The market for architectural services

Overview

• Architects face intensifying competition in the market for architectural services, which could challenge their compliance with professional standards.
• Disputes have become endemic in the sector, which could also undermine architects’ ability to discharge their professional obligations.
• Disruptive trends are also likely to fundamentally affect the provision of architectural services and could exacerbate current market dynamics.
• Compliance with the regulatory framework applicable to architects will enable them to overcome these challenges.
• Prioritisation of compliance with professional standards obligations will help to ensure that the quality of architectural services is maintained, the reputation of the profession is preserved, and the interests of clients and end-users are protected.
• There is a role for regulators and industry bodies to support architects in light of challenging market conditions. In addition, architects will themselves play a critical role in navigating the challenges arising from current market conditions.

A. Background

23. The construction sector globally and in Australia is a major contributor to economic growth.[1] It involves the development of a spectrum of small-scale and large-scale residential and non-residential projects and covers a broad range of services including planning, surveying, architectural design, engineering, structural construction, and painting and decorating.[2]

24. During the COVID-19 pandemic, the Australian construction sector experienced an unexpected boom due to government support for the industry, including through the ‘HomeBuilder’ program, which sought to encourage consumers to proceed with residential building projects.[3] However, data published by the Australian Bureau of Statistics in 2022 indicates a downwards trajectory in building and construction activity,[4] which is linked to a range of factors, including disrupted global supply chains, rising input costs, and falling business confidence.[5] The sector has also seen a recent spate of insolvencies of major construction companies.[6]

25. The current state of the construction sector in Australia will have impacts for all sectoral participants, including architects. Declining activity in the construction sector is predicted to translate into reduced demand and limited profitability for architectural firms.[7] In addition, fears have been expressed about the domino effect recent insolvencies of construction companies could have on the large number of contractors operating in the sector,[8] including architects who are facing increasing pressure as a result of various market forces that are outlined below.

B. Key issues

Architects face intensifying competition in the market for architectural services, which could challenge their compliance with professional standards

26. The market for architectural services in Australia is intensely competitive. Local market structures and ease of entry have resulted in a proliferation of mostly small companies with limited economies of scale.[9] Around 98% of architectural firms employ less than 20 people.[10] The industry’s largest firms account for a small proportion of industry revenue.[11] None hold more than 2% of the market for architectural services.[12]

Falling demand and downward pressure on fees

27. Demand for and revenue from the provision of architectural services is expected to decline over the next 5 years, as clients delay or cancel projects.[13] Falling construction activity has increased competition for the available construction projects and has placed downward pressure on fees for services.[14] Some firms have sought to reduce costs, which has contributed to decreasing wages and employment levels over the past five years.[15] The latest ‘pulse check’ of architectural practices around Australia undertaken by the Association of Consulting Architects (ACA) refers to a very ‘tight employment market’ coupled with concerns about staff well-being that are associated with exhaustion, fatigue and ongoing uncertainty.[16]

Vertical integration

28. Architects are also likely to face increasing competition from large, vertically integrated and multidisciplinary construction firms, limiting the ability of many architectural firms to raise prices for their services despite increasing input costs due to inflationary pressure.[17] These large firms can offer clients a ‘one-stop shop’, including project management, surveying, engineering, architectural and construction services.[18] The trend towards integration is a response to the preference of property developers to use large firms that can provide the range of services required to deliver a construction project.[19]

29. The increasing integration of the architectural sector in Australia appears to be in line with what has been occurring in the United Kingdom. The results of a survey commissioned by the Royal Institute of British Architects (RIBA) in 2011 – the UK RIBA Survey – reveal an unprecedented growth of integrated and multidisciplinary consultancies within the construction sector.[20] The report notes that these large conglomerates offer a more cost-effective and ‘business savvy package’ than typical architectural practices.[21] The report further suggests that medium sized-architectural practices are increasingly under threat from these conglomerates, which have the capacity to ‘swallow’ smaller firms.[22]

Building designers

30. Another source of competitive pressure for architects comes from other building designers, including draftspersons, who do not have the same educational background and qualifications as architects, are not regulated in the same way as architects, and are not held to the same professional standards. Nevertheless, building designers can perform similar services to architects (particularly architectural drafting) and typically charge lower fees.[23]

31. Building designers that hold themselves out as architects could be in breach of the ‘title offences’ contained in both the Victorian Architects Act and the NSW Architects Act, which prohibit representations and expressions that indicate a person is an architect without being registered as such.[24] They could also be found to have engaged in misleading and deceptive conduct in breach of the Australian Consumer Law.[25] Despite these deterrents, the ARBV and NSW ARB have been receiving an increasing number of complaints about building designers. It is apparent from those complaints that clients may not be able to easily discern the difference between architects and building designers, nor to understand the differences in the way they are respectively regulated.

32. The difficulty for clients to distinguish between architects and building designers may be linked to various factors. In the experience of the NSW ARB, some architects routinely fail to publish their registration numbers, including on their websites. In addition, under the NSW regulatory framework, the term ‘architectural services’ is defined as ‘a service provided in connection with the design, planning or construction of buildings that is ordinarily provided by architects’ (emphasis added),[26] which could give rise to ambiguity as to whether practitioners other than architects could also provide such services. Meanwhile, the ARBV has noted that confusion could arise from the fact that some practitioners who are not architects could nevertheless legally reference ‘architectural’ services in their title – such as the category of draftsperson registered by the Victorian Building Authority as ‘building design (architectural)’.[27]

Partial services

33. Engagement of architects for ‘partial services’ in the context of residential and non-residential construction projects is not uncommon within the sector. This approach towards procuring architectural services could pose further challenges for architects.

34. When partial services are procured, an architect may be engaged to develop the initial design, but the builder, other type of practitioner or client may progress the project without further input from the architect. Apart from the additional competitive pressure this can exert, engagement of architects on the basis of partial services could also expose architects to undue risk, particularly when the demarcation between the responsibilities of the architect and other parties involved in completion of the project is unclear.

Perverse outcomes that could arise from intense competition

35. Promoting competition is broadly accepted as being in the best interests of consumers because it can lower prices, create more choice, enhance efficiency and encourage innovation. However, competition that is too intense can lead to suboptimal consumer outcomes. Stucke (2013) refers to the ‘dark side of competition’, which can actually result in poor quality, exploitation of consumer biases and overall bad outcomes for consumers.[28]

36. The intense competition faced by architects in the market for architectural services could lead to perverse outcomes, such as unviable low fees charged for architectural services that do not reflect the actual work and time involved. As explained in the RIBA Journal (2021), ‘[t]here is a danger of a pincer movement as clients become alarmed at the rising cost of material and labour, so try to compensate by negotiating architects’ fees down’.[29] In such a context, there is a risk that consumer expectations are not met.

37. In particular, complaints data available to the NSW ARB indicates that, in at least some cases, there could be a correlation between low fees and adverse client outcomes, including delays, disputes and poor quality design. Nevertheless, there is no evidence demonstrating that intensification of competition in the market for architectural services is leading to these outcomes across the sector, nor that there has been a generalised adverse impact on architects’ compliance with professional standards. Further research could be useful in this context to identify and assess the actual impact of the intensification of competition in the market for architectural services on the delivery of these services and the compliance of architects with their professional standards obligations.

Disputes have become endemic in the sector, which could also undermine architects’ ability to discharge their professional obligations

38. Disputes within the construction sector are endemic.[30] Many have analysed why this is the case.[31] Love et al (2009) explain that disputes are the result of a complex interplay of causal variables.[32] One study undertaken by Kumaraswamy (1997) used data from construction projects in Hong Kong to identify ‘root causes’ – that is, underlying reasons, which, if eliminated, would prevent recurrence.[33] The root causes that were identified included:

• unfair risk allocation
• unrealistic time/cost/quality targets by the client
• adversarial industry culture
• inappropriate contract type
• unrealistic information expectations.

39. Despite the fact that the Kumaraswamy study was undertaken more than two decades ago, the findings appear to have ongoing relevance in the Australian construction sector today. Indeed, there is some evidence of a linkage between disputes in the Australian construction industry and the prevalent design and construct procurement model, which can lead to an adversarial culture and unfair risk allocation.[34] In a submission on unfair contract terms, the ACA (2014) noted that architects may be subject to unfair contractual terms that expose them to liability and impose additional burden in a marketplace that is already highly competitive.[35]

40. The issues facing architects that arise from procurement models,[36] an adversarial culture[37] and unfair risk allocation[38] are considered in more detail later in this report. Suffice it to note here that the success of a construction project critically depends upon well-functioning relationships between all participants, including building contractors and architects. Yet, these participants may have different ways of thinking, attitudes, practices and approaches to work and, often, divergent objectives.[39] For example, developers and contractors are incentivised to deliver large-scale construction projects at the lowest possible cost in order to maximise profit,[40] whereas architects are more likely to be motivated to deliver good quality architectural services not least because the regulatory framework governing their conduct requires them to do so.

41. The inherent tension that can arise between contractors and architects in the context of building projects needs to be considered in light of the relative bargaining position of these parties. The asymmetry in power, control and information in favour of contractors, particularly for large-scale projects, can limit architects’ options to resist the demands and expectations imposed on them by contractors. These dynamics are of concern because they could compromise the ability of architects to insist on best practice service-delivery and design and, at worst, this could lead to unsatisfactory outcomes for the client and end-users.

Disruptive trends are also likely to fundamentally affect the provision of architectural services and could exacerbate current market dynamics

42. In the coming years, McKinsey (2020) predicts that fundamental change in the construction sector is likely to be catalysed by factors including persistent cost pressure and evolving sophistication and needs of customers and owners.[41] Emerging disruptions within the sector include the development of new construction materials, increasing importance of sustainable design, and the automation and digitalisation of construction products and processes.[42]

43. McKinsey speculates that, while all participants in the construction value chain will need to contend with these disruptive forces, the impact is likely to be particularly pronounced for entities involved in engineering and design (among others) due to the commoditisation of some services they offer and the emergence of specialists for other types of services.[43] The UK RIBA Survey (2011) notes that, increasingly, specialist service providers are being engaged in place of architects – for example, in relation to cladding – and that this trend is likely to be exacerbated as architects seek to reduce their exposure to liability.[44]

44. Various disruptive forces are considered in more detail later in this report.[45] Here, it is simply noted that these forces are likely to intensify competitive pressure in the market for architectural services. For the reasons identified earlier in this chapter, there is a risk that this additional competitive pressure will create further challenges for architects when complying with their regulatory obligations and striving to meet the applicable professional standards. Clearly, in light of the current market conditions, architectural practices will need to employ new strategies to remain competitive and viable and able to thrive.[46]

C. Findings

45. The analysis of the market for architectural services in Australia indicates that architects face intense competition, adversarial relationships and disruptive forces. These developments are not new. However, it is their confluence and likely intensification over time that are a cause for concern.

46. While there is no evidence to indicate that market forces are leading to a decline in compliance with professional standards by architects across the sector, these forces will undoubtedly create challenges for architects in providing architectural services, which are explored in greater detail later in this report.

47. The regulatory framework applicable to architects will enable them to overcome these challenges, notwithstanding the existence of adverse market conditions. More specifically, compliance with regulatory obligations will help architects to deliver positive outcomes – not just for the architect, but also for clients and end-users. Prioritising compliance with professional standards obligations will help to ensure that the quality of architectural services is maintained, the reputation of the profession is preserved, and the interests of clients/end-users are met.

D. Regulatory role

48. The ARBV and NSW ARB have a range of regulatory initiatives that are currently in place to support architects to comply with their regulatory obligations, including compliance with professional standards. They include the provision of educational material and engagement with architects to ensure that these obligations are well understood. These initiatives will continue in the future and, where necessary, will be informed by current market dynamics.

E. Role of other stakeholders

49. Architects will play a critical role in navigating the challenges arising from current market conditions. It will be important for architects to take stock of the various forces at play, identify how professional standards can be maintained notwithstanding those forces by focusing on the factors that are within architects’ control, and adjust operations and practices accordingly.

50. Specific actions that architects can take include putting measures in place to assess and respond to risk, particularly in the context of projects and procurement models that could give rise to an unfair allocation of risk. Architects should ensure that their registration status, and the implications of registration for the provision of architectural services, are made clear to prospective clients so that they can better differentiate between architects and building designers. Architects should also ensure that their fees are at a level that support the provision of quality architectural design services.

51. Industry bodies could also play a role in informing clients and end-users about the differences between architects and building designers, particularly the services that they respectively provide and standards that they must meet. They could also provide educational material and seminars to support architects to better understand how to effectively mitigate risk in light of current market conditions.

F. Implications and recommendations

G. Areas for further research

[1] Atradius, Market Monitor: Focus on Construction Sector Performance and Outlook (2020), at p. 17. See also J. Sharkey, P. Greenham, M. Bell, W. Jocic, J. Korolkova, & D. Hu, The Health of the Australian Construction Industry: Research Report (2020), at p. 1.

[2] Australian Industry and Skills Committee, National Industry Insights – Construction accessible at: https://nationalindustryinsights.aisc.net.au/industries/construction.

[3] See Fact Sheet on the Home Builder program accessible at: https://treasury.gov.au/coronavirus/homebuilder.

[4] Australian Bureau of Statistics, Building and Construction accessible at: https://www.abs.gov.au/statistics/industry/building-and-construction.

[5] IBIS World, Architectural Services in Australia: AU Industry Report M6921 (2021), at p. 12.

[6] R. Clun, ‘Construction industry faces “raft of insolvencies” without assistance’, The Sydney Morning Herald (25 July 2022) accessible at: https://www.smh.com.au/politics/federal/construction-industry-faces-raft-of-insolvencies-without-assistance. See also ASIC insolvency statistics accessible at: https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/.

[7] IBIS World, n. 8 above, p. 4.

[8] M. Bleby, ‘Cash flow a looming risk for builders as insolvencies rise’, The Australian Financial Review (17 August 2022) accessible at: https://www.afr.com/property/commercial/cash-flow-a-looming-risk-for-builders-as-insolvencies-rise. See also J. Coggins, B. Teng, & R. Rameezdeen, ‘Construction insolvency in Australia: Reining in the beast’ (2016) 16(3) Construction Economics and Building, pp. 38–56.

[9] McKinsey & Company, The next normal in construction: How disruption is reshaping the world’s largest ecosystem (2020), at p. 5.

[10] IBIS World, n. 8 above, p. 35.

[11] Ibid.

[12] Architects Accreditation Council of Australia, Industry Profile: The Profession of Architecture in Australia (2018), at p. 7.

[13] IBIS World, n. 8 above, p. 4. See also Architects Accreditation Council of Australia, n. 14 above, p. 7.

[14] IBIS World, n. 8 above, p. 9.

[15] Ibid. p. 13.

[16] ACA, ‘Navigating Practice Two Years In – Preliminary Findings’, ACA Pulse Check No. 6, 22 August 2022.

[17] IBIS World, n. 8 above, p. 9.

[18] Ibid. p. 19.

[19] Ibid. p. 14.

[20] C. Jamieson, 'The Future for Architects?', A report commissioned by the Royal Institute of British Architects (2011), at p. 22.

[21] Ibid. p. 22.

[22] Ibid. pp. 22, 25.

[23] IBIS World, n. 8 above, p. 23.

[24] See Part 2 of the Victorian Architects Act (Prohibited conduct) and Division 2 of Part 2 of the NSW Architects Act (Offences relating to the practice of architecture), which contain the title offences.

[25] In a matter before the NSW Civil & Administrative Tribunal in 2022 (Application to the Tribunal concerning Adrian Di Francesco and Stephanie Di Francesco – Sydesign Pty Ltd), NCAT found that the website of the respondent design firm contained an implied representation that plans drawn up by the firm would be drafted by, or under the supervision of, a registered architect and that the client in that matter relied on such a representation to enter into the contract. However, the firm was not listed on the NSW List of Architect Corporations and Firms nor were any employees on the NSW Register of Architects. The firm was found to have engaged in misleading and deceptive conduct in breach of section 18 of the Australian Consumer Law and ordered to pay restitution to the client.

[26] Section 4 of the NSW Architects Act (Definitions).

[27] These building practitioners are regulated by the Victorian Building Authority (VBA) under the Building Act 1993 (Vic). The categories of draftspersons regulated by the VBA are listed on the VBA’s website accessible at: https://www.vba.vic.gov.au/registration-and-licensing/building-practitioner-registration/draftsperson.

[28] M.E. Stucke, ‘Is competition always good?’ (2013) 1(1) Journal of Antitrust Enforcement, pp. 162–97.

[29] A. Mirza, ‘The fee squeeze: sector dictates whether your fees will rise or fall’, The RIBA Journal, 24 November 2021 accessible at: https://www.ribaj.com/intelligence/architects-survey-shows-fee-squeeze-cost-monitoring.

[30] P. Love, P. Davis, J. Ellis, & S. On Cheung, ‘Dispute causation: identification of pathogenic influences in construction’ (2010) 17(4) Engineering, Construction and Architectural Management, pp. 404–23, at 405.

[31] Ibid. pp. 406–8.

[32] P. Love, P. Davis, K. London, T. Jasper, ‘Causal modelling of construction disputes’, in Twenty-Fifth Annual Conference 2009 Sept. 7-9 Albert Hall Nottingham, (ARCOM, 2009).

[33] M.M. Kumaraswamy, ‘Conflicts, claims and disputes in construction’ (1997) 4(2) Engineering Construction and Architectural Management, pp. 95–111.

[34] Love et al, n. 33 above, p. 405. See also J. Sharkey et al, n. 4 above, pp. 28–9.

[35] Association of Consulting Architects, ‘Submission to Unfair Contract Terms and Small Business Consultation Paper’ (2014), at 1.

[36] See Chapter 4 of this report (Procurement models).

[37] See Chapter 5 of this report (Building defects, professional standards and compliance culture).

[38] See Chapter 7 of this report (Risk, liability and insurance).

[39] N.A. Ankrah & D.A. Langford, ‘Architects and contractors: A comparative study of organizational cultures’ (2005) 23(6) Construction Management and Economics, pp. 595–607, at 205.

[40] M. Hardie & S. Saha, ‘Builders’ Perceptions of Lowest Cost Procurement and Its Impact on Quality’ (2012) 9(1) Construction Economics and Building, pp. 1–8.

[41] McKinsey & Company, n. 12 above, p. 5.

[42] Ibid. p. 5.

[43] Ibid. p. 3.

[44] C. Jamieson, n. 23 above, p. 24.

[45] See Chapter 8 of the report (Climate change, sustainability and the transition to net zero) and Chapter 9 (Automation, digitalisation and innovation).

[46] J. Bruen, J.P. Spillane, J. Bradley, & T. Brooks, ‘Managerial representations of achieving a competitive advantage in architectural practices: a UK perspective’ (2022) Archnet-IJAR: International Journal of Architectural Research.