Rise of Design Consultants

Should integrators worry or embrace the growing trend of homeowners hiring third-party design firms directly, then putting systems out for bid?

By Jason Knott
September 14, 2011
“Technology Architect” is a term that integrators may need to become familiar with as they start hearing it more. The label represents a growing breed of third-party design consultants who are being engaged by homeowners directly to design integrated residential systems, create a spec, then help put the systems out to bid for a chosen group of integrators to fight over.

In some cases, consultants are even selecting the integrator who is awarded the contract, and then staying involved as almost secondary project managers throughout the installation process on behalf of the homeowner. And for the most part, we’re talking about big-money, six-figure jobs.

The role of design consultants is somewhat controversial for several reasons. First, in essence, the design skills of dealers are being completely bypassed. Many dealers are turned off because they hear a giant sucking sound as they see design fees that they may have received going to another company. In general, these third-party design fees can be up to 15 percent of the total installation cost. On a $1 million job, that’s $150,000.

Second, some integrators are not wild about bidding against a spec at all, due to pricing issues as well as limitations in selecting products. Those are the main reasons many CE pros avoid the commercial market in general.

Third, most CE pros simply don’t like the idea having another company between themselves and the homeowner. In some cases, these third-party designers are the same companies that some dealers have used for many years (and continue to use) as valuable partners to help create their own system designs and write home control code.

So why are design consultants’ businesses thriving? One reason is that many consumers have become frustrated with the entire custom installation process where they receive confusing proposals from different integrators all using different equipment, which makes their decision-making difficult. That initial confusion breeds immediate distrust of their custom installation company - consumers wonder why certain pieces of equipment are spec’d versus others. Imaginations run wild of dealers receiving kickbacks or dusting off old product they have on their shelves for their job. Another reason might be that these specialist consultants are able to design better, more thorough systems, and thereby minimize change orders.

Consultants see their roles as very clear: they are acting as an advocate for the homeowner. They are designing the best solution possible, because 100 percent of their payment is the design fee. (Besides, many integrators don’t even charge for designs, but simply build the cost into their equipment margin.) Also, and importantly, integrators who bid on these jobs know they are 100 percent, no-questions-asked getting a highly qualified client since the homeowner has just shelled out significant money for the design. Finally, the installation itself is likely to go much smoother with many fewer change orders, because the design, construction documents, elevation drawings, etc., were not rushed together by the integrator himself.

So is this trend a sign that the residential market is heading further down the path of the low-bid, set-in-stone product specification that exists in the commercial world?

CE Pro spoke with several design-installation firms, who offered their take on why this is a growing trend.

What Do Consultants Do?
Bob Kranson of Axiom Design in Pleasanton, Calif., is not new to this realm. In fact, he has been doing design and software for homeowners for 20 years. At any given time, he has 20 to 30 jobs ongoing in various stages.

“All of my clients are homeowners,” says Kranson, who adds his large-scale systems typically include design, construction and software services. “Integrators are usually competent in one or more of those areas, but rarely in all three. And they are not likely to maintain proper margins in all three areas.”

Axiom’s primary roles as a consultant are to educate the customer about what technologies are available and the risks/rewards from each option, and to produce engineering documentation.

“I am just like an architect,” say Kranson. “Technology without a plan is more likely to become a science project versus a construction project. At some point, the custom installation industry has to realize that products are a commodity, and service is the differentiator. End-users are becoming more savvy about what they want and don’t want. Dealers need to recognize that their service is the value-add, not products.”

Mark Sipe of Prime Industrial Design only recently joined the consulting world. Sipe and his wife, Susan, run several companies in the custom installation space, including X-Spot, Abacus Prime Consulting and SalezToolz software.

Last year, Sipe was contacted by a long-time friend to manage the design and construction of a massive 28,000-square-foot, $20-million home in Paradise Valley, Ariz. The trials and tribulations of the job have been documented on cepro.com, as Sipe has faced budget issues, an intrusive homeowner and unforeseen problems - namely the architectural firm folding and the integration company being purchased. But through it all, the job is progressing, and Sipe sees consulting roles continuing to gain momentum.

“This is absolutely a growing trend,” he says, noting that he has recently been hired to oversee the technology implementation in a 180-home community in Mexico.

Firefly Design Group in Hollywood, Fla., has seen its revenues migrate from only 5 percent from homeowners in 2009 to 50 percent in 2011. In a six-week span this spring, the company awarded $7 million worth of homeowner-driven projects to integrators.

“Generally the people who are hiring us have already been through multiple integrators. It is usually not their first house with automation, and they are seeking an alternative,” says Ron Callis, president. “They use us because we are brand agnostic. They know I’m not trying to sell them product because it is sitting in my warehouse.”

The primary services Firefly provides are: discovery, design, construction documentation, bid management and construction management.

“We don’t necessarily design better systems than an integrator can,” admits Callis. “I’m just giving the client an experience that he desires. Meanwhile, the integrator is getting a job handed to them once they have competed with a couple other dealers. Firefly doesn’t make any percentage on those jobs. I have no stake in which integrator gets selected. All the bids are sealed and sent to the client [who is an architect in many cases.]”

Andrew Southern started his consulting firm - Andrew Southern Consulting in New York City - last year at the encouragement of multiple end-users he met at InfoComm. He said corporate end-users, including architects and MDU builders, were a bit scared of digital technology versus analog and they were looking for a security blanket. Consultants fill that protective role, he notes.

“My approach is to be an architect of technology,” he says. “Ideally, I will be the centerpiece of all the technology questions and help project manage the job to completion.”

Kranson says homeowners prefer working with consultants rather than with integrators directly on their system designs for several big reason: “It takes away the perception that whoever is designing the system has his hand their pocket and is trying to steal their wallet. Also, there is a very narrow gap on the pricing in the bids, because the scope is so well defined.”

Advantages for Dealers
Kranson says the biggest dealer advantage is that they will have “an objective design and complete mechanical connectivity in place. The proposal is no longer an estimate; it’s targeted. There will be fewer change orders — guaranteed. There will be fewer physical location changes, no cost overruns and no product omissions.”

The wide scope of bids is exactly what drove Southern to establish his firm last year. “Homeowners get such a wide range of costs from integrators that it creates a strange situation for them,” he says.

Axiom also puts the job out for bid on behalf of the homeowner after vetting a short list of dealers by analyzing best practices and their history. He targets three to four bidders in order to help him establish high and low bids. Callis targets five bidders for Firefly. Southern targets three to four bidders he knows, plus one “wild card” bidder that he does not know.

“I don’t want dealers to get frustrated and think they are never going to win a bid, so I can’t solicit bids from too many companies,” Southern adds.

For almost every proposal, Axiom is also hired — by the homeowner — to write the software code too, says Kranson. “This keeps dealers in their sweet spot by reducing their exposure to just the construction area. Dealers are not as thorough at writing software as we are and our designs are more comprehensive,” he says bluntly.

For Sipe, his specs are fluid; thus, it is less difficult to find an integrator who is familiar with every piece of equipment in the spec. For instance, if the integrator is skilled with 80 percent of the products, then the remainder has flexibility to change.

“The spec can be changed to match an integrator,” says Sipe. “The spec has been built mainly to find a price point and determine what is possible. Being the consultant, I know the margins that the integrators are working on. He is going to be less likely to overcharge me because I know. The bid will be fair and even. And once we have the integrator set on his margin, we are going to hold him to those margins.”

Callis agrees, noting that the “flagship products” (like control equipment) in a spec are locked in, but there is flexibility for products like TVs, Blu-ray players and other A/V sources. Often, if there is a long time between the spec and the start of construction, model numbers must change due to discontinuations. Firefly has had jobs in which the discovery phase alone was two years long.

Sipe adds: “In the commercial world, there are no protected lines. Any commercial integrator can get a product in a spec and install it. But no spec is perfect. There is always something that will need to be designed and engineered in the field. The integrator is the person who picks up those pieces, so it is really a team.”

Southern also lets integrators alter the spec, but they must make the case in a written document explaining the price difference, function and performance.
From an efficiency standpoint, Southern advises dealers to think about all the time-wasting questions they get from homeowners that will instead be fielded by the consultant. “No one is in a position to say no to a qualified client in this economy,” he adds.

Callis admits that dealers can be squeamish about the whole process. “Integrators really don’t like bidding against a spec, mainly because they like to get a job because they have sold the client and established a rapport. I get that. They feel threatened by the process,” he says.

But, like Kranson, Callis thinks the prospect of having the job run smoothly outweighs any drawbacks. “I believe that the main reason so many integrators have projects that do not go smoothly is because they do not spend enough time on the design and engineering phase. And they don’t spend a lot of time on that because they are typically not charging for it. If they are lucky, most dealers are maybe charging 1 percent to 5 percent of total labor costs for the design/engineering part of a job. In the commercial space, it is comfortably 10 percent to 15 percent.”

Callis says the only drawback from a business model standpoint for dealers is that they must change the way they compensate their sales staff. By using an outside designer, CE pros cannot, and should not, charge sales commission.

For dealers who complain about missing out on design fees, “I would say that in most cases, integrators are not ever charging for discovery, and rarely for design,” Callis says. “Integrators can actually conduct the discovery process on their own, but generally most integrators are focused on the bigger picture of selling hardware and installation services. For us, all we have to sell is our time and expertise. That is our focus. So when we sell design services to architects or consumers, they believe it. They want someone to hold their hand.”

Projects and Fees as High as 15%
A consultant is primarily going to focus on integrated systems that include whole-house control, lighting control, security, networking, etc. So far, with eight jobs under his belt, Andrew Southern of Andrew Southern Consulting hasn’t had a project less than $50,000. “I have a vision of doing smaller jobs, especially as people incorporate iPad as a controller and look to build their own systems.”

Southern bills a fixed price based on the projected time for the job. It typically runs about 10 percent to 15 percent of the total technology budget. One other interesting note: Southern says he does not typically spec high-margin product because he is looking for value for the client. That means few 50-point lines will be in these consultant-fed jobs.

Firefly’s typical fees equate to between 5 percent and 10 percent of the total job cost, depending on the level of documentation. If the company is only doing discovery and creation of a spec (no engineering docs), then it charges around 75 cents per square foot.

Axiom’s service continues all the way through the construction cycle if need be. The company’s fees, of course, vary on the system size and the extent of Axiom’s involvement. Bob Kranson of Axiom says he has done jobs from “$250 to several hundred thousand dollars,” but he says that cost is more than paid for via the elimination of wasted time/effort and installation glitches on the job.

Mark Sipe of Prime Industrial Design charges hourly for some services and a flat rate for others. The customer always knows what he is paying upfront.

“In general, I am going to help you get a spec, I am going to help you find an integrator, and I will take you to a designated point in the job,” he says. “Beyond that, you will pay more.”

Lack of Design Standards Will Inhibit Consulting
Besides the hesitancy of dealers to bid on these projects, there could be another hurdle to the unimpeded growth of third-party design consultants: lack of design standards.

Dave Tkachuk, president of veteran A/V design and engineering firm Symbol Logic in Burnham, Maine, believes that until the custom electronics industry adopts “a standard set of diagramming language and drawing standards,” the market for independent design firms will stall, even for “smaller, off-the-shelf designs like what architects use in the development of their construction plans,” he says.

“However, even after our industry has everything in place to support totally independent design-and-build firms, we may still require the support of each other’s work through close working relationships and solid communication as our skills continue to evolve.”

Symbol Logic strictly works for integrators, providing design and engineering documentation services as well as design symbols, templates and tools. Tkachuk says he has had no increase in requests for design services directly from homeowners in the past two years.

He emphasizes that no matter where the design originates, it must include proper design diagrams (floor plan layout and block diagrams) and engineering diagrams (wiring schematics, equipment rack layouts, and theater and room layouts).

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