Firsthand perspectives from groundbreaking architects
Say goodbye to Chasing Owners for Termination Fees on Owner Architect Contracts
Author: Alina Yu.
August 14th, 2023.
After an owner pulls out of a project, most architects have two choices. Give up and write it off, or hound the owner for a termination fee and fight it out. Not Mark Elster. After using the AIA’s concept for termination fees for the first half of his 35-year career, he realized he needed to change the process.
Quick background on a termination fee: A termination fee is a charge on the owner paid to the architect when the owner ends the project without cause. It’s article 9 in your AIA B101 contract.
Today is part 1 of 3 in the “Better Contracts” series with Mark from AOME architects. And we’re covering a critical topic: how do you protect yourself when projects terminate. If you’re a high end residential architect that has had owners pull out, this article is for you. Big thanks to Mark for helping us dig deep into these better practices.
Let’s dive in.
How to save yourself: Completion Bonuses 101
The premise of the AIA Termination language is upside down and backwards! Casting off their premises about lost anticipated profits, Mark reformulated that premise.
He arrived at a solution that gets his firm paid what is due every time. And in a way that richly rewards and incentivizes better behavior in his clients.
Consider: finished projects are worth exponentially more to the architect than unfinished ones.
Why? Finished photographed projects are immensely more marketable. Marketing that is of immense value to the architect and virtually valueless to the existing client.
His insight was the creation of a new compensation concept — the Completion Bonus.
What is it? A Completion Bonus is the inverse of a termination fee. And it’s simpler. If the project completes, you pay a portion of the fee back to the owner. If the owner cancels their project, you retain the fees already collected.
Why is it great?
Owners who complete their projects no longer subsidize clients who do not complete theirs.
The additional fee is collected as the project progresses.
If the project is finished, the owner gets rewarded
You no longer have to chase your owner around, trying to get them to pay the termination fees on canceled projects.
Imagine you are an architect finishing a high end residential project. You pay the completion bonus to the grateful family, and you get a completed project for your portfolio and most importantly… a happy owner.
Now, imagine the family pulls out at the last minute. Rather than chasing the family for that termination fee, dragging out negotiations and disputes, you can put your energy into the next project and feel great about it!
Mark has been doing this for years. He kindly shared the clause he includes with us.
What AOME Architects is doing
Mark has been using completion bonuses since 2018, and he’s never going back. Why? Because it makes the aftermath of every project smoother.
Let’s suppose you’re working on a project with a 1 million dollar fee and the client cancels the project when half that fee has been collected. If you’re taking a 5% termination fee on the remaining portion of $500,000, you charge the owner $25,000 that you have to collect in arrears. Most will object and refuse to pay when you have no more leverage (other than words on a contract).
But if you charge a 5% completion bonus on the fees as you collect them, you charge 1.05 million up front and return $50,000 only in the event that the project finishes. The larger “termination fee” of $50,000 is effectively already in your accounts by this stage so there is no opportunity for disputes to erupt.
But how do you sell the owner on it?
So we asked Mark. This is how he does it:
The first step is to reframe your own thinking — recall how it is nearly impossible to ‘sell’ clients on the concept of termination fees. Many architects already gloss over this part of the agreement.
Inform owners that without the bonus, clients who do not finish their work would be unfairly subsidized by those who do.
Termination fees are negatively framed. As a penalty for not completing the work.
Avoid the negative! Instead, change the existing agreement to limit Termination fees to services performed to date plus expenses and spend very little time reviewing this portion.
A Completion Bonus is based in a positive frame. As a generous reward from the architect to the owner for completing their project!
Tune in to the next article in this series to learn how the Completion Bonus also helps address photography rights.
By using a completion bonus, the owner and the architect are motivated to see projects through to the end.
Which means you get a finished project to photograph and market, and owners get a beautiful home.
Call that a win-win.
What else can we do?
In fact, we have two more articles on Mark’s innovation to the AIA contract. But you’ll have to check in later for Parts 2 & 3.
Shout out to Mark again for collaborating on this article with us. If you have insights for the next generation of architects, get in touch email@example.com
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