Every owner-architect agreement needs to answer one critical question: how does the architect get paid? The answer shapes the project's risk allocation, cost predictability, and the incentives driving both parties.

Four primary compensation methods exist in architectural practice. Stipulated sum (also called lump sum or fixed fee) sets a flat price for defined services. Percentage of construction cost ties the architect's fee to what the building costs to construct. Hourly billing charges for actual time spent at agreed-upon rates. Cost-plus (also called cost-plus-fixed-fee) reimburses the architect's actual costs and adds a fixed profit component.

Each method shifts risk differently between the owner and architect. A stipulated sum puts cost risk on the architect: if the work takes longer than expected, the architect absorbs the loss. A percentage fee creates a perverse incentive problem: the architect's fee grows as construction costs increase. Hourly billing gives the owner minimal cost certainty. Cost-plus sits between these extremes.

Federal projects have specific rules. The Federal Highway Administration prohibits two methods entirely: cost-plus-a-percentage-of-cost (where fee grows with actual costs) and percentage of construction cost. The reason is straightforward: neither method incentivizes cost control.

For the PjM exam, you need to match compensation methods to project situations, understand the risk each method creates, and know which methods are prohibited on public work.