Practice Management: Top-Down and Bottom-Up Budgets
Budgeting and contracts are nothing short of an artform when applying them to the practice of architecture. They are always trying to hit a moving target-you never know what the outcome will be.
With budgets, the moving target is the work needed to perform the services and allocating them in order to make a profit. In the following example, we are looking at the budgets for an architectural firm's services.
Referencing the example above, top-down budgets start with the estimated cost of construction and the allocation of the architect's fee from a percentage of estimated construction costs (note that this assumes that the architect's contract is based on a percentage of construction costs for their service fee). That gross fee then subtracts the consultant's fees (per the B101-2017 contract, the architect's services includes consultants: structural, mechanical, and electrical engineers) in order to produce a net service revenue. The net service revenue is the monies that should be allocated for the architect's services. However, the direct expense budget and the contingency budget should also be considered. Direct expenses are billable to a specific project and should be set aside as there are always direct expenses for a project. Contingencies cover any expenses should there be design changes. Top-down budgets set aside a direct expense budget and a contingency budget to cover unexpected expenses as a safeguard, so they don't come out of the service revenue-the monies needed for the actual services of the contract to be performed. If they are not used, they are considered profit. Those expense budgets subtracted from the net service revenue results in the project labor budget, which is then broken down per phase and service percentages (e.g., 5% may go to bidding and negotiation because that is the typical percentage breakdown of that service phase).
With bottom-up budgeting, services are broken out by how long the architect thinks it will take to perform the service per phase multiplied by an average service fee. A bottom-up budget is much more organic and relies on experience to be able to allocate the time per service.
What is important to remember is that, again, this is trying to hit a moving target. How do you know which method is right when, compared side by side, they can have a huge difference? What's important is to recognize that difference in going through the exercise. It should be common practice to work with both budgets side by side and if differences are way off, more time may need to be added/ subtracted per phase (bottom-up) or a different percentage may be allocated (top-down). The point is to see if the budgets meet in the middle and how. However, it is also important to review this along with other business expenses to ensure that compensation is not only fair but attributes to the health of the business practice in other areas (covering benefits, payroll, overhead, etc.).