The words are often used in lieu of the other, because both are promises that manufacturers or sellers make to customers. Each is a promise, but, offers different legal rights. A guarantee has no actual ‘legal’ transport, whereas a warranty does. Guarantee, are commitments, and Warranty is the assurance made to buyers by the producers. In the case of a product guarantee is a promise that it will work as they claim it will. A warranty is a promise (or guarantee) that they will fix it if it breaks within a certain period of time. A warranty is usually a written guarantee for a product that makes the producer responsible for repairing or replace a defective product or its parts.
A warranty is in its simplest form a simple contract. Some warranties run with the product, so that a consumer who is distanced (by wholesaler, distributors, dealers) from the manufacturer also gets it. A warranty may be express or implied. Express warranty is explicitly provided (written) with indication of the jurisdiction. Implied warranties are unwritten promises that arise from the nature of the transaction, and the inherent understanding by the buyer. Here the goods are expected to be merchantable that is to confirm to ordinary expectations of the buyer. Limited warranties are time limited, whereas performance warranties have set parameters (like kilometres). Warranties often exclude abusive usage, malicious destruction, acts of God or nature, and parts or other inputs that wear out (rubber plastic goods) and replenishment (tires, lubrication, fuel, coolants). Warranties are often limited to the first consumer (buyer) and original location of delivery.
Warranties and Guarantees are mechanisms of assurance. When one procures a consumer item, some degree of assurance in expressed and implied form is automatically available. Entities that are formed of several components are assured by the assembler. Complex structures like buildings, however, come-up through works of several assemblers, and lack comprehensive assurance.
Comprehensive or Compounded Assurance : Concepts turn into Designs + Specifications + Contracts, and ultimately into a deliverable entity. If the deliverable entity is deficient, than everyone concerned for its conception, design and production, is held responsible. But in reality this is very difficult, as there are many persons, agencies, materials, technologies etc. involved in the process, with very indistinct and overlapping roles. Often, the extent of individual responsibilities and mode for verification of their compliance, are not properly defined. In some instances’ delivery occurs as compounding of many entities, where the individual share of responsibilities need not match with the physical scale of contribution. Compounded entities do not automatically offer a comprehensive assurance. Here all individual assurances must be assimilated into a comprehensive assurance which then must be transmitted to the owner or operator of the project.
Creating – Providing own Guarantees : Dynamic Users employ raw materials (materials, parts, components) in forms and conditions beyond the original manufacturers’ provisions. Guarantees provided by the original manufacturer for the few definite end-uses are rarely of any help for dynamic users. Even where materials are employed in the manner prescribed by the original manufacturer, the output process could make it impossible to relate a particular inadequacy to a certain material or procedure. People who assemble complex entities cannot hope to dilute their responsibilities even by involving people like suppliers of materials, etc., System creators must evolve their own guarantees.
Comprehensive Guarantees: In some jobs several vendors come together to a site, and create a System. Designers are not equipped to check or test run the system, or in such instances the system is not completely verifiable. Often there is no Master Agency to assure that the system so assembled will function according to the parameters set by Designers.
Owners (of buildings, structures and systems like ships, aircraft) however, need a comprehensive guarantee to assign the operations and maintenance to agencies concerned with working of the whole entity, such as Insurance companies, Safety (fire, security) Engineers, System Operators, etc.
Processes required for Comprehensive Guarantee to materialize: Specifications for Turn-key Jobs invariably include ways and means for assimilating and interpolating individual guarantees into a composite form for the individual part buyers or users. Specifications are also provided for appointment of third party agencies to manage the guarantees and warranties for the life cycle of the entity. Such additional mechanisms provide an uninterrupted cover for all the resultant liabilities and an operandi for the management of risks thereof.
Lloyds Register of shipping: Lloyds is one such organization that began in 1760 in London, It provides standards for construction and maintenance of merchant ships, and provides necessary technical help. Shipping agents, governments, bankers, insurance cos all depend on the certification provided by Lloyds.
Contingent liabilitiesare commitments that may give rise to a cost as a result of a future event. They often result from indemnities, guarantees, warranties and certain liability caps in contracts. Contingent liabilities are generally used to allocate risk between parties to an arrangement. The Commonwealth’s policy is that risk should be managed by the party best placed to manage it.
A liability account that reports the estimated amount that a company will have to spend to repair or replace a product during its warranty period. The liability amount is recorded at the time of the sale. (It is also the time when the expense is reported.) The liability will be reduced by the actual expenditures to repair or replace the product. Warranty Payable or Warranty Liability is considered to be a contingent liability that is both probable and capable of being estimated.
25 GUARANTEES and WARRANTIES –part of the lecture series DESIGN IMPLEMENTATION PROCESSES
In any venture risks of under-performance, non-performance exists. These are due to mis-match with the expectations, circumstances and inadequate foresight and care during planning, execution and operations of projects.
Theliabilities in ventures manifest, at many different levels:
● Designers’ Liabilities: Project conceiver, planner or designer, are all liable for the inadequacies of conception resulting in poor definition of performance requirements, for having inadequate processes of verification for the offerings of the contractor or vendor and for establishment of operations mechanisms that is ineffective and lacks coordination. Designer’s take-on liabilities of sub-consultants, by agreeing to work with under-qualified experts.
● Contractor or Vendor’s Liabilities: Contractors’ or Vendors’ liabilities are more defined and so always restricted, in spite of all-inclusive clauses that may have been integrated in the terms of contract. The liabilities of the contractor generally relate to correcting the defects or complete replacement. The liabilities may also include making good the loss of profit and loss of opportunity during the period of inadequate working. In some conditions it may include the cost of misuse of materials, site facilities and loss of life and damage to other properties.
● Operations’ Liabilities:Liabilities arise from the operations of the project or system. Designers and Contractors usually preempt such situations with appropriate provisions in the contractual relationship with the client. Operations specifications, in recognition of such situations provide for setting up of appropriate Risk Management Systems. A risk management system recognizes the role of regular maintenance. Guarantees and warranties help in diluting the level of apparent risks and thereby reduce the Cost of Risk-Management (insurance premium).
● Circumstantial Liabilities are mainly from external conditions like, disasters, calamities, political situations, changes in law, rules, perceptions, trends, fashions, etc. Some of these are natural and involve designers for inadequate perception and provisions. But other external liabilities depend on political, economic and social changes, and so many not attach a designer.
Liabilities for designers arise from what they professionally deliver. These include specifications, observations and supervision of a job. The specifications include 1 Drawings, Graphical representations, 2 Literary or oral explanations, 3 Models, samples, surrogate representations 4 Formal or tacit acceptance of happenings related to design.
Quality of Expression in Specification Writing: Writing Specifications is the most important way of facilitating a product or service. Specifications writing is an extended activity of contracting, so here too all the contract fundamentals are strictly followed. As per the natural law ‘a contract has to be enforceable, and whatever is specified must be doable. Specifications cover all valid and essential requirements of the job. A major danger in writing specifications is to include unnecessary information. So choosing, what to exclude is as important, as choosing what to include. Specifiers (Designers) must eliminate any requirement that adds no value to the Product or Service being acquired. The Specifier (Designer) must state clear conditions in a complete language, and yet remain brief.
Defects in Specifications and Liabilities: Very few specifications are totally free from defects. As a fundamental principle of law, a specifier (Designer) is responsible for the consequences of the specifications. Designers usually put in a disclaimer (in the contract with their client) for errors found in their work. The Insurance companies that cover the designers for Professional Liability (Professional Indemnity Insurance) insist upon it.
Most of the specification writers (Designers) incorrectly presume that their text of specifications is read and interpreted by comrade technocrats only, with whom they share similar experience and mind-set. During a dispute specifications are, however, more attended by non technocrats like the administrators, lawyers, jurors and judges.A contractor interprets the specifications, as long as the interpretation is commercially reasonable (an earning proposition).
The Notion of Deconstructionism: A French philosopher, Jacques Derrida originated the Notions of Deconstructionism. It is a whim of finding alternate interpretations of text. He contended that the meaning of a text is dependent on the context in which it is interpreted. All writings in some degree can be interpreted differently from what was intended. Deconstructionism doctrines, from Jacques Derrida and his colleague Michel Foucault, were a rage in many universities during the 1980’s. A quotation from Thoreau, ‘The mass of men lead lives of quiet desperation’ was attacked by a feminist deconstructionist in words like: ‘….. real intention was to say that most women lead lives of noisy elation.’ Here the writer’s unintentional gender-specific wording was interpreted differently.
Faulty Specifications and a Contractor’s Attitude: A contractor works with sheer sense of profit, and so deals with faulty specifications in any one of these ways:
1 A contractor charges by doing the prescribed work according to the personal interpretation.
2 demand extra for undoing what was done
3 charge for redoing the job according to the corrected interpretation.
1 a Contractor may refuse to execute the work causing delay, or
2 take a legal recourse on the grounds of impossibility of performance or commercial impracticability.
Specifications and Enforcement: A neat contract is one where things are delivered for consideration, but strictly in a one-way transaction. However, contracts are very complex. Certain jobs require clients to provide information, materials, equipments, facilities or services to the contractor (as per the terms of a contract or job specifications), and an obligation is incurred. Even if such things are offered with or without a return consideration, the contracting parties get tied up in the Reverse Transaction. A client, failing to deliver as promised, takes the blame for missed schedules and cost overruns. Specifications causing such Reverse Transactions are prone to enforcement difficulties.
Accuracy and completeness of Contract Specifications: A Contract is in force the moment it is signed, or dated to be effective. Once a contract comes into force, any thing has been left-out, or not properly defined, can be only corrected through a Negotiated Supplementary Agreement. A Contract and Specifications must not leave out any aspect, as something to be agreed or determined later on (e.g. a clause like: plastic paint of x quality, but colour shade to be approved later).
In design offices specification-writing is a last moment compilation, and as a result it is common to see specifications of items that do not exist, or have been eliminated from the project. Specifications of only intended items and required quantities of work should be provided to the contractor. Otherwise, the bids will reflect the necessity of being prepared to handle Intended items and Quantified work.
Holistic Products and Site Assembled Systems: Job assignments for Structures, Architecture, Interior Design, etc. consist of both, Holistic Products and Site Assembled Systems. It is often easier to handle Holistic Products, fully or substantially through Performance Specifications. However, Site Assembled Systems inevitably have some form of Design Specifications.
Specifications and Fair Trade Practices: Avoid specifying a particular product, agency, tool, equipment, or a patent process. Favouring one, to the exclusion of others would mean Unfair Trade Practice. It is a good business sense to encourage competition to achieve better prices and quality. Competition also provides optional and reliable sources of supply. Mentioning a particular product, provides an unintentional warranty of its suitability for the purpose. It is better to confine Specifications to Requirement Statements.
Property Disposal: When Writing Statements of Work, the Contractor must be told How to dispose of residual materials, garbage, sewage, emissions, etc. Such Disposal Procedures have to follow the local regulations, often at cost. The liabilities arising out of compliance and the cost operations need to be specified. If the residual materials are to be handed back to the client, then handling and storage must be specified. If disposal of such items is likely generate an income, who takes the money must be mentioned. The Tax liabilities of expenditure, income generated, or sales done for disposal, also requires clarification.
Valid Claims: A Designer and Client realize shortcomings of the work being executed, and request alterations or corrections. Such changes are not executed unless formally requested. The cost of such constructive changes is to be paid by the client and is considered a Valid Claim. Contractors also make mistakes. A contract specifies modalities for notifying mistakes and what is considered to be improper communication of information or reportage by the contractor. Contracts also list modalities for corrective action and settlement of costs.
Language: Contract languagemust be simple and for that reason sentences should be short. Long sentences do not provide any sensible meaning. Throughout the document for the sake consistency and even at the cost of creating dull and a simplistic write-up, use the same words, phrases (rather than exploiting a thesaurus). Use category numbering system and avoid inter-document referencing such as ‘see xxx page, ref to yyy sub item, see above-below’, etc. Avoid acronyms, If must, use the commercially known abbreviations, and provide a reference index with expanded meanings. Avoid ambiguous words, or phrases that reflect more than one meaning. Refrain from phrase constructions that due to their sequence of placement, context or grammatical relationship could be interpreted differently. Conflicting Requirements often result from using totality words (such as: all, always, never, every, and, none, etc.) in statements, when something else in another sentence makes an exception to the totality.
Writing in Passive Voiceis always superior. The object of an action gets precedence and thereby the required special attention. In specifications the emphasis must rest on the product being described. It also removes the mention of the actor. Government servants favour passive voice because it does not require the mention of the actor, and thus avoid the responsibility. Avoid using gender nominating words like he, she, his, her, him, man, men, woman, women, etc.
Grammatical Errors:There are three levels of grammatical errors. At primary level such errors do not affect the meaning being conveyed. (X ate less apples than Y vs. X ate fewer apples then Y). At next level the grammatical mistake renders the sentence totally meaningless. Such errors can be corrected through meticulous proofreading. But the most dangerous grammatical blunders are those that alter the intended meaning of the expression, to something different. These get passed over by most literary proofreaders and software like word processors’ grammar checks. Such mistakes can only be checked by an expert Specification Writer, or a Seasoned Contractor. The last levels of errors are most exploited by a lawyer in case of a dispute.
11 LIABILITIES –part of the lecture series DESIGN IMPLEMENTATION PROCESSES
Design professional and Finance: A designer needs to involve own-self where financial viability of a project is discussed. For this designer is expected to have some understanding of basic finance terms. Some of the documents like project reports, estimates, schedules, invoices, etc., generated by the designer must meet the requirements of an accounts department of clients.
Some terms of finance are explained here > Capital, Working capital, Investments, Expenditures, Return, Interest, Dividend, Money, Wealth, Assets, Depreciation, Value, Cost, Price, Costing, Valuation, Cost-based fees, Value-based fees, Cost-plus fees, Managing clients’ money.
Capital is any amount that is spent for creation of wealth in a business. It includes all possible material, non-material, and human inputs. There are two forms of capital. Money, is a fluid and intangible form capital that is used as investment. The other capital is in the form of physical things such as: buildings, machinery and equipment employed for production of other goods and services, talent and experience, i.e. wealth.
Capital Creation occurs through, personal savings, borrowed from some source with attached obligations, or one that can be availed of by selling, renting, transferring in any other manner, whole or part of any tangible or non tangible property. Capital can be in cash, rights (ownership, tenancy, membership, citizenship, patent, copyright), abstract things (prestige, goodwill, expertise, knowledge, skill, information), etc.
Capital or the advantage out of it, are primarily used in creation of assets like fixed assets. Other uses include investment for the purchase of inputs, rents, etc. till an output is readied: working capital. The income earned by capital is profit.
Types of Capital: Capital comes as debts or borrowings, and must be repaid intermittently or in future, as Interest. Capital also comes as participatory investments in the form as equity which may not involve a direct obligation to repay the funds, but requires compensation in the form of a dividend.
● Fixed capital is usually defined as that which does not change its form in the course of the process of production, such as land, buildings, and machines.
● Circulating or Working capital consists of goods in process and operating expenses, raw materials, and stocks of finished goods waiting to be sold.
Return on Investments:Interest and Dividend: Investment is any sum that is not used by a person in buying assets but allowed to be used by others for the same purpose. The other party provides some return for the sum allowed to be used for such a purpose. Generally investments are arranged with a fixed rate of interest, but sometimes these are linked to rate of inflation, risk perception, period of borrowing, etc., often called a floating rate of interest. Compared to these when a lender agrees to share the profit and / or loss (but may not participate in matters of other party’s affairs or business), called a dividend. The dividend is dependent on the share of profit being generated from the investment, so it is uncertain and risky, but provides greater advantage.
Assets are resources with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. An asset is a physical or non-tangible entity with some value of sale, purchase or even possession. Normally we procure entities, with some value now or in future. To ‘own’ here include rights of exclusive possession (traditional ownership), rights of utilization (lease or rent), and other rights (visitation, guardianship).
Assets are capital: ‘It is any entity formed out of capital, and any entity that can be converted back as capital’. In account books, such assets are accounted as capital. Projects on completion become physical assets for the clients. Assets, in economics are stocks of resources that are used for production of goods and services. In classical economics there are three factors of production: Assets, Labour and Land.
Design Practice and relevance of Value and Cost : Design practice includes dealing with works of art, artefacts, craft pieces, and many other precious things. It involves identifying objects, judging their true worth, acquiring, producing and sometimes even disposing off such articles. When a designer helps in handling such precious entities, the benefits accruing to the client are several times more than the cost of creation or acquisition. It is very important for a design professional to be able to differentiate between the cost and value.
Cost is the amount of price (money or something else) paid to buy, or produce a thing. Cost of buying includes the cost of production and cost of delivering the thing to the location of use. It also includes any costs of financing the purchase. Cost of production is little more complex, as it is composed of elements such as: cost of materials, labour, and a proportion of the costs for the capital investment required to produce the good or service. Certain costs like rent (for plant, equipment, buildings etc.) remain consistent, no matter how much one produces, and are commonly referred to as the overheads or fixed costs. The variable costs are inputs like materials and wages, these vary according to how much is produced.
When the product is unique or first ever, two categories costs are recognized: Primarily labour and materials’ costs are considered, whereas average overhead cost, predetermined for some production volume are added. However if the product is reasonably known, the overhead costs are actual and exact.
Costing (cost finding) is a tool to derive the cost of a product, providing a service, performing a function, or operating a department. Some of these are historical facts or historic costs –How much did it cost? -while others are predictive or budgetary costs –What will it cost? Cost has relevance primarily to the person, who wishes to acquire or dispose off the item. But often a person to assess the ‘value’ of an object’ wishes to determine its worth through the costing. Cost of a product is the total expenditure (cost of raw materials, labour, rent for plants, and producers’ profit etc.) incurred to produce or procure an item, or its exact replica. Costing can be conducted through two routes: Cost analysis and Rate analysis. Cost analysis and Rate analysis have very thin differentiation, and so some consider them to be the same.
Cost analysis takes into consideration all factors that form an item or service. Cost analysis is more effective, for whole items, that is when an item is at a design or conceptual stage, and its parts have not yet been perceived. Yet it requires fairly clear perception of the system. Unless external conditions change, a product of cost analysis is specific, fairly stable, and may not need frequent revisions.
Data Input for Costing
Cost of materials, including cost of royalties, taxes, mining, procuring, producing and all those expenses required to convert the materials into a utilizable raw material.
Cost of materials and other inputs required to effect a service.
Cost of labour required to modify the materials, assimilate into a product, to transport, store and protect it, market it and in some cases trial run it.
Cost of labour for services such as performing, supervising and providing required assurances for the service.
Post production costs are amounts paid to launch a finished product or services in the society, such as: royalties, cess, taxes etc.
Cost of rents or hire charges for plants, tools, equipments to manufacture, erect, install, testing, test operating, transportation, etc.
Expenditure for risks and responsibilities associated with the product generation, installation, operation and maintenance, and conduction of the service.
Cost of investments on resources that are tied up,till about a utilizable product delivered or service is rendered and paid for.
Cost of other overheads such as cost incurred for managing the setup for procurement, production, testing and marketing.
Rate analysis is comprehensive application of various costs (arrived through cost analysis). Unlike cost analysis, the rate analysis takes into consideration the optimum costs of production or supply (economics of volume, batch sizes, packing unit), wastage, residues, etc. External conditions affect a rate, extensively and often unpredictably. Costings made through rate analysis need to be continuously improvised.
Application of Rate Analysis : Items that have not been well detailed, or vaguely or partially conceived, various cost parameters like cost per unit of length, area, volume, or unit of the entity derived from the known situations, are applied. Often cost of a known thing is considered a typical rate and applied to nearly similar things, with accommodation of the variations, as plus or a minus factor. Costing done through rate analysis provides a generalized picture. Rate analysis is preferred for task-based items (assignments that have universal identity).
Value : Designers often help their clients to acquire or dispose off entities in their completely prepared form. When the transaction originates at producer’s end, it is little above the cost, at a price. Price, reflects the value a producer attaches to the entity. Later transactions may not in any manner relate to entity’s cost.
For a thing to have a value, it must be transferable. A latent value becomes potent when it is perceived that someone needs the entity in some time and space, for a utilitarian or hypothetical purpose. A demand for a perishable commodity, if does not occur within its life span, is irrelevant. Similarly demand for something in a far off place cannot be satisfied, due to transportation hazards and handling problems. Air has a lot of utility but is not scarce. Rotten eggs may be scarce, but hardly have any utility. Friendship is very useful and scarce, but is not transferable or marketable.
Historic cost of creating a painting may be few drops of colour, a canvas and artists’ few moments. But once the fact is accomplished, the painting gains a very high value due to its extra ordinarily high relevance to the society. Relevance of a product in terms of its utility is (more) likely to degenerate over a period of time, but its value may appreciate or depreciate depending on its relevance to the owner or the society.
Price and Value : Prices are effected in money. Prices go up or down depending on the fall or rise in the (universal) value of the money. Any change in money (monetary value) affects the prices of all things across the board. Value of a thing, however, is specific. There cannot be a general fall or rise in value of all things. Value of a thing goes up, when we can acquire or aspire for more or superior things in exchange. Value of a thing goes down, when we can acquire or hope for less or inferior things in exchange. Value is relative, referred in terms of something else.
Value of a thing, cannot be always measured in money. Value has many different connotations, typically, it has relevance in terms of, emotions, remembrances, associations, ageing, maturity, heritage, rarity, ecological, environmental, social, etc.
Valuation, in functional sense, is done to determine what one would gain by acquiring, or forgo by disposing the item, but not necessarily doing so. Value of a product means an addition or deduction to wealth, Cost at the moment of transfer may or may not reflect the value of an item, but it helps in a better judgement of the value.
A rare painting or an antique may have an indeterminable cost, but will have a probable value. Value could be several times more or less than the actual cost of the item. Value is considered to be the true worth of an item, more lasting, but not necessarily reliable. Cost and price are very realistic and reliable, but not always representative of the true worth of the item. Both, perhaps, are required to gain a full insight of the situation.
Monetary versus Non-Monetary Valuations. Monetary valuations are not very different from costing exercises. Value of a thing, cannot be always measured in money. Though here utility, desirability, scarcity, availability and marketability etc. of an item are assessed in monetary terms rather than market equivalent costs of such items.
Valuations of non-monetary type are made to check adherence to values, customs, traditions, ethos, rules regulations, laws, etc. Greater adherence to these issues results into higher value realization for the product. Often negative or repulsive aspects of an entity, such as Hitler’s memorabilia, black magic tools, due to their rarity, invite a connoisseur’s favour. Non-monetary valuations have a relevance only to people who are concerned with it in some way. Non-monetary valuations based on one aspect or few concerns are not very useful, desirable, or even reliable. Non-monetary valuations based on too many aspects are not comparable, so must be scaled into some economic or monetary component. These makes, a valuation very complicated process.
Costing versus Valuation: Costing is a logical (mathematical) process, and any technically proficient person can carry it out. Costing process must always remain justifiable, and requires many exact inputs, including latest market costs etc. Valuations, however, involve many hypothetical judgments, are very subjective, and so may not seem rational. It is the experience of the valuer that imparts some degree of objectivity and also reliability to the valuation. Valuation on the other hand is a subjective judgment, and no explanations may be asked for.
Costing helps a designer in planning, budgeting and auditing the expenditures. Valuation is used to confirm or justify expenditures, indicate non monetary savings, and to convince a client for quandary options.
Design Practice and Cost Determination Methods: Designers choose entities, increase or decrease their usage by predicting the costs. Designers develop their own cost determination methods, appropriate for the jobs they handle, and for types of items specified in their projects. Input data like market rates for materials, parts, components, labour etc. are continuously updated or sought as and when estimates are to be prepared. Updating feedback is also available through the historic estimates conducted on completion of a project.
In design offices predictive cost analysis is made through Rate analysis. Average prices of all commonly used materials, operations, etc. are collected routinely, reformatted and stored. These are presumed as standard rates, and form the basis for the cost analysis. To simplify the process of cost analysis, number of items and their individual rates or prices are reduced by approximation (through definition of a factor for variation) in quantity and quality.
Routine jobs and jobs with substantial intellectual effort : Routine jobs have a determinable cost (and by adding a customary margin of profit, etc. one can derive the price). However, jobs with substantial intellectual effort accomplish more than the cost of implementation. So, dilemmas occur, should one charge a professional fee on the total cost of the job, or value accruing out of the job? Authors of creative efforts must know how to value their accomplishments, and thereby demand a fair compensation for it. Designers need to know both the cost and value of their professional services.
Cost versus Value for Designers : The understanding of Cost versus Value of an entity helps a designer at TWO distinct levels:
1 Determination of Fees: Cost-based, Value-based, Cost-Plus
2 Helping a client for the value-assessment of their possessions.
Cost-based Fees : Design practice follows age-old traditions of Architectural practice. Jobs are generally executed by appointed contractors or selected vendors. These third party (away from the Architect and the Client) business entities present an invoice, which reflects the nearly true cost of the job. Architects base their fees on this foundation after adding certain percentage amount to account for miscellaneous expenses, (such as on power, water, etc.). Substantial part of Designer’s work follows a similar path.
Value-based Fees are charged for jobs like renovation, extension, addition, conservation, etc. that make substantial change to the existing environment, upgrading the commercial value, or advantages deriving out of it. A unique concept that costs very little to implement, provides a substantial benefit to the client. Should one charge a fee on the cost of a job or on the value of the completed job? Here determining an appropriate cost base for fees is very difficult.
Value Assessment of Possessions : On some sites there are pre-existing structures which are to be only reformed or reused. The design cost of continuing or protecting such structures is difficult to compute, and so must be value-based. Cost of works or supplies by third party vendors and contractors are accountable, but items supplied by the Clients from the existing stock are difficult to document. Cost of Retained Structures, Antiques, Curios, used in a project are often indeterminable, instead their values, if available need to be used. On sites where several Professionals operate simultaneously, exclusive authorship to a creation is disputable, so cost of a patent idea is disputable.
Cost Plus Fees : Fees for very complex jobs, or jobs that are unique, and without any precedents are very difficult to pre-define. A Client wishes to see the job properly done, and the Professional wants a guaranteed, but a fair amount of income. Such jobs are executed on Cost Plus Basis.
The office work of the professional and the site work of the project, both are executed in a very transparent setup. All the expenses at the Professional’s Office (salaries, stationary, conveyance, rents, service charges for equipments, etc.) and at the Project Site (on raw materials (stationary), wages, and salaries, rents for equipments, conveyance, postal and telecommunication charges, taxes, etc.) are well monitored, documented and audited. The Professional is then allowed a percentage over the Audited Costs.
Investments and Expenditures : Design jobs create assets through substantial investments, or are maintained at their optimum operational conditions through expenditure. Designers need to be aware if their decisions relate to ‘investment’ or ‘expenditures’ in accounting terms. Nominally assets are large physical entities with some life of utility, whereas small things, services, repairs, maintenance activities do not create assets and so are accounted as expenditures.
Depreciation : Assets once created lose their value, gradually over a period of time even while, being used, not used at-all, under-used, or over-used. Assets, also lose their value suddenly on sale or through accidents. The sudden reduction in the value of an asset is easy to note but the gradual diminution is often not perceptible, and is difficult to account for. The value degradation could be for external or contextual reasons like changed relevance. The value decline for intrinsic causes could be due to the reduced utility of the asset.
Dilution of Value :Normally dilution of value in an asset can be ultimately adjusted when a less useful object is sold off (at discounted value) or disposed off (at zero or debris value). However, in accounting procedures such loses are discounted on a year to year basis. Normally the income earning capacity falls due to increasing inefficiency arising from physical deterioration. Some assets like adornments go out of fashion very fast whereas electronics see technological obsolescence.
The gradual dilution of valueof an item occurs for many reasons:
Physical deterioration of the item affecting the possible benefit accruing out of it.
Availability of a similar product at a lower price (obsolescence).
Fall in value due to changed relevance.
Appreciation of Value of Assets. An upgraded or reconditioned item can once again achieve higher yields. Some items with associated values are considered rare, and become a treasure with high value. The value of a land is due to the location but more due to the circumstantial surroundings.
Some Methods of calculating the Depreciation
These methods or formulas are found in excel or other spreadsheets like programmes. There are many such methods but some basic-simple ones are provided here.
● Straight line method:The rate of depreciation is constant for the entire working life of the capital assets. This is based on three aspects, 1 assets’ cost, 2 the salvage or the book value of the asset at the end of assets’ useful life and 3 the period of useful life of the asset.
● Sum of the years depreciation, to be calculated: This is based on four aspects, 1 assets’ cost, 2 salvage or the book value of the asset at the end of assets’ useful life, 3 the period of useful life of the asset, 4 period for which depreciation is to be calculated.
● Double declining balance method: This method recognizes the substantial consumption of some assets’ service potential in early years. This is based on four aspects 1 assets’ cost, 1 period of useful life of the asset 2 salvage or the book value of the asset at the end of assets’ useful life, 3 period of useful life of the asset, 4 period for which depreciation is to be calculated.
Design Professionals deal with Money, to conduct own commercial organization (professional practice), and sometimes to help a client to implement a project. The second case like situations are rare (but occasionally do happen with small clients). Here a designer gets a free hand, to spend someone else’s money. In a professional practice, however, it is the management of these sums that provide great comfort to the client, but causes discomfort to the tax authorities.
Managing Client’s Expenditures for the Project: Designers can get involved in spending money for and of the client, knowingly and inadvertently. For managing project expenditures some precautions are necessary:
The ideal condition is one where the designer approves bills of expenditure and certifies the payment, client then arranges the payment.
Next option is to operate a joint signatory bank account. This must be operated in the name of client with client as the main operator, and the designer as the authorized signatory. Alternatively a single operator bank account, in the name of a client, but operated by the designer as the power of attorney signatory.
In case 2, a designer must avoid granting payments to own-self such as for professional fees or other chargeable amounts.
Client’s money (in any form) meant for the execution of a project must never be deposited in a designer’s personal account or design company’s account, even for a short duration transfer.
For case 2 (as above) All other transactions must be through cheques drawn to party receiving the payment, and no third party or bearer cheques. No self-cheques for cash withdrawal be made.
All payments to designer own-self, design company or their employees must be made with clients’ own signature on the cheque.
When a bank account as per 2 above, for project expenditure is operated, it is meant for expenditure on the project such as payments for labour, services, materials, other consultant’s fees, etc., but may not include payments for site rent and taxes. For the later, a separate clause must be added to the authorization deed.
The power of attorney or authorization must be for specific period (if necessary with provision for periodic renewal), but not with non-specific mention such as ‘till a project is completed’.
Avoid payments from such accounts that are like investment (including shares, bank deposits or bonds), or speculative spending.
All payments (by client or by designer as an authorized signatory) must be over invoices or vouchers made in the name of the client. Avoid accepting any invoices made in the name of the designer or designer’s company. Write cheques only in the name of the (suppliers, vendors, contractors, etc.) party who generates the invoice (to avoid third party payments).
Project Expenditure by Small and Large Clients : There are some basic differences how small and large clients (and corporate) manage their project expenditure.
● Small clients have the budgeted amount almost ready for investment, as if the entire sum is to be spent immediately, and in one lot. Projects, however small, consist of items that occur in phases, and so do the payments for them. If a designer takes care to prepare, a schedule of expenditure, in addition to the nominal schedule of estimates, a client can be advised on ‘When and What sums will be required’. By properly scheduling the purchases of independent systems to later part of the project one can delay the investments. Such delayed purchases also help in taking full advantage of guarantee and warrantee provisions, and also delay the expenses on risk management costs like insurance. Date of purchase also affects the amount of depreciation (a purchase made during the last few months before the year ends, qualifies for full year’s depreciation).
● Large and Corporate Clientsprovision money for expenditure as a strategy. They may arrange money for a project from different internal account heads, and also from outside sources like financial institutions. Outside borrowing have to be planned and sanctioned (committed), even before the project is launched. A service charge of 1 to 3 % is levied on the sums sanctioned (but not actually borrowed) as loan (in addition to the interest on the amounts as and when actually borrowed). For this reason loan sanctions, and consequently heavier borrowing are differed as much as possible. Stand alone or complete systems like ACs, elevators, etc. are procured, as late as feasible, but sometimes a little earlier to take advantage of depreciation accounting during a financial year. Such clients usually need not only an estimate but also a very detailed schedule for payments.
26 FINANCE –part of the lecture series DESIGN IMPLEMENTATION PROCESSES