Design
Economics Student-Led Lecture Notes 2004
Q & A
Q1.
Selecting materials is crucial to building design. What is the best way to take advantage of the
economics of material supply and demand to lower my costs? Moreover, how do I protect myself from fluctuating
prices once final materials have been selected?
Materials supply is governed by the same rules as all other goods in a free market—by the rules of supply and demand. There are, of course, exceptions, such as oil markets which are governed by OPEC (Organization of Petroleum Exporting Countries). These types of markets (like power generation in many countries) are controlled by an oligopoly (a near monopoly) or a monopoly and, hence, the market price is arrived at by a more complex process.
Oil prices, for example, affect a huge range of other prices. Materials for construction need to be transported to a site—and this is often by truck. Also, the energy content of many construction materials is very high (e.g., roofing shingles). Therefore, higher prices for oil can often lead to higher prices for materials.
But I believe the major factor affecting costs of materials is supply and demand—you want to build when demand for materials (and labour) is low. Paradoxically, this will often coincide with a period of high interest rates. Since planning cycles and construction periods are usually so long, I tend to pay little attention to recessions; that is when you want to build because everyone else isn’t. They’re afraid to. So buy land or real estate when everyone else is selling and sell when everyone else is buying. Same principle can be applied to construction—build when everyone else isn’t and your cost of material and maybe even more importantly your cost of trades can be a lot less (as much as 30% less for the latter).
You may also be able to protect yourself by buying forward hedging with respect to crucial components (oil, steel, currency, etc.) If you are buying a large amount of your construction material denominated in USD, for example, and you think the C$ is going to go down, you hedge against this as I did in 1991 when buying the Ottawa senators franchise form the NHL for $50m USD. In 11 months, the C$ went down from 90 cents to 81 cents USD—on a $45m USD balance owing at the end of 1991, that works out to just under $4.5 million more. We bought a forward hedge for $45m for $380,000 CAD, a pretty good hedge I would say.
Q2.
Before investing resources in a competition, what is the best way to evaluate
the client in order to decide whether or not the project will be economically
viable? (I.e. will the project be
canceled? Will I get paid? What are my chances?)
I don’t like these types of competitions—to me the creative process is an individual thing, something done by an individual and never by a group. The idea that the public, a design committee, a city council, whatever, can determine what is and what is not great architecture is laughable.
Inevitably,
this can only lead to me-too architecture where everything is MOR (middle of
the road) like elevator music. One dare not offend anyone.
I
have always thought that design competitions are pretty much a waste of
time—not only are most of them pre-ordained (i.e., the ‘winner’ is known in
advance and so really a total waste of time) but also the judges are often
quite unqualified to recognize great architecture anyway. They tend to fall
back on the reputation of the Architect or firm and not see what is in front of
them. For that reason, most new ideas and most young architects need not apply.
How
do people cook these competitions? Well, if they are smart, they do it legally.
And while it might be legal, it often isn’t very ethical. Governments do this
all the time—they spec their tender documents in a way that only one or two
firms or one or two consultants can meet all their criteria. For example, they
might spec a consulting contract for a professional who has, say, a civil
engineering degree and a master of engineering-science degree with a
specialization in traffic and transportation engineering who also has a Ph.D.
in urban economics and 20+ years of experience in the development industry and
… gosh, there might only be one such person available (moi).
A very negative competition like the one that Channel 4
viewers in the
Certainly
the tradition in town planning has been that you must attend the town hall
meeting to speak your piece. Our traditions do not allow anonymous complaints.
If you don’t like the fact that Tom’s goat is eating Mary’s vegetables, then
you have to be prepared to stand up and say so. The idea of an anonymous
1-800-RAT-LINE circa the 19th Century is ridiculous. So if you want
to critique one of my projects, at least have the courtesy to say so to my
face.
And
you can be sure that I will be prepared to stand up publicly too and defend
myself and my project as well. I tell my architecture students that they must
be prepared to defend their projects in public. If you are too shy to do it,
that’s troubling because excellent projects can go down the tubes because the lowest
common denominator tends to prevail in committee meetings if there isn’t a
passionate spokesperson (you) defending it. This is the way it should be
done—rezonings, planning approvals, architectural design committees and what
have you should be an affirmation of a project by the community; it is a way
for you to bring your neighbours on side.
The
only project I ever had turned down is the one where my lawyer told me he could
handle it and I didn’t need to take the stand at an OMB (Ontario Municipal Board)
hearing. He told me he had it under control. Sure. We lost. We had it reversed
on appeal thankfully but we lost valuable months.
Martha
Stewart should have taken the stand in her defense, in my opinion. I was amazed
when she didn’t. O.J. Simpson did. Look which one is in jail.
However,
if you feel you must enter these competitions, you may do so on the basis of a
win-by-losing strategy—by entering you will become better known and you will
get to know the people behind the competition, so maybe you can win future
competitions. You will also get media coverage, which may lead to single source
contracts with other new clients who hear about you for the first time anyway.
At
the very least, you need to meet with and interview the people behind the
competition and try to get assurances that everyone is on a level playing field
and that you understand the competition and that you will meet all their
requirements no matter how trivial some of them may seem.
Q3. I am
curious about potential development along
To fix
The only reason that
Q4. In
“Why Invest In Real Estate?” it is stated that an individual would want “…to
pay off your home mortgage as fast as you can pretty much anywhere in the world
today except perhaps the USA where mortgage interest on your personal home is
tax deductible which changes the calculations a bit.” I am aware that
I tell people to pay off their home mortgages as fast as
possible so that they can enjoy security and lower costs and the benefits of
imputed rents. In the
I am not aware of any particular part of the tax code in
either
I usually tell clients not to do things solely for tax reasons. If an investment is a bad investment, tax advantages usually won’t offset that or, at least, not for very long. Governments are constantly backing and filling tax ‘loopholes’.
Q5. How
is an architect able to strike a balance between running a practice, choosing
work that they are interested in, and taking on projects simply to turn a profit?
Is it viable for an architect to refuse projects based on ethical considerations
or ideological positions?
Fire your clients. Generally, when you start your own practice, you take just about anything that comes in the door. For example, one of our graduates was talking to me yesterday—they started Kantec/Maple Leaf Design and Construction three years ago. Today, they find themselves overwhelmed with work.
Brian Saumure and Fred Carmosino started this business like so many other entrepreneurs, not just to make more money but because they could create more interesting work for themselves than others could create for them.
Now they find that they are really in three different businesses: custom home building, speculative home building (e.g., the development business) and contract building.
These are three different businesses requiring different skill sets. Now they understand that they too need a business model. So, for example, if they decide to get out of custom home building because say it takes too much management time to hold customer’s hands, they are going to ‘fire’ a whole range of clients and greatly simplify their business model.
Or they may decide to keep all three divisions but treat them that way.
You should never compromise your integrity; your reputation and the trust that the industry extends to you are all important. Never, do anything that you feel will harm this. So, yes, you can fire clients who you feel are doing inappropriate, unethical things.
Q6. Is
it economically feasible to operate an architectural practice that designs only
small scale residential buildings (as this type of building often requires many
hours of intense work and does not usually yield a high profit margin)? Does
one need to work on projects such as warehouses, office buildings and hospitals
to make money?
Can one make a living on small-scale projects like residential buildings? Sure. But you will need to do mass marketing and contract out a lot of design work and construction. The best way to make this work is to offer not only design services but also construction as well. Design work creates a ‘problem’ (the client has paid for something that she or he can’t touch, feel or use). Construction solves that problem.
You will also need to do decks, gazebos, renovations, additions, etc. to make a meal out of this.
Q7. Is
it economically better for an architectural practice to specialize in a
specific type of building and construction method or to have a general
knowledge of many building types and construction techniques and therefore be
in a position to accept any type of work that might be available?
Specialization versus a general practice is an age-old question. I am not really sure. Most architects do eventually find that they specialize in something—custom homes, office buildings, arena design, industrial buildings, sub-division work, institutional work (like schools say), retirement residences, what have you. But what happens when that sector gets overbuilt, which seems to inevitably happen in r.e? Builders and financiers are like sheep in r.e. If retirement homes are hot, hot, hot, then every developer gets the fever and starts building them until there are too many of them. If you have specialized in that sector, you could go as long as seven years in a down cycle so at the very minimum, you need a couple of ‘specialties’.
Q8. If
you don’t have enough money to do a project on yow own, how can you get started
with investments from other people? How many ways can you get started besides using
a bank? Is there any regulation regarding international investors?
You can read about Bootstrap Capital at: http://www.dramatispersonae.org/BootstrapCapitalSources.html
To bootstrap yourself in the r.e. business for example, you need to know about VTB mortgages (Vendor take Back Mortgages), land options, pre-selling (of s.f. homes or condos), taking deposits, debenture investors, private equity lenders, mortgage brokers, home equity loans, etc.
International movement of capital is generally pretty free amongst nations these days but there are exceptions. A friend of mine just bought a lovely loft condominium in downtown Buenos Aries. He believes (and I tend to agree with him) that r.e. there is way undervalued. Argentines have very little confidence in their national economy since their financial system melted down three years ago.
To close a transaction in
Q9. In
starting a new architectural firm, I understand that a clientele and reputation
need to be built up over time. If a firm desires to be known for a certain type
of architecture, how do they maintain their reputation when they often need to
take on “bill paying’ jobs, not necessarily related to their specialization?
Well you do site visits much as Vince Colizza did in the
tech revolution of the mid to late 1990s. He wanted to beak into tech
architecture in a big way so he went down to CA on his own and toured the
greatest concentration of tech industries on the planet; he met with
architects, developers, owners and tech management to find out what they
wanted, what worked and what didn’t. The he could speak with a new authority
when back in
Q10. It
is not rare for projects to be put on hold due to lack of funding, lack of
resources, or issues of zoning or building code compliance or site plan control.
Plus a project can take more time and labor than anticipated due to these
problems and other unexpected matters. How is finance arranged for projects
that are put on hold or cancelled? How is the architect paid for the time and
labor that has been put into projects that have been started but not completed?
Is there a minimum fee to the client/developer when a project is cancelled?
I tend to have contracts with my clients in my consulting practice that allows either me or my client to ‘fire’ the other on 30 days written notice. I don’t want to continue to work for clients who I have lost confidence in and vice versa I am sure. These contracts require me to turn over all the work that I have done to that point and requires the client pay me for work done to that date.
For Consulting Architecture assignments, much the same arrangement may apply. Hourly rates for senior architects’ time and junior architects and other staff time is established usually together with an upset limit. The upset limit is the amount that the contract will not exceed without the written permission of the client. This gives the client an assurance that their costs are largely known in advance.
I usually add 15% to 25% to sub-contractors fees (with the client’s agreement in advance on this) for the cost of my administration of these contracts. I am also taking the risk that the sub-contractor will perform so some of this margin is compensation for risk of non-performance.
I also ask for retainers much as lawyers do. If you are worried about the client’s ability to pay the fees, you can also ask the client to top up the retainer on a regular (usually monthly) basis so you are always paying yourself from funds you control (these funds are impressed with a kind of trust BTW).
If you are doing working drawings for a client say, you
can ask for progress payments on a regular basis so you don’t get stuck paying
yourself and your staff from your own funds only to fins that your client won’t
or can’t pay you. At that point, you do have the right to, for example, refuse
to provide working drawings, approve change orders, issues certificates of
payment, do field supervision and so forth. This will stop most projects cold.
Architects in
Q11. In
this Internet age of electronic communication and documentation, the speed of
the business and the speed of architecture are ever increasing. I believe that
there is still strong design and inter-personal value created by drawing by
hand during the development stages of projects rather than using CAD and by
coordinating projects verbally and in-person to develop relationships with the
various stakeholders involved with projects. Also, the unreliability of
computers and the Internet create unnecessary risks when proceeding with a
project. As design professionals, should we be questioning these new faster and
easier construction and coordination methods more often rather than jump on the
latest technological bandwagon?
When Gino Rossetti and his son Matt Rossetti were creating
the Corel Centre for us, they went everywhere with their sketch pads. In the
What this tells me is that there is still a great deal of respect for the hand drawn sketch. I am a great believer in this too—there is a different relationship between an artist and a sketch pad using a stylus than between someone and his or her keyboard. Using CAD to design buildings right from the start is a partial explanation of why so many buildings look like rectangular boxes.
I am told too that some novelists today might try to create a new work using the longhand and a pen; they expect it might result in a very different, perhaps more intimate or more ‘poetic’ work than something that is keyboarded.
My Dad, the late Professor O. J. Firestone, told me that if you want to build long term relationships based on mutual respect and trust, there is no way to do this other than in RL (Real Life) with F2F (face to face) meetings. The telephone, the fax, the letter, a third party communication (i.e., telling someone else to tell someone something) and (especially) email are practically useless.
Q12. Is
there any room for creativity while working on a small project with a very
tight budget, especially, in a small town where “new” methods and designs are
not as sought after? Should one compromise design in order to meet the budget?
I am pretty sure that these two goals are not mutually inconsistent. To me a tight budget is a challenge and can lead to great insights and creativity.
There are two ways to solve this problem—either create a design that works within the budget you are given or increase the budget by showing your client that a larger budget brings him or her greater benefits.
For example, we were trying to build two more boxes (private suites in the Ottawa Civic Centre) in 1993. Each of these two new suites was going to cost quite a bit more than the 40 suites we had already built—about 50% more ($65,000 each instead of $40,000+ for the others). They were at a lower level in the arena with greater ceiling heights. But they were only able to host six people instead of the ten to twelve we got in the other suites because of the viewing angle. So not only were costs higher but benefits (i.e., revenues) were lower. This is a bad combination.
However, by making one simple design change—rotating the seats by 45 degrees and using the extra height by building seating platforms (i.e., using a rake angle), we increased the seating from 6 to 22 persons. This greatly increased the value of the suite—it created a larger private suite which was also one of the closest to the action in any NHL rink at that time. The project got green-lighted as a result of this design change.
Q13. Can
the design of custom homes be economical/practical, especially since there is
constant competition from developers spewing out catalogue design homes?
Most of the custom home builders today in
Few architects today can make custom home design a full time job and, for most of those that do, they combine it with a construction capability. So you need to become both a designer and constructor (a contract builder) or an architect/developer in your own right or, at least, have a very close alliance with a custom builder you can trust*.
(* Remember that the
industry is rife with bad builders and trade contractors. There is a saying in
the industry that if you can’t do anything
else, you can always get a saw and a hammer and become a builder.)
One of the reasons that tract homebuilders are successful is that, for most clients, when they buy a lot, they have bought a problem. When they buy a home, they have bought a solution. Few people want to face the daunting challenges of constructing their own homes. There are maybe 25+ trades involved and a lot of things that can go wrong. So I believe that if you want to make a career out of designing custom homes, you need to also offer the solution—a completed home.
Q14. Over
the summer, my family and I traveled to
Sure. I got my start in the development business in 1982 with an old strip plaza that was rented out to IGA. They occupied the whole building and were paying a really low rent. IGA left the premises and we hired a (then young) architect by the name of Barry Hobin. We asked Barry to design a lipstick job for us. He spec’d the outside colours for us (we repainted the place). He designed a nice new canopy for the front of the building, wrapped the columns there and added new signage. We cleaned the place up inside and out, broke the space up into smaller bays, rented them out at five times the rent IGA had been paying and sold the building for six times what it cost us, in less than 18 months. Paint, a fresh face and cleanliness can do wonders for old real estate.
Q15. Since
architecture is considered a form of art, to what extent does the architect’s
reputation affect the value of real estate (not taking land value, building
cost into consideration)? Whether or not the architect is alive, does that make
a difference?
This is an interesting question that no one has asked me before. There is no doubt that if you own a Frank Lloyd Wright designed home, that its value is greater than a replica would ever be. So the reputation of an architect can make a difference and whether or not he or she is alive can also probably make a difference.
I know that the reverse is also true—a bad architect (or, at least, one with a bad reputation) can affect real estate values negatively. If an architect is known for, say, interiors that don’t work in residential construction or inefficient use of space in commercial construction, values can suffer.
Reputations take a long time to create (good ones that is)
and one bad project can torpedo your career for a long time. So protecting your
reputation is very important in my view. One architect I know designed one of
the least efficient office buildings ever built in
Copyright. Dr. Bruce M.
Firestone,
http://www.dramatispersonae.org/DesignEconomicsFrontPage.htm
http://www.dramatispersonae.org/
StudentQuestionsAnswers2004.doc November 8, 2004