Tuesday, May 6, 2014

How to Increase Fees when Clients Use Price for Selection

The following material is for informational purposes only. Before taking action that could have legal or other important consequences, PSMJ Resources suggests you speak with a qualified professional who can provide guidance that considers your own unique circumstances.

Some clients will always select the lowest price in choosing an A/E firm. These clients will obtain
quotes from several firms and pick the low hourly rate as the winner. Clients who have “purchasing agents” in control of selection, or who must approve the decision made by a selection group, are always likely to base selection on perceived prices for services.

So how can you avoid playing the cut-rate game?

First, recognize that clients who use price as the sole selection criteria cannot be converted into “relationship” clients. They will not be open to mutually supportive working arrangements.

Second, realize that you can’t possibly be a winner every time in competitions like these. Some other firm will always quote lower; there are just too many firms out there.

Cut your costs, keep your profits
Once you have accepted that price will be the sole selection criteria, how do you respond (assuming
you have not decided to avoid responding altogether)? The overall goal is to make your proposed prices look low, while not compromising your basic pricing.

Here are some high-leverage proposal tactics that, in a low-fee competition, will allow you to quote
lower hourly rates, while keeping a higher profit potential:

• Make your price (or rates) dependent upon being paid 50 percent of the fee up front as a retainer.

• Make the payment terms 10 days—rather than 30—from date of invoice (with a high late payment penalty).

• Don’t just limit your liability; include a “hold harmless” clause shifting responsibility to the client
for design errors.

• Eliminate any redesign that would go over construction budget bids. State that this will be an additional service.

• Add a higher percentage markup to subs and reimbursable.

Try some fixed-price tactics
If you are quoting a fixed-price fee, try these scope modifications:

• Have all project meetings at your office, thus eliminating local travel time. Include any travel time as an additional service.
• If you prepare zoning permitting applications, do it as an additional service.
• Clearly state that you will use “proven design solutions,” and then reuse as much as possible from prior projects. Studies and new solutions will be additional services.
• Be very clear in stating the number of things you will do as basic services. It’s not enough to say “monthly meetings”; you need to say “6 monthly meetings of two hours each, attended by the project manager.”
• Flatten your hourly rates by lowering the principal rate and raising staff rates. Clients who are price-sensitive often focus only on the highest rates.

The best tactic: offer choices
What happens when the client calls and says, “You have the job, but we can’t pay a retainer”? The secret is to be prepared with pricing options. Be ready to say, “We can skip the retainer, but the fee increases by 2 percent.” Even better, if your proposal offers the choice of either a 50 percent retainer or a 2 percent additional fee, you can refer the client to that part of your proposal.

A key to this approach is to include a standard “terms and conditions” page in your proposal, and then send it along with your price quote. Think along the lines of airline tickets or rental car agreements that print limitations on the back (although we do not necessarily recommend using 4-point type).

Does this sound like we are advocating you act like a contractor who relies on change orders? Quite frankly—yes. In low-bid situations, if you don’t strictly define what your price includes, and then charge for services beyond that price, you sacrifice profit. This applies to all businesses, not just A/E/C firms. Your other choice is simply to say “no” when asked to bid in a price-only competition. If you don’t want to limit your services or quality, this may be the more profitable way to go.

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