The Fragile Micro Architects Practice Setup
The following analysis is a financial setup for a Micro Architects Practice in the UK in 2014 / 2015.
The analysis is split down into sections with a total at each end.
The analysis is then summarized and its effects considered.
The housing sector is in decline but of all the potential accepted forms of Architectural Practice it was the most profitable due to its timescales and fee availability. It therefore forms the scheme basis of the fee analysis.
It is assumed that the Micro Architects Practice is financed to a level of £25,000 in the first year to set it up.
The analysis starts at the end of the education process with the student moving from their education into their own Micro Practice as an Architect.
Student Grants and Loans
= £3575 Maintenance Loan per year
= £9000 Tuition Fee Loan per year
= over a 6 year Architecture Course
= £21,000 Expected salary on graduation
= £0 First monthly repayment
= 30 years repayments
= £75,000 Total amount borrowed
= £86,805 Total amount to be repaid
= Repayments start the year after graduation
Source: http://www.studentfinance.direct.gov.uk
Potential Work for an Architectural Practice
= 143,680 Houses constructed in the UK in 2012
Source: ONS
= 34,500 Total Architects in UK on ARB register
Source: ARB
= 4 house designs per year per Architect in the UK
= 1 to 2 years construction time for each house
= 3 months work time per house design
= 1 year approval process per house design
= 4 house designs a year.
Value of Work
= £250,000 construction value per house x 4
= £1,000,000 per year
Income from Work
= £250,000 Project value for one new build house in 2014
= 4% Fee on project
= £10,000 Potential income
= £40,000 potential income per year per Architect
Cost of setting up a Micro Architects Practice in the UK in 2014
A: One Time expenses
= £0.00 Office - None. Allow for mobility and work from any location
= £500 Software
= £500 Hardware
= £0.00 Misc. And unforeseen
= Total of A = £1,000
B: Yearly Fixed Expenses
= £0.00 Office rent - allow for mobility and work from any location.
The mobile phone becomes the office.
= £40,000 maximum potential staff annual salary
= £20,000 actual startup staff annual salary = 1 - 2 people x £10,000
= £0.00 Payroll Fringe Benefits
= £500 Business insurance /PI
= £0.00 Legal services allow for as and when needed
= £0.00 Cleaning annual service not required - mobile
= £0.00 Property taxes, common maintenance - mobile
= £500 Vehicle insurance
= £0.00 Misc. and unforeseen
= Total of B = £21,000
C: Yearly variable cost (average)
= £200 Office supply
= £100 Utilities – Minimal - Allow for mobility and work from any location
= £500 Communication equipment i.e. phone, internet etc.
= £100 Equipment maintenance
= £100 Postage, courier
= £1000 2 x £500 Professional membership /renewal fees etc.
= £500 Bank /financial charges
= £0.00 Credit Cards charges - No Credit Cards
= £100 Petrol, parking, vehicle maintenance etc.
= £100 Professional consultants like legal, financial, management etc.
= £100 Travelling and conveyance
= £100 Marketing and PR activities- seminar, promotional material, advertising
= £0.00 Repairing and replacement of fixed assets - non see mobility
= £100 Misc. and unforeseen
= Total of C = £3,000
Total of A + B + C approx. £25,000 for the first year of business
Yearly Increases
Total of A + B + C approx. £25,000 for the first year of business
Total for year 2 allow 10% variance £2,500 approx. £30,000
Total for year 3 allow 10 % variance £3,000 approx. £35,000
Total for year 4 allow 10 % variance £3,500 approx. £40,000
Total for year 5 allow 10 % variance £4,000 approx. £45,000
Variance over local authority UDP / Government election timescale
of 5 years £25,000 to £45,000 for a Micro Architects Practice to
be viable and earn profit.
Bank Loan
= £25,000 bank loan
= £25,000 for 12 month, 1 year, at 5% interest rate
= £1,250 total interest
= £26,250 total repayment
Possible Income to balance expenses and costs and achieve profit
= Profit potential of £40,000 project value in year 1 less costs of
£25,000 = £15,000
= Profit banked in 1st year £15,000
= Interest on savings £750
= Total £15,750
= Total savings £15,750 year 1
= Profit potential of £40,000 project value in year 2 less costs of
£30,000 = £10,000
= Profit banked in 2nd year £10,000
= Interest on savings £500
= Total £10,500
= Total savings £26,250 year 2
= Profit potential of £40,000 project value in year 3 less costs of
£35,000 = £5,000
= Profit banked in 3rd year £5,000
= Interest on savings £250
= Total £5,250
= Total savings £31,500 year 3
= Profit potential of £40,000 project value in year 4 less costs of
£40,000 = £0,000
= Profit banked in 4th year £0,000
= Interest on savings £0,000
= Total £0,000
= Total savings £31,500 year 4
= Profit potential of £40,000 project value in year 5 less costs of
£45,000 = -£5,000
= Profit banked in 5th year - £5,000
= Interest on savings £0,000
= Total £0,000
= Total savings £31,500 year 5
= Bank loan total repayment £26,250
= £5,250 Final profit = £31,500 - £26,250
= £500 Business insurance /PI maintained for 16 years post work
= £8,000
= Final profit -£2,750
Returning to Education
The effect for the Architect moving from their practice and into further education before returning into their own practice can be calculated through the financial effect of the mature student grants and loans.
Student Grants and Loans
= £3575 Maintenance Loan per year
= £0 Tuition Fee Loan per year
= over a 3 year Masters Architecture Course
= £21,000 Expected salary on graduation
= £0 First monthly repayment
= 12 years 5 months repayments
= £11,250 Total amount borrowed
= £18,413 Total amount repaid
= Repayments start the year after graduation
Source: http://www.studentfinance.direct.gov.uk
The clients financial viewpoint
How does the Micro Architectural Practice Financial setup for 2014/ 2015 work from the type of clients the Architect could choose to work with.
The largest group for Architectural Micro sized practices is domestic clients.
Source: Building Design 18th April 2013 Is architecture a tale of two professions?
These clients have the following earning ability.
£517 = full time employed median gross weekly earnings April 2013
Source: ONS Annual Survey of Hours and Earnings, 2013 Provisional Results
£489 = average weekly spending for UK households in 2012
Source: ONS. Family Spending 2013 Edition
£28 = full time employed median gross weekly potential savings April 2013
£1456 = annual money available for potential fees for Architects Practices
Therefore the fees allowed for and invoiced for by Architects should be at maximum £1456 per year to allow for the ability of domestic clients in 2014 / 2015 to pay for Architectural services without cutting back on their existing lifestyle.
Working this example backwards towards a potential project type using a percentage fee for a construction budget the type of work that domestic clients in 2014 / 2015 can pay an Architects Practice for can be established for taking a project up to approval stage and no further.
Allowing for the domestic clients £1456 annual money available additional funding is required.
This allows for a build value of £36,400 in one year.
This allows for a flat roof, single storey, single room, sized extension of maximum 20m2
This only allows for construction after a bank loan is obtained.
The bank loan would be for a maximum of £25,000 in the post 2007 economic crash lending markets.
The loan would be £25,000 for 12 month, 1 year, at 5% interest rate
This would leave a £12,000 finance gap for the proposed work.
The bank loan would require the repayment of £1,250 total interest in the one year.
This means that the domestic client savings over one year of £1456 would only allow for the repayment of the interest on the loan.
The remaining £25,000 could not be paid off in a single year
This repayment timespan would not within the timescale of the construction.
This is therefore a likely construction scenario for only a design to be prepared without any Architectural services being carried out.
However, considering the funding, it is not feasible since it will destroy the life of the domestic clients, the contractors, the design team and also their families lives.
To get to the construction of a new build 2st, 3bed house the clients would need to achieve £10,000 fee levels assuming 4% of £250,000 build value.
Allowing for the domestic clients £1456 annual money available extensive additional funding is required.
The client would have to obtain a bank loan of 7 times their savings or repayment ability.
The client would have to increase their savings ability by 7 times the amount available in 2014 / 2015
The client would have to half their salary for a year.
This is therefore very unlikely.
Conclusions
The setup for the Micro Architects Practice can now be summarized.
The major market is identified as Domestic.
The financing is identified as a bank loan to start up and then by fees from clients.
The salary of the Architect should be at least the full time employed median gross weekly earnings for April 2013 of £517. This equates to annual salary of £27,000 to £30,000
This Practice would require 3 to 4, 2st 3b, houses, of £250,000 build value per year to be successful.
This is 1 scheme every 3 months workload for each design to be prepared without any architectural services being carried out.
This practice would need 20 to 21, flat roof, single storey, single room, sized extension of maximum 20m2 to be successful.
This is 2 schemes per month workload for each design to be prepared without any architectural services being carried out.
However the housing market; to create both forms of domestic work at the required level of income; is too financially weak to provide it.
Smaller, higher financed, domestic clients could be sought out but these create a more limited market and so reduced, less consistent fees.
For the Architects setting up a Micro Architects Practice the level of repayment of loans exceeds the amount of money available in the construction market 2014 / 2015.
From being a student the Architect will be in debt to the value of the original loans and the business start-up loan for approx. 40 years even if the original student loan is repaid or cancelled after 30 years.
The likelihood of students of Architecture setting up and achieving a viable, profit making Micro Architectural Practice is therefore very low.
Even if the repayment of the initial bank loan are spread over the 3 years this would leave a profit for the 3 years’ work of well below the national minimum wage or the welfare weekly wage rate.
The financial stability of the Micro Architects Practice is totally dependent on the workload, fee income and setup levels and these are currently inadequate.
The potential of asset stripping the Micro Architects Practice is negligible.
If the setup and yearly costs are reduced to less than the above more profit is accrued at the expense of income. The bank loan can be repaid. The end profit is however still negligible.
If the workload is increased then the work would spread over more years but the profit would be reduced gradually due to external economic increases in costs for the basic practice setup.
If the bank loan could be avoided the profit to setup is increased by a gearing of 6 to 1
If the work is completed then the insurance cover for the work would wipe out any profit from the work and any savings from the Architect for the next 16 years.
If the Architects returns to education as a mature Architect re-student they will be in debt to the value of the business start-up loan and the additional student loans for approx. 20 years even if the original business loan is repaid or cancelled after 3 years of Architectural Practice.
Therefore the likelihood of Architects leaving practices and becoming mature students of Architecture and achieving a viable, profit making Architectural Practice is very low.
The major market to create both forms of domestic work at the required level of income is too weak to provide it. Smaller, higher financed, domestic clients could be sought out but these create a more limited market and so reduced, less consistent fees.
The Micro Architects Practice in its known form is therefore not a feasible option.
Effects through the Architecture Profession.
Alternative methods of Architectural Practice must be found.
Enhancement of individual skills through formal education is not viable.
Architects practices are not small to medium practices they are micro practices of less than six people.
‘40% of Britain’s architects are employed by just 3% of practices approx.
‘the majority of firms employ fewer than six staff’.
‘Most practices are tiny, locally based and primarily serving a residential market. These focus on self-managing a very small, often ‘hand to mouth’, operation.’
Source: excerpt from ‘RIBA survey finds 'split profession' Building design 18 April 2013 | By Elizabeth Hopkirk
RIBA Chartered Practices account for approx. 3000 practices in 2009-2014
The largest group in 2009 was the 2 to 5 staff band Approx. 40% of the total number of chartered practices.
The next largest group was the 1 staff band. Approx. 20% of the total number of chartered practices.
Source:http://www.justpractising.com/its-about-money-stupid/uk-architects-practices-increase-but-sizes-shift-%E2%80%93-riba/
34500 architects are registered in the UK
3000 architects practices are operating in the UK
13800 architects work in the top 90 practices in the UK
The top 90 practices employ as an average153 Architects per practice
There are 1200 practices with 2 to 5 staff
There are 1110 mid range practices
There are 600 practices with 1 staff
If all the Architects were in one company then the total fee earning ability of that company would be
£1,500,000,000
Source: Building Design 18th April 2013 Is architecture a tale of two professions?
This would allow for £1,500,000,000 / 34,500 registered architects or £43,478 per annum turnover per Architect.
Therefore the numbers in Architecture compared to the overall turnover balance still confirm it to be a financially viable profession for all registered in it.
The structure of the Architecture profession is a statutory regulated profession.
Therefore if amendments are needed it is in the actual scope of the work being carried out by Architects Practices.
The Financing of Micro Architects Practices in 2014 / 2015
In a world economy that refers to debt as economic growth and wealth the Architect practice has adapted to live from year to year by loan financing, repayment time scaling and prestige.
The source of Architects and their clients finance are bank loans based on the likely amount of work to be undertaken in the next year.
The key to establishing a successful practice is therefore to establish a list of clients who may want work done. The work does not necessarily have to be undertaken immediately. In fact having the work listed on a potential project list for several years allows it to be seen as a potential asset and so allows it to attract bank funding.
4 x £250,000 project value in one year. £1,000,000.
Extended over 5 years. The value increases to £5,000,000
Plus: Income. One time expenses. Yearly expenses. Yearly costs. £65,000
Plus: Minimal wage levels for qualified Architects. 2 x £30,000. £60,000
Potential bank loan value £5,125,000
If invested in property this sum could create income from landlord rents, sales values or further loans.
It could allow for an extended loan repayment plan and also cover variations in the work flow.
Therefore as a set of assets the Micro Architects Practice is even more viable if artificial.
The Architects and clients during the period of the bank loans enjoy the benefits, prestige, links to companies, contemporaries and potential work. They live annually under extended; but maintained so as to be unquestionable by the banks; repayment plans.
They live on other people’s money.
The more bank loans the Micro Architects Practice can attract the more clients they attract.
The clients use the Micro Architects Practice bank loans to increase their own ability to attract funding by being associated with what the banks classify as ‘good customers’.
These ‘good customers’ are actually ‘debtors’ to the bank.
They are people who owe the banks money and so keep them in business.
The whole system operates on the creation of temporary value out of debt and a need for prestige.
The Environment Factors
Our planet is entering a new age. The age of depletion. An age when environment,resources and energy are depleting due to human consumerist policy.
The solution to the human accelerated climate change is to reduce those areas of human life that contribute the most to this depletion. Construction is the largest human depletion system on the planet.
It accounts for approx. 65% of UK energy use per year, approx. 62% of the total UK greenhouse gas emissions from fossil fuels.
In energy terms the domestic construction sector uses the equivalent of 14 to 20 times the existing number of houses; 27,000,000 homes x 14 or x 20; in Britain each year.
Architecture and Construction should therefore only be carried out when absolutely necessary.
Therefore the reduction in Architectural work is an opportunity for Architects to contribute passively to reducing UK and global depletion effects.
Alternative methods of Architectural Practice must therefore be found beyond this artificial, prestige, depletion, construct that is endangering not only human financial resources but human long term survivability.
Ian K Whittaker
My websites:
https://sites.google.com/site/architecturearticles
Email: iankwhittaker@gmail.com
01/10/2014
14/10/2020
2995 words over 7 pages