an opinion as to the applicable standard of practice for the case. The judge is ultimately charged with applying the standard of practice that they believe is most credible to the facts of the case and determining whether the architect acted appropriately. Despite the thoughts of some owners or their attorneys, the law does not require perfection from an architect based upon a typical standard of practice scenario. If given enough time, an experienced third-party reviewer would likely find some glitches or inconsistencies on any set of architectural drawings currently in existence. However, the mere existence of a few minor glitches or inconsistencies within project documents does not mean that the author has failed to meet the prevailing standard of practice. Despite the existence of alleged “flaws,” another expert may well opine that the standard of practice has nonetheless been met. The outcome of these types of disputes is dependent upon the particular facts in each case. It should also be noted that since architecture is an integration of art and building science, in virtually all situations there is more than one way to design a project or even a portion of a project. The fact that another architect would have used different details or materials does not necessarily dictate a violation of the prevailing standard of practice. The successful practice of architecture is based upon reasoned judgment and skill and the law recognizes that even if there is differentiation among various designs, it does not necessarily mean any of them were performed negligently. The standards of practice applicable to a particular project can be modified by contract or conduct. The most frequent example of this practice is an attempt by owners to elevate the standard of practice rather than applying the typical standard of practice, some owners’ contracts seek to require a standard of “best practices,” “highest prevailing standards,” or some other similar language that elevates the mandated standard of practice for those projects. Architects should be wary of such heightened standards for at least two reasons: (1) the new standard may not be adequately defined in the industry, which may lead to a great deal of subjectivity and debate if a conflict ever arises; and (2) such standards may not be insurable under many typical professional errors and omissions policies. Each of the components of the aforementioned definition of the professional standard of practice can be subjective in nature. Depending on the specific issue at hand, courts have given some latitude to the “in the same general locale” component. Yet in other instances, courts have held that knowledge about basic design concepts should be known by architects throughout the country. This nationwide knowledge can be applied in several manners by the courts. In other situations, architects with certain building type specialties may have a national practice and may be compared to other architects with the same specializations, even if their respective offices are many cities or provinces away. The “in the same time frame” component has also been heavily litigated. In general, the applicable standard of practice is the one in place at the time of the project, not the one in place at the time of the dispute, which can be years later. Last, but not least, the “same or similar circumstances” component must also be strongly considered. For instance, the owner’s budget will significantly impact a project. The standard of practice must be determined for an architect working within the same budget, and under the same constraints, as were encountered for the underlying project. Alternatively, the “same or similar circumstances” also includes the type of project and the experience of the architect. That is, a small local architectural 1 Prelims Module 1 Page 2 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS firm designing residences in a certain locale will not be held to the same standard as a national architectural firm that routinely designs large and complex facilities such as sports stadiums or health care facilities. Unfortunately, meeting the relevant standard of practice may not be enough to protect an architect from litigation. A lawsuit can be commenced by almost anyone, in most cities even by a party with whom the architect had no contractual relationship. However, if an architect is mindful during the course of the project of the standard of practice that must be met, it will go a long way toward both diminishing the chances of the commencement of litigation as well as providing good defenses to the architect if litigation does arise. Modifying the Standard of Practice by the Architect’s Actions Even though the law requires only reasonable and prudent behavior, an architect can expand or raise the standard of practice. This may be done either consciously or inadvertently. The standard of practice can be altered in literally countless ways by the architect’s actions, such as promising a specific project result (example, that the roof or basement will not leak); taking on the contractor’s responsibilities (example, dictating means and methods or designing something that the contractor was required to do as part of a performance specification ); or promising a specific supplier performance result ( example, delivery of certain materials by a specific date). It is important to realize that raising the standard of practice increases the architect’s liability exposure by making the architect responsible for more than the professional standard requires. Sometimes design professionals, under pressure from clients or contractors or propelled by their own drive for perfection, raise the standard of care that will be applied to their services without intending to do so. Damages Damages for negligence claims are typically measured by the standard of the plaintiff being entitled to compensation to remedy the negligence of the architect. If the case were litigated or arbitrated, the judge, jury, or arbitrator would have to decide what that compensation would entail based upon the arguments set forth by the litigants. For instance, if litigation resulted in a finding that an architect improperly designed a set of stairs that did not meet the applicable building code and those stairs were subsequently constructed in accordance with those faulty plans, an owner may be entitled to the cost of removing the stairs and installing another set of stairs that met the applicable code. Breach of Contract Claims Overview of Breach of Contract Claims “Breach of contract” claims are relatively self-explanatory. Such claims are based upon an allegation that a specific duty or duties existed pursuant to a contract between two parties and one of those parties either failed to perform that duty or did not perform it properly. For instance, an owner-architect agreement may specifically require that the architect provide record drawings at the conclusion of the project. If the architect fails to do so, a breach of contract claim may ensue. The elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement by the other party and damages. To form a valid and binding contract there must be a mutual understanding of the terms that are definite and certain between the parties. Each must be found to have been based on an identical understanding by the parties and an agreement must be definite and certain as to its terms and requirements. Contractual Protections Logic dictates that the quality of the architect’s contract will have a large impact on the potential claims and defenses against the architect. It is imperative that the architect spend time on each and every contract to understand and negotiate each of the clauses. Each and every contractual clause may prove to be either a significant defense available to the architect or a huge detriment. Owner-architect contracts can be either written or oral. Written contracts are preferred by almost everyone in the design industry. Perhaps the largest benefit of a written contract is the fact that it preserves a written articulation of the agreement between the parties, including all critical components, which can be referenced if a subsequent dispute arises. Coming to a common understanding of the terms of the original agreement often proves very difficult if an oral agreement is in place and a dispute subsequently arises. In addition, the applicable statutes of limitation may vary depending upon whether the contract was in written or oral form. 1 Prelims Module 1 Page 3 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS It is important to recognize that written architectural contracts take many forms, depending upon the particular project and parties. The most common construction contracts in the industry are form contracts that are published by various industry groups, the industry standard being the AIA documents. The provisions included in these form contracts have been formulated over many years of use in the industry. While many parties opt to use the industry forms “as is,” there are other situations in which one or both parties may seek to modify one or more of the provisions, sometimes significantly. In addition to the industry form contracts, there are many other types of contracts prepared by specific owners, design professionals, or others that also are used. The following are some key provisions that, if properly included in an architectural contract, will go a long way toward protecting the architect. The Absolutely Essential Terms: Whether an agreement is written on the back of a napkin or consists of a long-form agreement, it is absolutely critical that the agreement include a written summary of the project scope, the time frame in which it will be performed, and the fee agreement for the project. The Project Scope: It is critical to describe the scope of work to be accomplished. In some instances, it is equally or even more critical to describe any exclusions. The Project Time Frame: Many disputes have occurred because the owner and architect did not specifically discuss the time frame for the project and assumed vastly different parameters for the start and completion dates of the work. Project Fees: It is essential that the architect and owner agree on the type of payment ( e.g., lump sum, hourly, not to exceed, etc.) and the time frames for the payment. Other Key Terms: The following are a few of the many contract terms that can have a significant impact on an architect’s exposure should problems arise during the course of the project. These terms are but a few of the many critical contract provisions that may exist for a particular project: Limitations of Liability Clauses: These clauses will limit claims by the owner against the architect to a certain amount should a dispute between the parties arises. Mutual Waiver of Consequential Damages: This should be a standard clause in UAP form contracts, but is often stricken by owner’s counsel. Consequential damages are those that are not direct damages, but only arise as a consequence of some act or omission. In the prior example, if an architect failed to design a set of stairs to code and they subsequently had to be replaced prior to a certificate of occupancy being granted, the cost to do the replacement work would be direct damages. The delay in the opening of the facility would be consequential damages and, if the waiver was part of the contract, the owner would not be able to collect damages of this type from the architect. Indemnification Provisions: Many owners attempt to add indemnification clauses to the agreements with their architects, which, in essence, are a contractual requirement that the architect reimburse the owner for damages caused by the architect’s acts and/or omissions. It is absolutely critical that the architect confer with his or her insurance broker and/or attorney prior to agreeing to any such clause. Many of these clauses, as proposed, are so broad and onerous that they are not insurable by the architect’s professional malpractice carrier and therefore put the architect at tremendous risk if the language is not modified. Changes in Scope of Service It is equally important that architects properly document any changes to their agreement with the owner during the course of the project. Almost every project is a very dynamic process, with changes occurring rapidly that impact the architect’s scope of work and fee as well as the project schedule. Just as it is critical to properly document the agreement between the parties in the initial contract, it is equally important to document any subsequent changes during the course of the project. If a subsequent dispute arises, written change orders documenting any changes to the original agreement will be essential to allow a court to determine the agreement between the parties. It is essential that the architect documents these changes and brings them to the attention of the owner. If possible, a formal change order should be prepared and signed by all parties. In some instances, it may be difficult to get the owner to sign off on a change order during the course of a project. In those instances, it is critical to nonetheless document the changes in writing and send it to the owner advising them that a change has been made to the contract scope, time frame, fee and outline those changes. That documentation will be very helpful in proving the changes were known and agreed upon should a subsequent dispute arise. 1 Prelims Module 1 Page 4 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Damages Damages for breach of contract claims are typically measured by the standard of the plaintiff being entitled to compensation that would put them back in the position they would have been in if the contract had not been breached. If the case were litigated or arbitrated, the judge, jury, or arbitrator would have to decide what that compensation would entail based upon the arguments set forth by the litigants. Vicarious Liability In General Agency relationships are common in everyday practice. That is, one party acts on behalf of another relating to a particular project or task. However, certain obligations and liabilities arise out of these relationships. The world of construction is no different. For instance, an architect’s employee acts as an agent of the architect on a project. A corporate officer acts as an agent of a corporation in signing an agreement for professional services. Partners are agents and, under the law, also principals for each other. That is, partners are agents when they act for other partners (principals) and principals when their other partners (as agents) act for them. Under an owner-architect agreement, the architect may have an agency relationship with the owner for certain designated activities. The central question in agency relationships is the scope of authority the agent has been granted to act on behalf of the principal. Thus, architects acting as agents of the owner need to know the limits of their authority in dealing with the contractor and other third parties. Firms will want every person who can be perceived as acting as the firm’s agent to understand the limits of his or her agency authority. Staying within the limits of their authority is the best protection agents can give themselves and the principals they serve. For Consultants In many typical projects, the architect enters into a contract with the owner for all, or virtually all, of the design services for the project. The architect, in turn, retains consultants (typically engineers in various disciplines) to perform portions of the overall scope of design work. Consultants who perform professional services on behalf of architects under the terms of an architect-consultant agreement are independent consultants. In those situations, the consultant may sometimes act as an agent of the architect. While the law will hold these consultants to the standard of reasonable practice applicable to their professional expertise, the architect may be found to have liability for the consultants should an issue arise during the course of a project. In essence, many courts have found that the architect was contracted to provide the entire scope of design services and therefore has liability if a problem arises. While the architect may likely have a claim against its consultant for indemnification in such instances, such a claim may not fully exonerate the architect for future claims by an owner if, in the intervening period, the consultant has become financially unable to take responsibility or the consultant’s insurance coverage proves to be inadequate. In some instances, the owner, not the architect, engages certain consultants and the architect’s obligations with respect to those consultants may be limited. Typically, the architect has far more limited exposure relating to the acts or omissions of those consultants. In these types of situations, the terms of engagement should be clearly stated in writing. Architects usually are not responsible for project consultants hired directly by the owner unless the architect agrees to this responsibility in the owner-architect agreement or acts in a way that makes the architect responsible, such as signing a Certificate for Payment or a Certificate of Substantial Completion for the consultant’s work. For Employees Similarly, the architectural firm is responsible for its employees during the course of a project. The Courts will generally hold the architectural firm itself responsible for the acts or omissions of each employee. A possible exception to this responsibility is if the employee clearly acts beyond its role and tasks required of it by the architectural firm. For instance, if, unknown to the architectural firm, the employee sells illegal drugs while on the job site, the architectural firm will likely not be culpable for those acts. Alternative Project Relationships The types of relationships between members of the construction community seem to constantly evolve and expand. In addition to the conventional owner, design team, and construction team relationship, a number of other alternative 1 Prelims Module 1 Page 5 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS relationships are being employed in the industry. Two examples of these alternative relationships are contractor-led design- build and joint ventures. Contractor-Led Design-Build: In this variation of the conventional construction project delivery, the owner contracts with one entity, the contractor, to provide all design and construction services for the project. The architect typically subcontracts directly with the contractor to provide services for the project. While this type of arrangement may offer many advantages on certain types of projects, it also raises certain potential risks to the architect that do not exist with the more conventional project arrangement. For instance, the conventional construction project arrangement is set up, in part, to provide a layer of checks and balances that protect the owner. In such situations, the architect typically has certain obligations to identify problems relating to the contractor’s work and the contractor has similar obligations regarding the architect’s work. These obligations may not exist, or at a minimum are severely compromised, in a design-build relationship. Many architects have been placed in very difficult situations when their client, the contractor, wishes to perform work in a way the architect may not agree with. The drafting of the agreements in these types of arrangements is critical in order to protect the architect from these types of problems. Joint Ventures: It is common for the courts to consider the parties to a joint venture to be jointly and separately responsible for the actions of the joint venture. That is, if an injury occurs because of the negligence of either party to the joint venture, the joint venture can be sued collectively or the parties to the joint venture can be sued individually. Therefore, professional responsibility and liability should be carefully allocated in contractual agreements between the parties to a joint venture. PRIMARY TYPES OF OFFICE ORGANIZATION 1. Single Proprietor: The individual owner or single proprietorship type of operation is still alive and going well in many cases. The Primary advantage, of course, is that the proprietor is his own boss and can accept or reject any clients’ as he feels inclined. However, if the proprietor is a little particular about the type of work he does, and there isn’t enough of that available, the going may be a bit more difficult. There is a considerable satisfaction in doing only the interesting and challenging projects, but many young offices find that some compromise is usually necessary. The disadvantages seem to outweigh the advantages. While the young architect may be a good designer and like to do his part of the total work, someone must be out finding more work to keep the office alive. The same is of course true of all other phases of the project. Finances to operate the offices are available through only one source – the owner. When the architect is out of the office, too often the office is closed, with the possibility of missing important telephone calls manufacturer’s representatives, or prospective clients. A small office usually does small work-perhaps better quality, but nonetheless small in size or peso value. If draftsmen are employed, there is always the problem of keeping them busy if projects are not available, and the additional lack of ability to do all phases of the project may cause some problems. Smaller offices seem to employ less experienced draftsmen, probably because salary outlay is low, so the draftsmen may not be as thoroughly trained or able to make decisions without approval from the “boss”. And certainly, if any trouble arises on a project or a court decision is given against the office, the single proprietor is the one who assumes the entire load perhaps to bankruptcy. For those who like to have the entire responsibility, and can handle the financial and other aspects that go with it, single proprietorship is simply rewarding. There is a pride in being able to feel that you, and you alone, operate a successful business doing quality work. There is also a responsibility to any employees to keep them happily employed and of course to the architect’s family. The latter can be a major problem since many more hours’, nights and weekends will be used in finding work and processing it properly. Until a single-proprietor office really develops, there is usually a minimal chance that multi-million projects will be offered, due strictly to office size, but as the office continues to grow this deterrent may be gradually eliminated. The principal advantage of the small office is the simple fact that the office is small. Work that requires more facilities than are available in this size of office may go elsewhere simply because of the fact. One method that may be used is, of course, to increase the office force as occasion warrants. This means violent changes in the operation and additional paperwork. Joint ventures with other offices may also be the answer, but limit the freedom experienced by the single proprietor. The fact that a single proprietor leads the office also does not necessarily mean it has to be small. Quite a few large offices started as small single-owner operations, but grew by good management and still maintained the single-owner status by employing the expertise necessary. 1 Prelims Module 1 Page 6 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS 2. Partnership: This form of organization maybe considered in two major styles: two or more equal active partners, or a senior or junior partner. Each condition may also involve associates. Partnership exists where all partners are registered architects, where partners are architects or engineers, or even when only one person is registered architect but other partners are contractors, lawyers, or good businessman in related fields. Which is best depends greatly upon the qualifications, financial status, capabilities and interest of those concerned. The most obvious advantage of a partnership is the fact that more than one practitioner means more cash-backing more actual hands or bodies to do the work, more minds to think out the problems, and more client contacts that may be made. In a well-developed partnership, the various phases of the work are as equally divided as is possible, each responsible of the portion delegated to him. The partners may be equal by virtue of equal investments in the business, or may be unequal due to unequal investment. Regardless of the amount of investment, unless special responsibility is agreed upon, all partners are responsible for the debts of the partnership, and a contractual agreement by one partner binds all partners. Without a good agreement or confidence in partners, it might be an undesirable situation at times. In a good working partnership, someone needs to be the business-getter, the “front-man” someone to handle the cash flow and general business phases. Different persons need the ability to design, and to supervise the production work and field construction. Each partner could belong to a different club or service organization in order to have diverse contacts for possible business and probably should live in a different suburban area for the same reason. These things may require some adjustment but probably will benefit the partnership in the end. Now let’s take a look at the possibilities of a senior-junior partnership. This type of arrangement usually starts when an older, established architect begins to feel that he is working too hard, that he has a bright energetic employee, or that he would like to retire in a few years. Most often the younger partner is a long-time office employee who supposedly knows the operation of the office, complements the architect’s abilities, and is “itchy” to be on his own. The senior partner is the one with the investment. Agreement regarding returns may be varied, but the senior partner will retain control. If the idea is to provide for ultimate retirement of the older partner, there may be a gradual increase in percentage for the young partner with a corresponding decrease in the percentage for the one, until, at ultimate retirement, the office belongs to the younger. Thus, may take a considerable period of time of course. While this is often an arrangement between only two men, there is no reason that more than one junior partner cannot be included. So, partnership sounds better than most single proprietorship. The advantages are that, when probably constituted, the partner’s expertise complements each of the others. The financial base may be broader and in greater depth as each partner has some money. The partners will probably live in different client contacts. And what more partners to share the required work necessary for best operation, the amount of extra work time, beyond a normal week, may be shortened. The primary advantage is that partners may not agree about business after an initial period of “togetherness”. The one, who attends meetings, play golf, has client-oriented lunches, may be considered by the others as having too enjoyable a time. Unless strict control over contract signatures and cash flow is maintained. It is possible that unwelcome work situations may result. Several partners may want to work on design with no one interested in production documents or contract administration. In the senior junior partnership, the older partner may be very set in this method, design criteria, or type of projects. He may not be interested in change and since he has majority control, may not agree with his junior partner. A major disadvantage if full partnership is that each partner is professionally and financially responsible for any or all business actions of other partners. 3. Associates: The term associates may mean something or relatively nothing. When younger employees reach an advanced stage of value to the office, they may consider their own office. They may have skills to replace and not really want to leave. They may simply want recognition thus, enter the associate status name on the door and letterhead; with no change in financial situation or office responsibility may be the answer. If this arrangement continued, an additional raise in pay or a part of the profits may result. In larger firms there may be quite as many associates as numbers of partners. Associates firm members expect to ultimately become partners and usually do or they use that status symbol to negotiate for a better situation elsewhere. Generally, the office gets the better part of the deal as the associate feels a greater responsibility since he is now a part of management and perhaps someday may become a partner. As a result, he often takes on additional responsibility and works more diligently. Some firms avoid the word associate instead use directors of this or that, which usually amounts to the same as associate. 1 Prelims Module 1 Page 7 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS 4. Corporation: In many cities, architects may form a corporation. Simply explained, the corporation is a theoretical employer organization and all members (stockholders) are employees with financial responsibility limited by their amount of investment. When a partnership becomes so large or unwieldy that efficient operation becomes difficult, the partners may decide that a corporation type office with its benefit’s would be very interesting. A corporation is formed by obtaining approval of articles of incorporation, a charter from the city, establishing a board of directors, and electing a slate of controlling officers. A stock issue is provided and may be common stock or preferred stock, the latter having priority or preference when dividends are declared. Stock may have an initial par value or no value and the investors either buy shares, or acquire them by their monetary interest in the office. This cash flow provides the starting finances for the corporation. The board of directors and elected officers are responsible for the efficient operation of the corporation and all persons work for the corporation as employees and receive a salary, plus stock dividends, plus a bonus, if profits are more than those expected. Market value of stock fluctuates up or down from issue price depending upon amount of dividend or other indications of profitable operation and may or may not be indicated in stock market quotations. Financial and size advantages are more rather obvious. With a greater number of stockholders there is more money with which to work. As a large organization, it is possible to have more employees and more or bigger work. Diversification of skills or abilities is also more possible. Departmentalization may also result, again bringing larger and more varied types of projects. Proper business methods may bring a good return on any investment. All of this larger work, larger office, and less personal in-office contact may lead to a feeling of “factory workers” and stifled ambitious younger people. With a large group of principals, it generally works out that individuals develop considerable personal skills in a particular area rather than improving over the entire field, and while some people do not object to a human boss they do not like to be supervised by a corporation. Bigness as related to a corporation has its advantage and disadvantage. From the standpoint of the client, the large corporate office generally has the advantage of being able to provide expert knowledge in a number of fields, a client wishing to build a special manufacturing plant probably will have better results with a large office with specialized interests, and most such offices are organized as a corporation. From the standpoint of an employee, exposure in a large corporate office will give him a much different feel for projects than is generally possible in a smaller office. This may be good or bad depending upon the individual. A by-product of a large corporate office may be the better understanding of business as it relates to the design professions. 5. Joint Ventures and Others: Regardless of the basic structure of a professional office, there are times when it may become expedient to combine offices or reorganize to better advantage. When several small offices feel that it may be advantageous to combine forces, they may joint venture the same as many other groups. This usually results in a form of partnership since each office functions as an individual, so joint venture is to continue for a rather extended period of time, a corporation agreement may be best for the participants. Sooner or later most architectural offices consider inclusion of full services ( structural, mechanical and electrical ) within the organization. Depending upon the amount of work in this specialized field, this may be an advantage, but in many cases the amount of architectural work is far greater than the engineering work. This immediately poses the question of separate but interlocked offices, one for architecture, and another for engineering. In most of such cases the corporation form or limited partnership is more desirable. When we consider formation of architectural office, we normally consider only registered architects. There are many other combinations that may be considered; however, present day development and construction practices indicate the serious consideration should be given to association in one form or another with contractors, land developers, or others in near-related fields. The old taboo on architects also operating as contractors for the same client has been removed. Assistance in profitable development of vacant land or urban reconstruction is also a possibility. Project management in cooperation with other businessman is an area of increasing interest. Most laws relating to the use of the title “Architect”, in any of these associations require that a clear indication be made as to exactly who is the architect. Where architect-engineer combinations are arranged, each professional must usually sign or take responsibility for the entire project. Each type of arrangement should be carefully investigated before starting a new office and the one, which seems to present the most advantages and fewest disadvantages considered. 1 Prelims Module 1 Page 8 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS ENTREPRENEURAL PRACTICE: Starting an Architectural Firm Derrick Choi, AIA LEED AP, and Rena M. Klein, FAIA Twenty-first-century practice requires architects to adopt an entrepreneurial approach dependent on risk-tolerance, self- awareness, and comfort with unpredictability. Starting a firm gives architect’s opportunity to leverage talent and drive to create a work-life that is both personally satisfying and financially rewarding. The Great Recession that began in 2008 has had significant impact on the American design and construction industry. Along with the new tools of twenty-first-century technology, the changing economy is creating irreversible industry transformation. While entrepreneurship has always been part of architectural practice, changes to the business environment have created a new normal, wherein entrepreneurial traits - business acumen, nimbleness, risk-taking, and the capacity to assess opportunities - are increasingly essential for success as an individual professional and as a design firm. The Freelancer’s Union of New York City estimates that nearly one-third of Americans are self-employed, adding up to almost 42 million people. As an advocate and insurance provider for the self-employed, the Freelancer’s Union sees entrepreneurial individuals as the true engine of economic growth in the United States. They dub the new normal “the gig economy.” For architects, engaging in the entrepreneurial economy is not new. The 2012 AIA Survey found that 81 percent of architectural firms have fewer than five members, and that these firms employ over one-quarter of all architectural staff. The design and construction industry has been aptly described by Barbara Golter Heller as an “immense aggregation of cottage industries”. That the industry is still, for the most part, local and diverse in scale creates a myriad of opportunities for entrepreneurial activities. The preponderance of very small firms and self-employed architects is in itself proof that a financially successful and personally satisfying career is possible through starting a firm. The ability of start-up and small firms to succeed in the new economy has increased owing to a number of factors that enable expanded capacity and reach. These are: Infrastructure, Collaboration, and Global Practice. Infrastructure: Technology is enabling architects who start their own firms to expand their capacity and the possible types of engagements. The choice to leave a larger firm and go out on one’s own does not necessarily mean giving up large projects or participation on the teams that execute them. And working with larger projects or firms does not necessarily require a big operating budget. The evolution of file-sharing technologies, building information modeling (BIM), multiplatform collaboration, and online project communications and management tools have enabled small and start-up practices to quickly develop offices that are cost-effective, flexible, and scalable. Collaboration: New firms can serve as expert consultants, contract production staff, or valued collaborators. Founders of start-up firms have the opportunity to thoughtfully assess their skills, strengths, and areas of interest to determine project opportunities that are a good fit. Depending on the nature of the project team arrangement, firms can often take on discrete tasks or serve in a support role, demonstrating value and expertise. New firms also have the option of expanding their services to include the construction phase through ongoing collaboration with contractors. For instance, if the founder has the interest and aptitude, incorporating Construction Management into a practice, either as Adviser or as Constructor, is a possibility to expand one’s scope beyond the design phase of the project. Architect-Led Design-Build offers the possibility of influence and revenue (commensurate with the additional risk) beyond the design phase of the project. Global Practice: Advances in production technologies and telecommunications have greatly improved access to the global design market for firms of all scales. With the appropriate roles and responsibilities, it is possible for a variety of practices to work and compete successfully in the global marketplace. Smaller firms, or those in a start-up mode, with an appetite for international work may want to consider entering the international marketplace as a designer (perhaps in collaboration with a local associate firm), or in a consulting or support role. DESIGN FIRM BUSINESS MODELS When starting a firm, being intentional and strategic about a business model may be challenging. Nevertheless, understanding the options and proceeding with self-awareness is essential. The material in this section was sourced from The Architect’s Guide to Small Firm Practice (Wiley 2010), by Rena M. Klein, FAIA. In general, a business model is a plan that articulates what business is being conducted and how the business will generate income. Renowned consultant David 1 Prelims Module 1 Page 9 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Maister, author of many books on management of professional service firms, has identified three business models that are common in organizations that offer professional services: efficiency-based, experience-based, and expertise-based. Each of these business models can yield growth and profitability, assuming that they are operated appropriately. Efficiency-Based Firms Efficiency-based firms are focused on fast and less-expensive project delivery. These firms often specialize in one project type or a narrow range of services and tend to serve clients that are looking for standard solutions and quick turnaround. For example, a small architectural firm that serves residential developers might operate effectively within this “efficiency” model (see Figure 5.1.) Efficiency Because efficiency-based firms do projects with a Profitability depends on standard production processes and repeatable significant amount of routine work, founders may be able project elements to hire a less experienced person for production More routine work, more junior staff assistance as soon as workload permits. This will help to keep production costs down, while freeing the founder to Partners/ Principals acquire more work. Routine work may also lend itself to having a remote virtual workforce or to subcontracting Project production work. With repeatable elements and standard Managers/Project Architects processes, project delivery can be streamlined. Profitability is dependent on volume and productivity and Interns/Drafters is relatively easy to obtain once systems are in place. Sustainable success in these firms requires continuous Wide Staffing Triangle improvement of work processes and staying current with The Architect’s Guide to Small Firm Management (Wiley,2010) technology and trends. FIGURE 5.1 Efficiency-based Firms Rely on Repeatable Processes Experience-Based Firms When asked, most small firm leaders will describe their DESIGN FIRM BUSINESS MODELS firm as operating within the second business model- experienced-based-and most are correct in their EFFICIENCY assessment, to a greater or lesser extent. In contrast with We can do it better, faster, cheaper. efficiency-based firms that have deep experience but We do projects that are not complex and have many engage in routine projects, true experience-based firms repeatable elements. are proficient at solving non-routine and complex design We employ the latest production technology and problems. While their experience may be in a certain continuously improve production processes. project type, such as public schools or museums, their EXPERIENCED core competency is the ability to successfully organize and We know what we are doing. deliver significant and complicated projects. Many We can do unique complex projects by applying our successful experience-based firms find they are able to accrued knowledge. apply their accrued knowledge to a diversity of project We leverage relationships to acquire projects and types, a strategy that can help weather economic collaborate to deliver them. downturns in individual market sectors. (See Figure 5.2.) EXPERTISE Starting an experience-based firm requires a founder to We have special knowledge and talent. have knowledge and experience in solving complex design We serve as expert consultants or are design starts. problems and serving on teams that regularly execute We continually work to innovate and to create and significant projects. The initial management challenge for acquire new knowledge. this type of firm is to match the project task to the “pay- grade.” Much of a design fee can be spent when the founder performs work that could be done by someone Excerpted from Architect’s Guide to Small Firm Management with a lower salary. For solo practitioners who have Klein, 2010 meaningful experiences in complex projects, a first hire might be administrative support, rather than production 1 Prelims Module 1 Page 10 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Help. This will free the founder to do more billable work and nurture relationships that will lead to more opportunities. Once the workload of a start-up firm grows, hiring a Experienced skilled and experienced architect to assist the founder, Profitability depends on well managed products and skillful use of staff resources as opposed to an intern, may be the best practice. This Mixture of tasks and staffing levels person should be able to manage projects and provide reliable assistance to the founder in delivering complex projects. Partners/ Principals Virtual collaboration with other experienced collaborators as subconsultants or joint venture partners Project is also an excellent strategy for project delivery in start- Managers/Project Architects up experience-based firms. Sustainability for experience-based firms is enhanced when they are adept at creating and acquiring new knowledge from Interns/Drafters doing projects that can be applied to future commissions. Balanced Staffing Triangle The Architect’s Guide to Small Firm Management (Wiley,2010) FIGURE 5.2 Experience-based Firms Rely on Applying Accrued Knowledge Expertise-Based Firms Expertise-based firms have service offerings that rest Expertise Profitability depends on high fees for expert or unique service upon deep knowledge and/or exceptional talent. (See More non-routine work and senior staff Figure 5.3.). These firms include those headed by “starchitects,” with their unique style and abilities, or, more commonly, specialists in a narrow band of professional knowledge such as acoustical design or PARTNERS/ commercial kitchen design. PRINCIPALS For founders who have deep knowledge or unique talent, an expertise-based firm may allow a financially PROJECT MANAGERS/ successful one-person firm to be established and PROJECT ARCHITECTS sustained. Administrative help is advisable to free the INTERNS/DRAFTERS principal to complete billable work. However, the Narrow Staffing Triangle straightforward nature of this kind of practice might keep administrative demands to a minimum, allowing The Architect’s Guide to Small Firm Management (Wiley,2010) the principals to do it themselves. FIGURE 5.3 Expertise-based Firms Rely on Deep Knowledge or Unique Talent Basic Staffing Triangle Since most of the work is non-routine, few, if any, middle-level and junior staff are needed to complete the work. More commonly, expert practitioners will partner with experts in their related field to offer a broader range of services. Many also connect with academic institutions that allow expert practitioners the opportunity to teach and facilitate research activities that forward knowledge creation. One- or two-person firms can be very successful using this model since profitability often depends on high hourly rates for services. Any Project That Comes Through the Door: Opportunistic vs. Strategic Most design firms will start in an opportunistic manner - a project is offered that allows an architect’s initiative, talent, and training to be exercised and showcased. Whether making the leap from employment by others to being self-employed, or starting a firm because no other option is available, since design services are project-based, having a project to do is usually a prerequisite to starting a firm. This may make the discussion of choosing a business model academic, as the kind of firm being established may be dependent on the job opportunities present in the marketplace. Given this reality - an environment where it appears that all opportunities must be explored and accepted - how is it possible to be strategic? 1 Prelims Module 1 Page 11 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS The answer to this question is simple. All opportunities need to be explored, but not all opportunities must be accepted. The interests, skills, and aspirations of the founder must be considered at firm start-up in order to set a course toward both personal satisfaction and financial success. Nevertheless, accepting any project that comes along can lead to a strong generalist practice and can be a strategic choice in itself. Generalist practices may be particularly successful for firms established in smaller communities, where the work available is likely to be varied in building type and scale. These firms prosper from the broad generalized knowledge they have acquired and can become stable and well-rounded. The downside of this strategy for many practitioners and start- ups is that it may limit the depth of professional knowledge acquired over time, leading to fewer opportunities for complex projects. Firms that accept “any project that comes through the door” can become unfocused and spread too thin. Naturally, the core competencies, personal connections, and interests of firm leaders will attract certain clients and projects even if there is no intentionality. At some point in the firm’s life, especially if firm growth is a goal, a more intentional approach to the firm’s business model will be required. Figure 5.4 illustrates how the business models are formed by the interrelationship between a firm’s level of specialization and its ability to deliver complex projects. Once a firm’s business model is understood, firm growth or sustainable stability as a solo practitioner or small firm becomes more possible. START UP BUSINESS PLANNING Legal Requirements There are several choices for a firm’s legal structure SPECIALIST GENERALIST regardless of whether a firm is founded by a single individual, a two-person partnership, or a group of Expertise-Based R Experience-Based COMPLEX owners. PP PROJECTS specialist generalists According to the 2012 AIA Firm Survey, 28 percent of complex projects complex projects all firms were formed as S corporations, making this the most common legal structure among all firms in 2011. This exceeded the percentage of firms formed Any project that comes Efficiency-Based as sole proprietorships (20 percent). Setting up as a through the door partnership of two or more requires additional specialist generalist, routine projects considerations besides the legal structure of the firm. PROJECTS complex projects ROUTINE PROJECTS It is important to consider the makeup of agreements between those entering a partnership. The Architect’s Guide to Small Firm Management (Wiley,2010) FIGURE 5.4 Business Models for Design Firms Relate to the Level of Project Complexity and Specialized Knowledge Required Financial Setup Financial planning is a vital part of getting ready to open a new firm. Key tasks in the financial setup of a firm may include the following: Selecting and setting up an accounting system Establishing tax identification and fi ling status based on legal structure Establishing a business bank account Engaging trusted professional advisers, including an accountant and attorney, if needed, to help set up legal structure or agreements Acquiring start-up funding from outside sources, if necessary Logistics Facilities Since home offices keep overhead low and are eligible for tax deductions, their inherent cost-effectiveness and flexibility is a natural fit for many solo practitioners and startups. While individual work settings can be increasingly remote, singularly efficient, and still be fully “connected,” many find working alone day after day to be unsatisfying. Firm founders who have recently left a larger firm may miss the collegial company of others during the workday. In addition, the continuing need 1 Prelims Module 1 Page 12 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS for face-to-face meetings as part of the project acquisition and delivery process requires most practitioners to have access to conference rooms and meeting spaces. As founders contemplate the leap from the home office, or options to augment and mitigate its limitations, a number of flexible space arrangements are available for consideration: Rental Office Spaces or “Executive” Suites: The predominant typology of emerging office arrangements, these are fully furnished, rentable office spaces for hourly, daily, or monthly rental. Office rental arrangements of this type commonly provide offerings beyond the rental of physical workstations, including social/meeting/ conference spaces, high-speed Internet bandwidth and connectivity, and telephone and receptionist service, as well as mail handling. However, the typical production necessities of an architect, such as large-scale plotting and scanning, are usually not readily available in executive suites, and there are generally no spaces or accommodations for equipment storage or services like model-making or photography. Those with a consistent need for meeting space may benefit the most from this kind of arrangement. Sole practitioners, specialty design consultants, and others not providing a full range of architectural services may also find these arrangements beneficial. Since rental costs are typically on a per-use basis, this arrangement can be cost effective. Virtual Offices: This office arrangement offers users a professional ambience and permanent telephone number with answering services, and in some cases mail handling, while reducing the overhead costs of a traditional office. As this is not a physical space rental, this amenity is particularly attractive to firms without a dedicated or permanent office space that would benefit from having fixed contact information for calls and mailings. This can provide stability for client correspondences regardless of where the practitioners are. For firms just starting out as well as those exploring multiple temporary or satellite locations, there may be considerable benefits to having a fixed office address and virtual phone line system. When using an office address located in a state where an architect is not licensed, practitioners should check with the state’s Architectural Licensing Board for relevant requirements or regulations. Coworking Spaces: A work space shared with other professionals, within or outside the design disciplines, is a popular office concept. Unlike executive suites, these workplaces are set up to foster interaction between users. Sole practitioners seeking potential synergies and collaboration with other like-minded industry colleagues, or simply seeking to simulate the congeniality of the office environment, may benefit the most from this space arrangement. Rental costs are typically on a per-use to monthly basis, and can be cost effective with some limitations on the type of work done there. Similar to the rental offices/executive suites, most coworking spaces are generally “plug-and-play,” and any equipment storage (e.g., laptops) is typically offered to monthly subscribers. As such, these types of workspaces can be less convenient on a per- use basis. In many cities, design-focused coworking facilities have been established, such as the Design Annex located in Somerville, Massachusetts. The Design Annex offer amenities that cater to a design office culture, specifically, architecture, graphic design, and web design. In the Design Annex, a dedicated model-making facility encourages a robust range of creative design work. Some coworking spaces participate in global reciprocity programs that allow their members to use other spaces in the United States and abroad. Under the Co-working Visa Program, the Design Annex allows active members of one space to use other coworking spaces around the world for free for a set number of days. Shared Office: Subletting office space from an established firm or sharing permanent office space with a number of other sole practitioners is the most conventional of the flexible office arrangements. For the leaseholder, there are some obvious benefits such as sharing overhead (e.g., rent/mortgage, utilities, Internet service, printers, paper, and ink, etc.) as well as having tenants who offer unique skill sets and professional services. More important, if collaboration is encouraged, new tenants may provide access to new markets and clients. For start-up renters looking for a space requiring limited customization, a shared office space could offer benefits such as reduced start-up time and cost efficiencies. While these arrangements are often short-term, since firms outgrow their shared office space arrangement, some firms may find natural synergies and ultimately consider long-term lease commitments to capitalize on both the cost-sharing benefits and the partnering opportunities. 1 Prelims Module 1 Page 13 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Infrastructure Never has the basic operating toolkit for the start-up had such relatively low barriers to entry. Full suites of Internet-based applications can be easily hosted with basic functionality at no cost, and open-source (nonproprietary) applications from sites like Oracle’s OpenDocs.org have lowered the historical software acquisition investment costs for new businesses. Telecommunications tools, such as Skype® Internet phone service and web-meeting services such as GoTo Meeting™, provide relatively low-fee services while considerably improving the lines of global teleconferencing for firms of all scales. Cloud-based data sharing tools like DropBox® allow multiple users to access electronic files from a remote, independently hosted server that is hosted for a monthly fee, thereby alleviating the business owner of the typically higher hard and soft costs of maintaining and periodically upgrading a conventional in-office server. For project management, new integrated project tracking and management applications can provide a wide range of functionality that could put off the need for dedicated accounting staff as a firm grows. Current design-friendly software such as ArchiOffice™ provides customized project controls for timecards, project scheduling, and project tracking. A complementary accounting application can integrate with ArchiOffice™ for invoicing and expense reporting to clients. For many start-ups, more affordable and less industry-specific small business accounting software, such as Intuit’s QuickBooks™, may be adequate. Financial Resources Start-up financing is increasingly difficult to obtain as architecture firms and their owners are often required to meet stringent loan eligibility criteria. Without considerable personal savings or personal loans, start-ups need to be wise with their res allocation and thoughtfully prioritize office start-up investments. While firm IT infrastructure needs can be obtained at a minimal cost, there are still significant financial considerations to address at the outset of setting up a professional services firm, including but not limited to office fixtures and furnishings, licensing and insurance, marketing and business development, salaries (for the founder and/or staff), and supplies. Traditional sources of small business loans and start-up capital made available through agencies and banks are increasingly limited and not always accessible for many founders of start-up firms. It is recommended that firms contact their local banking institutions that provide SBA loans to determine their eligibility to participate. Marketing Social media tools provide a means of online communication between the user and a larger audience. With the relative abundance of powerful and popular Internet-based social media applications-specifically Facebook©, Twitter©, Pinterest© and Linked In© - marketing for a start-up is a relatively accessible and cost-effective endeavor. Start-ups can use these social media applications to create a platform for broadcasting updates and virtually any message at the click of a button. Firms considering the relative value of social media should consider at least the following: 1. who is the potential audience? 2. the motivations and objectives behind such a marketing approach and the value of the content being broadcasted through these potentially “viral” media tools, and 3. the commitment and level of effort to maintain these applications. Lastly, it is not uncommon for firms to find themselves networking among themselves, when it may be more effective to fi ne-tune a social networking strategy that reaches out to a larger public audience, particularly potential clients. The use of the Internet to market start-ups also includes participation in competitions and other online gallery opportunities. Exposure on multiple Internet sites can increase a firm’s visibility on search engines and, ultimately, accelerate a firm’s name recognition with relatively little financial investment, if any. Start-ups with limited marketing budgets may find that participation in civic engagement commitments, UAP events, and public interest design projects may yield meaningful results. This is especially true when volunteer engagement is aligned with a founder’s genuine interests. For example, practitioners that are committed to public realm design may be inclined to serve on planning boards and design advisory committees in their local municipalities. These types of engagements can bolster the reputation of a firm and demonstrate the founder’s competence and capability to colleagues and potential future clients. 1 Prelims Module 1 Page 14 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Writing a Business Plan For design firms, business planning can be divided into four primary aspects: purpose, finance, operations, and ELEMENTS OF A BUSINESS PLAN marketing. Once purpose is understood, plans can be A. PURPOSE/BUSINESS MODEL developed within each of the other three functional Philosophy/ core values arenas. Please note that the business plans discussed in Project Types? Client Types? this section are not the kind needed for securing a bank Career contentment and disposition of owners loan. Those may have a particular form that is provided by Core competence and core weaknesses the lending institution. Instead, these business plans are Market opportunities and threats to market position meant as documentation of intentions and the proactive Firm size measures designed to accomplish goals. Business planning Firm future, including transition plan brings intentionality to the management of a small firm, which is a distinctly different approach than being moved B. FINANCIAL PLAN Financial expectation of owners primarily by external circumstances. Much of the material Revenue goals over time in this section was sourced from The Architect’s Guide to Operating budget expectations over time Small Firm Practice (Wiley, 2010) by Rena M. Klein, FAIA. Profit plan over time Although the components of the business plan appear as Scenario plans for firm revenue and staffing over time distinct parts, in reality they are interconnected. Each C. OPERATIONS PLAN aspect is an element of a whole firm system and, as such, Organization structure they impact each other continuously. Marketing efforts Technology upgrades and integration must link closely with aspirations, which often determine Project delivery model operational choices; operational effectiveness will impact Knowledge acquisition and development financial growth, and market position may determine what Promotion, recruitment and compensation is possible financially. D. MARKETING PLAN In Figure 5.5, each aspect of the business plan is shown to External market conditions and competitions have each of the other aspects within. For example, Target market consider Marketing-each quarter of the Marketing Key differentiators quadrant is related to one of the four major quadrants. Image and brand The financial aspect of Marketing is a marketing budget; Relationship-building and networking plan the purpose aspect of Marketing is alignment of the marketing message with vision; the operations aspect of Excerpted from Architect’s Guide to Small Firm Management Marketing has to do with improving job acquisition By Rena M. Klein (Wiley, 2010). processes such as the proposal writing; and, finally, the marketing aspect of the Marketing quadrant is outreach to Purpose Finance new prospects and forming new relationships. Align w/ Budget Financial Financial Business tracking Firm owners can customize this diagram to suit their own model goals planning and control business plan and update the diagram as some goals are Image Ethical completed and some are altered by external circumstance. Community Reduced reputation & Socially This fractal diagram can be used as a tool to plan and track & Brand Responsible giving Waste firm development activities over time. Align Align continuing Marketing Operations For start-ups, marketing is likely to be the most important message education budget w/purpose budget aspect of the business plan initially, but marketing is not w/purpose possible without knowing purpose. It is not possible to Outreach Improve Market Improve effectively deliver projects acquired without holistic to new marketing operational production prospects processes successes processes knowledgeable operations. Overall profitability will be elusive without financial management. All the parts of Marketing Operations business planning are interconnected. The Architect’s Guide to Small Firm Management (Wiley,2010) FIGURE 5.5 Each Box in This Diagram Represents a Different Yet Interconnected Aspect of Business Planning. 1 Prelims Module 1 Page 15 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS ENTREPRENEURAL PRACTICE Self-Awareness As a founder, the key to successful strategic and opportunistic choices is self-knowledge in two key areas: level of comfort with collaboration and tolerance for risk. Founders with self-awareness and integrity about these two issues can successfully shape a firm based on their own values and proclivities, using their understanding of self as a primary firm design-criteria. In the race to win work, keep staff billable, and build up a firm’s portfolio, founders should assess the advantages and disadvantages of pursuing or accepting certain projects or tasks. This underscores the importance of being strategic about identifying assignments that reinforce the firm mission or help build the firm’s brand and identity. Eugene Kohn, Founder and Chairman of KPF Associates, frequently recounts advice given to him by a friend during the recessionary times of the mid-1970s: “Your success will be measured by the work you turn down.” Level of Comfort with Collaboration How much trust and how much control feels comfortable to a firm’s founder is a function of personality and inclinations. The comfort zone will vary for different types of decisions; for example, a founder may feel comfortable collaborating on project management, but not allow collaboration on design decisions. In control-centered practices, architects keep a tight rein on information, knowledge, and drawings (or models), sharing only the minimum necessary for subconsultants to perform their work. In collaboration-centered practices, information, knowledge, and drawings (or models) are readily shared and the entire team participates, to varying degrees, in the co- creation of the design. Founders with a high degree of comfort with collaboration have the opportunity to participate on collaborative teams, either as a leader or an expert contributor. In addition, a highly developed interest in collaboration may lead to joint ventures with other firms, or participation in emerging project delivery methods such as Integrated Project Delivery (IPD). Founders who enjoy collaboration are likely to have success in growing their firms through cultivating an empowered and engaged staff. Founders who prefer a more controlling style may choose to be solo practitioners or leaders of very small firms where they can track everything and be completely in charge. Firms such as these can also be successful, especially when the founder has specialized knowledge, unique talent, or access to high margin markets. Being a solo practitioner or leading a very small firm can also be the choice of those who enjoy external collaboration but prefer to do much of the internal project work themselves. Clearly, there is a spectrum of practitioners within the boundaries of both extremes, but firm founders who have self- awareness about their place on this continuum are more likely to acquire and execute their projects with integrity-to say what they mean and to mean what they say. In addition, self-awareness about level of comfort with collaboration will help to unapologetically develop a firm that truly takes advantage of the founders’ strengths. Risk Tolerance Starting a firm is risky. Architectural firms operate in an environment of unpredictability where success or failure is not solely predicated on the talent and effort of the founder(s). There are ways to mitigate unpredictable risks, such as purchasing professional liability insurance and planning contingencies on projects. Practice risks can be mitigated through the careful choice of clients and projects and by following best practices in terms of agreements and documentation. Other risks must be accepted as inevitable, with corresponding actions taken to prepare for these risks. For example, there is likelihood that the founder’s personal income may be very low in the first few years of firm operations. Founders should be prepared to partially fund their own salaries for at least 12 months and for various periods of time throughout the life of the firm. In addition, founders must be able to provide health insurance coverage for themselves and their employees. The Affordable Care Act is expected to increase health care insurance options for individuals and as such may be beneficial to those starting a firm. As an illustration of the effects of health insurance costs on starting a business, a study by RAND 1 Prelims Module 1 Page 16 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS corporation (Is Employer-Based Health Insurance a Barrier to Entrepreneurship? [RAND, 2012] by Robert W. Fairlie, Kanika Kapur, and Susan M. Gates) found that an increase in entrepreneurship at age 65 is attributable to eligibility for Medicare. Because of the need to self-fund benefits that are usually supplied by employers, minimizing other kinds of overhead will help mitigate the financial risks incurred. If a person is uncomfortable with the notion of not receiving a predictable paycheck at regular intervals, and with providing their own insurance and retirement savings, being self-employed will be very difficult. Architects who feel uncomfortable with the unknown- “Will the phone ever ring again?”—may find self- employment to be overly stressful. Many deals with the unpredictable nature of practice by simultaneously engaging in other endeavors that supply more reliable incomes in more predictable time frames, such as teaching, or becoming a construction management adviser or building inspector. Despite the risk, many find the rewards of autonomy, the opportunity to design, and the ability to self-determine one’s work life to be well worth it. Why Firms Fail Data collected by the Small Business Administration between 1992 and 2002 indicates that less than a third of new businesses started in 1992 survived their first decade of existence. Martin Zwilling, a venture capitalist and contributor to Entrepreneur magazine, has developed a list of 10 reasons why first-time entrepreneurs fail (“10 Top Reasons Why First- Time Entrepreneurs Fail,” Entrepreneur, September 2012): Lack of or inability to execute a business plan Slim or no-revenue pro forma (projections) Limited business opportunities Inability or ineffectiveness in execution Too much competition Limited or lack of valuable intellectual property Inexperienced team/staff Underestimating resource requirements Lack of marketing Lack of resilience - giving in too early The list may be helpful to consider as an internal checklist for architects about to start their own firm. Most of the items can be addressed through careful planning, realistic assessment of strengths and opportunities, and thoughtful self- awareness. Writing a business plan that includes an operations and financial plan is one way to bring discipline and careful preparation to the endeavor. Architects, who are trained as planners and designers, can bring their abilities to the creation of their firms. No architect would consider designing a building without a purpose, site, structure, or budget. Starting a firm without articulating the mission, markets, project execution, or potential revenue stream is equally foolish. Considering these issues early in the firm planning process and throughout its start-up phase is the key to sustainable success. CONCLUSION Like the design of a custom home, starting a design firm presents the opportunity to create a business entity and firm culture that truly reflects the strengths, tendencies, and proclivities of its founder and by extension, its staff. The skills architects apply to their work as design professionals should be used to plan the start and ongoing evolution of their firms. Designing a firm entail considering financial goals, purpose, size, optimal structure, business development strategy, and the best possible integration of the interest, skills, and aspirations of its founders. While there may be no formulas, secret techniques, or consultants that can deliver a custom-designed practice, one’s awareness of self, knowledge of the basics of running a business, and understanding of the drivers of change are important first steps in the journey. Recognizing trends and patterns at the global, organizational, and interpersonal levels offers founders an insight into the potential for firm development and a growth strategy. Planning a new design practice, like planning a new space, also entails the consideration of sustainability, something that can stand the test of time. In the midst of change and unpredictability, it is important that founders prioritize personal values and preferences that will lead to professional satisfaction, which in turn is closely connected to potential for profitability. 1 Prelims Module 1 Page 17 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS Therefore, a key aspect of founder self-awareness is an understanding of how success and satisfaction in their work is defined. When thinking about starting a firm, consider the following: How important is financial success? How much money is enough? How will direct and indirect value of firm output be measured? How important are name recognition and design awards? Does success include “doing good” for the local community? Does success include having a healthy and contented office culture? How important is fun and creativity in the firm? Firm founders, in shaping their practice, should consider these personal factors along with external realities such as demographics, global practice, overall economic health, target market project opportunity, and the firm’s role in civic engagement. Appreciation of these trends in unpredictable times is essential for firm founders to navigate through uncharted territory in the New Normal. In some ways it has never been easier, or perhaps more necessary, to start one’s own firm. The advent of “tele companies” (“When Job-Creation Engine Stops at Just One,” New York Times, Oct. 04, 2012) allows solo practitioners to expand their capacity with a flexible virtual workforce. Web-or cloud-based IT infrastructure and new advances in business administrative support expand capabilities at a low cost. Furthermore, social media is providing a new and unprecedented ability to reach out to and engage potential clients and collaborators. Entrepreneurial architects who are self-aware, risk tolerant, and have a vision of how their offerings can fit into the marketplace have a unique opportunity to reap the benefits of designing their own work-life that is both personally satisfying and financially rewarding. STRATEGIC PLANNING FOR THE DESIGN FIRM Raymond Kogan, AIA and Cara Bobchek If firm leaders want to achieve something they’ve never had before, they must do something they’ve never done before. Through strategic planning, firm leaders can envision the future of their firm, and then implement strategies and action plans that will help the firm achieve positive results. WHY BUSINESS USE STRATEGIC PLANNING Strategic planning involves thinking about the future. Companies large and small use strategic planning to envision their objectives for the future and lay out the steps they will take to achieve them. The strategic planning process begins with envisioning a desired future state of the firm, a destination toward which the plan itself will plot a course for the firm to follow. If this vision for the future is considered the destination of the firm, then the strategic plan provides the road map to reach it. The purpose of strategic planning is to create positive changes and outcomes for a firm that aligns with its values and professional aspirations. In its strategic plan, a firm can articulate its fundamental mission, describe its long-term vision, and address its issues, initiatives, and goals in management, operations, and other crucial firm functions. The strategic plan is different from a marketing plan or a business plan in that it typically encompasses a broader scope of topics over a longer period of time, combining long-term, mid-term, and short-term strategies and action plans. Architecture firms-from sole practitioners to large multinational firms-can prepare for, understand, and respond to the dynamics of the ever-changing economic, social, and political environment in which they practice: They can plan for change, which is inevitable, and design their own futures through strategic planning. Business studies confirm that companies and organizations in any industry that employ strategic planning tend to be more successful than firms that do not. A STRATEGIC PLAN FOR FRANKLIN & ASSOCIATES Throughout this article, the development of a strategic plan for a fictional firm, Franklin & Associates, will be used to illustrate the process described herein. Franklin & Associates is an architecture and interiors firm with two offices in the Pacific Northwest. The firm engages mainly in K-12 education projects, with occasional work in higher education and civic buildings. The firm was founded 25 years ago by Leigh Franklin, who remains the majority owner; he plans to retire in the next 5 to 10 years. The firm is experiencing changing dynamics in its key market sector and has had difficulty in sustaining its once steady growth, having peaked at a staff size of 18 people and recently downsized to 12 people. 1 Prelims Module 1 Page 18 of 63 AR 541: BUSINESS MANAGEMENT AND APPLICATION FOR ARCHITECTURE 1 PRELIMINARY LECTURE HANDOUTS ELEMENTS OF THE STRATEGIC PLAN Firms that employ strategic planning use the strategic plan as a management tool, making all of their key decisions within the context of moving toward a carefully thought through vision that they wish to reach. The elements of a strategic plan, each of which is discussed in more detail in this section, are as follows: Mission Vision Issues and Initiatives Goals Strategies Action Plans DESIGNING A FIRM In strategic planning, a firm has the opportunity to design its construction documents, with each task assigned to a future. The process is comparable to the steps that an responsible champion with an agreed-upon deadline. architect takes to design a new house (or most any project): CONSTRUCTION CONTRACT ADMINISTRATION PROGRAMMING The house isn’t complete when the construction documents At the outset of an engagement, the architect meets with the are prepared. The architect still needs to monitor the client to determine the functional and aesthetic needs and construction so that the project achieves its original desires for the project. This prelude to design relates to the objectives. The architect holds meetings with the owner, first step in strategic planning: an objective analysis of a firm contractor, and subcontractors, and assesses progress to to identify the key issues and initiatives that affect its ability make sure that everything is being done as prescribed, or sees to succeed. that, if a change is necessary, it is implemented. In strategic planning, a firm will also continue to manage progress toward SCHEMATIC DESIGN

Prelims Module 1 PDF

Document Details

Tags

Related

Summary

Full Transcript

Upgrade to continue