Contract types for architecture and engineering firms include fixed fee, percentage of construction cost, hourly, recurring, hourly not to exceed, and more.
Updated November, 2024
Navigating the landscape of contract types for architecture and engineering services can be a complex task. Contract types including fixed fee, hourly, retainers, and percentage of construction cost, among many others. Each has its unique application, nuances, best-fit scenarios, and draw backs to consider. The challenge is understanding what these contracts are, and picking which one is the best fit for a specific project or client.
In this comprehensive guide to A&E contract types, we'll explore the specifics of the twelve principal contract types, their ideal application scenarios, and take a deep dive into their pros and cons.
This post is meant for architecture and engineering firm leaders, business development managers, office managers, and others at your firm that may help develop contracts. It is even helpful for more junior staff to understand contracts so they can better manage their projects and time, so share this resource with your entire team.
For clarity, we’ll group contract types into three main categories: Fixed Fee, Hourly, and Recurring. This broad classification will aid us in understanding the larger dynamics of contracts and the associated fee structures or pricing.
Following this, we’ll delve into each category, exploring each type in detail to unpack the twelve primary contract types for professional services. Through this process, we’ll not only decode what each contract type entails but also provide valuable insights into when they should be ideally used.
Fixed Fee
Hourly
Recurring
Now let’s take these categories a step further so you can see where we get the 12 contract types for professional services, and then we’ll discuss when to use them.
Contract types are generally broken down under fixed fee, hourly, and recurring. Below are a few different contract types for each of these categories. But no means are these the only contract types or fee structures available to your firm, but they are some of the more common types being used by architecture and engineering firms.
Fixed Price
Recurring With Cap
Percentage of Construction
Hourly
Hourly Not to Exceed (This is the worst option!)
Cost + Percentage
Cost + Fixed Fee
Recurring
Recurring + Expense
Recurring + Hourly
Although not a contract time we will touch base on non-billable aspects of your firm.
Marketing
Overhead
A fixed fee contract, as the name suggests, is a type of agreement where the service provider charges a predetermined, unchanging amount for the services rendered. In essence, this contract establishes a set price for a specific project or deliverable, regardless of the time or resources the service provider invests. This type of contract provides clarity and predictability, fostering a sense of certainty for both parties involved.
The fixed fee or fixed price contract is ideal in situations where the scope of the work is well-defined and the parameters of the project are clear. It also is great when you can base the fixed number on the value created for the client. It is particularly useful when an architecture or engineering firm can accurately estimate the time and resources needed to complete the project.
For instance, a residential architecture firm might use a fixed fee contract to design a custom house, as they can confidently predict the effort required based on previous projects. Or an engineer may offer a fixed price for a structural analysis with a set deliverable.
This contract type is beneficial for both the service provider and the client, offering the provider assurance of payment and the client a clear understanding of costs upfront. It also is the contract type that can lead to the highest profitability if you run an efficient firm. Investing in tools and processes to reduce the time it takes to deliver work directly leads to higher profits with fixed price contracts. It leads to improved operations which is a win for your client and for your firm's profitability.
A "Recurring with Cap" contract type is an arrangement where your firm charges the client a fixed recurring amount, usually on a monthly basis, until the total payment reaches a predetermined cap. Essentially, it's like a fixed fee contract divided into even installments, with a clear ceiling on the overall cost.
This contract type allows both the service provider and the client to manage cash flow better, spreading payments over time. A professional services firm might choose this contract for a long-term consulting engagement or a multi-phase development project. The recurring payments provide steady revenue for the firm and make budgeting easier for the client, while the cap ensures that the total costs stay within an agreed-upon limit.
This approach fosters a sense of predictability and stability in the financial relationship, but it requires a clear understanding of the scope and timing of the work to ensure that the cap is set at an appropriate level for the value provided.
I used this contract type very successfully with residential and retail projects. With an agreed fixed price for the scope of work, we divided the total contract into even monthly payments. This made invoicing easier and faster, saving hours of time each month. Since the monthly fee was predictable for our clients, they also paid much faster than they did on variable fee projects. This was a big win-win for us as cashflow greatly improved, and future revenue was much more predictable.
This is the contract type I would use on all projects if at all possible.
All fixed fee contract types in BQE CORE will track your billing, compared with the contract total. Once your billing hits that ceiling, all billable time will be automatically marked non-billable. You can override these settings on a project by project basis if you need to.
A percentage contract type is a somewhat flexible arrangement where the fee for the design services is determined based on a percentage of a specified value, such as the total cost of construction of a project or a value created amount. Unlike a strictly fixed fee, the actual fee can fluctuate in accordance with changes in the underlying value to which the percentage is applied.
Architecture and Engineering firms often employ this contract type when the scope of the project may vary or when the total cost might change due to unpredictable factors. It is particularly useful on project types where the project costs can be influenced by external variables, such as market prices, unforeseen circumstances, or client changes to the scale of the project.
For example, an architecture firm might agree to a fee based on a percentage of the overall construction cost of a project. If the client opts to expand the size of the project or add additional features, the firm's fee would proportionally increase as would the amount of work needed to deliver the project.
This arrangement aligns the compensation of the service provider directly to the scale and complexity of the project. It offers a degree of flexibility that can be mutually beneficial but also requires clear definition and understanding of the base value and percentage applied. It also reduces the need for multiple negotiations when scope changes. Since the fee scales with the project, your compensation automatically goes up when the project changes. This is a contrast to fixed price contracts where you would have to enter a new agreement to take on additional work if the scope changes.
This is a very common contract type for A&E firms. But there are some drawbacks to consider. The compensation is not necessarily aligned with the client's interests or goals. Most clients are price sensitive and when they see the project budget increase and thus your design fees increase they can get upset. When they see your fee increase because you designed a more expensive project than the original budget, they can blame you even if that blame is unfounded. They may see a firm's interest is in increasing their fees rather than delivering a project on budget.
This can be a great contract type but make sure you explain how it works to your client up-front, and be great at communicating throughout the project as you work through designs, respond to client requests, and get cost estimates. It is important to build a strong trusting relationship with the client early on to avoid conflict later if prices and fees rise.
Hourly service contracts have no fixed contract amount. You work, you track the hours, and you bill the client for all of the hours worked multiplied by your agreed upon billing rates.
As much as this seems attractive and appears that you've mitigated your risk because you get paid for the time you work, you could actually be losing money. As your firm gets better at the work, and you get more efficient, it takes fewer hours to get the job done. Now you’re getting paid less while the deliverables have not changed. The value you are delivering to clients is NOT related to the amount of time you work. Clients are getting the same value. You are getting a cut in pay, for being good at your job.
The other aspect of this is the fee does not align the interests of the client with your firm. Clients don't want to pay more when a project takes longer. In fact, people tend to pay more when things are done faster. Think of how you may pay for expedited shipping, or earlier boarding on an airplane, or may pay for more expensive tickets on a direct flight that will get you there faster than a flight with a stop or two. Delivering things in less time is a value add and you should charge more for doing things faster, not less.
The other issue with hourly pricing, is that too often firms discount hours. In this contract type the client is assuming the risk and the reward. If you work faster they save money. If the work takes longer they pay more. This means that EVERY HOUR your team spends on a project should be billed to the client. There are no discounts or write offs. If you spend an hour researching a code issue, that is billable. If you work for 4 hours on a scheme that doesn't work, and you have to start over, that is 4 billable hours the client should pay for. That is time your team couldn't spend on other billable work.
When you decide not to bill your clients for these sorts of time write-offs you are doing your business a disservice. You are directly cutting into your profitability and not following the terms of your agreement with the client. Every hour needs to be billed to the client or you may as well just do a fixed price.
You should record an estimated contract amount for reference in BQE CORE, but if you choose hourly as the contract type, the contract amount has no implications, as it does with fixed fee contracts.
The "Hourly Not to Exceed" contract type is a hybrid model that combines elements of both hourly and fixed fee contracts. In this arrangement, a professional services firm charges the client based on the actual hours worked but sets a maximum limit on the total cost. Essentially, the firm bills by the hourly rate, but the total charges will not exceed a predefined cap.
It is a lose-lose agreement for the design firm and win-win for the client. This is probably the worst agreement you could make as your revenue is capped, but the cost to your business is not. Client may love this because if you a re fast and efficient they pay less, while if you take longer or unexpected challenges arise, they also pay less than the cost of those hours.
We don't recommend this contract type for any architecture or engineering firm or for any project. We strongly urge you to avoid this contract type at all costs. It is great for your clients, but terrible for your business. In fact, if a client demands this contract type, that should be a big red flag that the client does not respect your services and is probably not worth working with.
A "Cost + Percentage" contract type is an agreement in which the professional services firm charges the client for the actual costs incurred during the project, plus an additional percentage of those costs as a fee. Essentially, the firm's compensation is tied directly to the costs of the project, allowing them to cover their expenses and earn a profit through the additional percentage.
This contract type is often used in scenarios where the exact costs of a project are uncertain or can vary widely due to the nature of the work or fluctuating prices of materials or resources. For example, an architecture firm or engineering firm might employ this contract for a project where there might be unforeseen design challenges or the need for specialized materials that could affect costs. By tying the fee to the actual costs, the firm ensures that they are compensated for the real expenses incurred, plus a set margin for their services.
The "Cost + Percentage" approach provides flexibility and also requires clear communication, transparency, and diligent tracking of all costs to ensure that both sides have a mutual understanding of what constitutes a legitimate project cost and what the final bill might be. It may be best suited for clients and service providers who have a strong working relationship and a shared understanding of the project's complexity and potential risks.
Like the hourly fees, it is important that your firm track and invoice for all time spent on a project, as the cost of your time is the basis for the final fee. Since it is still time-based, there should not be discounts or write-offs of time spent by your team. The full cost of the time is what the client agreed to pay.
This is just like Cost + Percentage but the profit added on top of the cost is a fixed amount instead of a percentage. Basically the Fixed Fee becomes the amount of profit you will make off the project.
A "Cost + Fixed Fee" contract type is an agreement where the engineering or architecture firm charges the client for the actual costs incurred during the project (including the cost of the time to do the work and all reimbursable expenses), plus a predetermined fixed fee. Unlike the "Cost + Percentage" model, where the fee is a percentage of the costs, here the additional fee is agreed to in advance and does not fluctuate with the project costs.
This type of contract is typically used when there's a need for flexibility in covering unpredictable or variable costs, but both the client and the service provider want to have a firm understanding of the profit or management fee involved. It's commonly employed in industries like construction, engineering, or architecture for complex projects where the exact costs may be hard to estimate in advance.
The "Cost + Fixed Fee" model provides transparency, allowing the client to see the actual costs and understand the specific fee being charged by the firm. It can build trust, as the firm has no incentive to inflate costs (since their fee remains constant), but they are also protected if the costs turn out to be higher than anticipated.
However, success with this contract type requires careful definition of what constitutes a cost, meticulous tracking of all expenses, and clear communication between both parties. It may be best suited for intricate projects where both sides are looking for a balance between flexibility in covering costs and predictability in fees on a certain time frame.
Tip: Most firms find the Cost + methods are overly complex and would much rather simply bill a flat fee and come up with a payment schedule. The best payment scheduled for your business is 100% up front, although most clients would balk at that. But it doesn't hurt to ask. If that doesn’t work, ask for significant percentage of the total fee up front, and then create a monthly payment schedule. For example, a 20% down payment and then 20% paid on the first of the month for the next 4 months. Simple and predictable.
A "Recurring" contract type is an agreement where you firm charges the client a fixed amount at regular intervals, such as monthly or quarterly, for ongoing services. Think of this like a retainer or subscription. This continues until the project is completed, until either party chooses to terminate the contract, or for a set number of payments, depending on the terms.
This type of contract is often used for services that require continuous, regular attention, such as maintenance, support, monitoring, or long-term consulting engagements.
The "Recurring" contract model offers several advantages for both the service provider, subcontractor, and the client. For the firm, it provides a steady and predictable revenue stream, making it easier to manage cash flow and plan for future business activities. For the client, it is a predictable expense that can be budgeted for, and offers the convenience of regular, scheduled payments and ensures continuous access to the necessary services.
This model fosters a long-term relationship and aligns the interests of both parties, as the service provider is motivated to keep delivering value to maintain the ongoing revenue, while the client benefits from uninterrupted service. It's essential, however, to have clear agreements on the scope of work, deliverables, and conditions for termination to make this type of contract successful.
This is your classic retainer type contract. Your clients pay a fixed, recurring amount, each month. It is also clear what they are getting from you each month.
This is really a fixed fee contract on a recurring basis.
This is a recurring contract, where you bill your expenses back to the client, over and above the agreed upon recurring contract amount.
This is used in the same scenario as a recurring contract, but where you know you will have significant and unpredictable expenses associated with doing the work. For example, this may be a good contract type for projects outside of your region that would have significant travel expenses, or for projects where you may be procuring materials or managing purchases for the client.
Let’s say you have a fixed fee pricing model or plan with a cap on the number of hours. In these types of contracts, there is often a clause that says something like, “$1,000 fixed price for up to 10 hours per month, plus $150/hour thereafter.” This is recurring plus hourly. Basically the client is purchasing blocks of time and you stop work, or inform the client when the time is used up.
You should use this contract type when you want to offer what looks like fixed fee pricing, but you want to hedge yourself against people taking advantage of you. I would think of this as a reverse of the hourly not to exceed. The client is committing to pay you a fixed price each month for an allotted amount of time. But if they don't use up all of those hours, they don't get money back. There is predictable revenue for you, predictable cost for the client, and once the time is used, you move into an hourly agreement assuming the client approves the additional work.
"Non-billable" expenses refer to activities or components within a project that are not charged directly to the client. Often these will be outlined in your contract terms to clarify what is and isn't included in billable work. These might include internal administrative tasks, auditing services, marketing efforts, training, or other activities that are essential to the business but don't constitute a direct part of the service provided to a specific client or project.
For architecture firms and engineering firms, tracking non-billable time is essential for understanding the full cost of delivering a project, or running the business and the time invested in non-revenue-generating activities. While these tasks are not billed to the client, they play a crucial role in the overall functioning and growth of the firm, and understanding them can help in assessing productivity, planning capacity, and determining overall profitability.
Typically you start working on the project before it becomes a signed contract. From attending site walk-throughs or taking the prospective client out to dinner to spending hours preparing a proposal, there is often significant time and expenses spent on a client before they ever become a paying client or there is an agreement in place.
This is good information to have as you plan future work and develop business budgets and resource allocations.
Using the marketing category on a project in BQE CORE’s time tracking feature allows you to track exactly these sorts of things.
This is how you can set up a project or projects in order to track time and expenses spent on your own firm. All your admin costs and anything you will never bill to or associate with a client or a paid project can go into an overhead project like this. It’s a great way to create a cost center, to track the costs needed to determine your burden rate.
Overhead projects could be things like office training, team building or management activities, larger marketing efforts, event planning, or even office parties. The goal is to understand how your team is spending their time on both the billable and non-billable work needed to keep the office going. You want this to be as accurate as possible so the firm's leadership has a clear picture and accurate data they can use to make smarter decisions.
You want to choose your contract types wisely. When using the best contract type for your professional services firm, you can receive the most profits from your projects.
BQE CORE was designed for the A/E and professional services industries to make managing your firm as easy as possible. With robust features that include project management, time and expense tracking, billing and invoicing, and HR, you can manage your projects in real-time and reap the rewards.
As the Director of Content & Community at BQE, Lucas Gray researches and writes about best practices for Architecture and Engineering firms. He also fosters community across the AEC industries. The content and community interaction focuses on providing business advice derived from his wealth of experience in architectural design, firm operations, and business consulting. Lucas's background includes co-founding Propel Studio Architecture in Portland, Oregon in 2013. He led the firm’s operations, focusing on business development, marketing, team management, financial management, and design direction. Specializing in addressing housing issues, Lucas has designed over 50 Accessory Dwelling Units (ADUs), various infill housing developments, and custom homes. He has worked internationally in Shanghai, Bangkok, and Berlin, on a wide range of large-scale design projects as well as community engagement processes. After working in the Architecture profession for about 20 years, Lucas transitioned into business consulting for A&E firms as part of CVG. Here he worked with small growing A&E businesses, helping guide them to improved operations and profitability. Passionate about the built environment, urban planning, transit, and public art, Lucas also writes about these topics on his blog and creates abstract art in his spare time.
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