The act or practice of using resources to the best effect.
Most architects are seemingly unaware of the concept of ECONOMIZATION which means “the act or practice of using resources
to the best effect” http://en.wiktionary.org/wiki/economization This is critical for both clients and society as Architects on behalf of their clients are the biggest consumers of the planet’s resources. It is crucially important therefore that an Architect is neither profligate, nor irresponsible with either a client’s budget, nor the materials and energy which go into building. Yet historically an Architect’s fees have been linked as a percentage of the clients construction costs – in effect rewarding architects with higher fees for higher expenditure. This does not work on several levels and in particular in relation to Architects fee bids – see fees below.

Typically construction costs are expressed as a rate per square foot, i.e £200/sq ft. and a Construction budget is determined as
follows:

B=R x S

Where B is budget; R is rate in £/sq ft; and S is size in square feet.
A simple example being a 1000 sq ft project will have a budget construction cost of £200,000 i.e £200,000 = £200 x 1000
It is a simple formula which helps clients determine costs and subsequently values, see below:
Construction Value
A projects value is similarly simply arrived at by the following formula:

V = S x E

Where V is estimated value; S is size in square feet; and E is the estimated value per square foot.
Assuming E = £800/sq ft value (e.g. say average North London House Price 2015)

Value = 1000 x 800 = £800,000

The profit is calculated by taking the costs away from the value, including fees, VAT and interest charges. For example using the above figures a 1000sq ft house costs £200,000 to construct and a further £100,000 in other costs, i.e. £300,000. The additional land cost is £100,000, giving a total of £400,000. This results in a gross pre-tax profit of £400,000 – apparently simple.

See “Property Developer’s Handbook” for further guidance.
http://www.amazon.co.uk/Property-Developers-Handbook

It is important a client understands not only how an Architects Fees are charged, but also the implications of fee discounts and construction cost over-runs. Using the above example:

11.04 charge say 10% of the £200,000 Construction Cost = Fee of £20,000

11.04 deliver on budget and the Total Cost = £220,000

Cynical Architects offers fee of 9% of the £200,000 Construction Cost = Fee of £18,000 (Happy Client?)

Cynical Architect then delivers the project at £230,000 (+15%) = Fee of £20,700 (Happy Architect)

Client Actually Pays £230,000 + £20,700, i.e. total cost = £250,700 (£30,700 more).

Clearly in this scenario the cheaper architect is incentivised to spend more to recoup the discount given to secure his fee, and the client in trying to reduce costs has incurred an additional cost of £30.7K. Or extended to a £1m Construction Cost = £153,500 cost extra.