Architecture has been in a league of its own in every conceivable way when compared to the construction trades and the other allied professions. It is not just the mastery of the design and building that makes an architect stand out from the crowd, but the way they approach problems and implement designs that set them apart.
Indeed, architects are problem solvers by nature. They are in a position to understand what a client wants from a design and they are able to create a workable solution to the problem. So it is no surprise that they often charge more than their counterparts in the building industry. But can their fees be justified? More importantly, does this mean that architects charge exorbitant amounts of money for their unique service?
In this article we will address this question that is in every client’s mind. While the architectural profession comes with an element of prestige, it is also a highly creative one that involves a lot of hard work and sleepless nights. Therefore, how an architect set their fees often becomes a balancing act between what the client is willing to pay and what the architect feels is reasonable.
Understanding The Basics Difference Between Capitalized & Expensed Costs
If you have a new construction project in mind, understanding the basic differences between capitalized and expensed will be beneficial. It is very easy to make mistakes when trying to estimate the financial impact of a new construction project. Both of these terms can be used when talking about construction projects, but there are some key differences to consider.
These are the costs of a construction project that have been formally recognized in the financial records. They are listed in the purchase orders, and the expenditures have been verified by other sources. These are recognized as materials used for construction and purchased assets.
It is recognized that costs can only be capitalized if it is perceived to increase the value of the building. Hence a tender is often called to get estimates from several different contractors to ensure that you have enough data points to make a well-informed decision.
These are the costs that have been incurred and does not add value or have an economic benefit to the asset. This can include necessary costs like the labor costs, inventory expenditure and permit costs. Expensed costs basically are seen as expenditure which the asset will not enjoy benefits through them.
Can Architect Fees Be Capitalised
Now that you have a better understanding of what capitalized and expensed mean, it is time to take a look at architect fees and decide if they are expensed or capitalized. As you can probably guess, the architect design fees are expensed. The architect fees for the building permit and the architectural plans are considered project costs that are directly associated with the building project. This is because the fees are not directly related to producing value, as the drawings and architectural plans are used in the development and construction of the project. The fees are therefore treated as part of the operational costs of the project.
Architect’s Fees vs Construction Costs
From the discussion above, the architect’s fees are seen as expenses in a construction project. For construction costs, i.e. the expenditure made for monthly interim payments and purchase orders are seen as costs that can be capitalized. This is because the materials used for the building can be seen to add value to the land and asset – there will an appreciation of value in time. The lay person may think that the contractor’s costs are better value for money, compared to a good architect.
While this may be true, it is wise not to forget – who is the person who came up with the design, and who is author and leader of the project. The originator of the design will always come from the pen of the architect. From the selection of materials used to the specification of unseen items such as water proofing and termite protection etc, – these are all decisions of the architect.
At the end of the project, a good architect does determine how the building will look upon completion. Clearly, when the building is completed and the valuation does show an increase in value for the asset – it is the joint effort of the architect and the workmanship of the contractor.
It is important to keep in mind to look at capitalization and expense rules with a macro view point. If you are unsure whether you should expense or capitalize a certain cost, you should consult a tax professional who is an expert in this area. But when thinking about engaging a Singapore architect for your project – be mindful to have a broader perspective beyond the calculation of capitalized costs and expenses.