Introduction

Architecture firms bill clients in several ways — hourly, fixed fee, percentage of construction cost, or hybrid arrangements. Each model affects when income is earned, how it is recognised for tax purposes, how HST applies, and how the firm manages its year-end tax position. Understanding the tax implications of the billing model is part of managing the practice efficiently.

Hourly Billing

Under hourly billing, the firm charges a rate for each hour of professional time. Invoices are issued periodically — monthly or at project milestones — reflecting hours logged.

Income recognition: Revenue under hourly billing is generally recognised on an accrual basis as hours are performed. Where the billed basis election applies, income is recognised when the invoice is issued. For practical purposes, hourly billing and the billed basis align closely — the invoice is typically issued within a month of the work being performed.

HST: HST is charged on each invoice at the time it is issued. The base amount for HST is the fee charged — the full hourly amount plus any disbursements that are part of the firm's taxable supply.

Year-end implications: At fiscal year end, unbilled hours represent work in progress. Under percentage-of-completion revenue recognition, a portion of unbilled WIP may need to be recognised as income. Under the billed basis, only billed amounts are income.

Fixed Fee

A fixed fee arrangement specifies a total fee for defined scope of services — regardless of actual hours spent. Fixed fee projects create a different profile: the income is known, but it must be recognised over the life of the project as work is performed.

Income recognition: Fixed fee revenue is recognised on a percentage-of-completion basis as the project progresses. A project that is 60% complete at fiscal year end should have 60% of the contract revenue recognised — regardless of whether any invoice has been issued for the second 60%.

This creates a disconnect between billing and income recognition that is particularly visible for fixed-fee projects spanning a fiscal year end. The firm may have invoiced only 40% (matching the deposit and first milestone payment), but income recognition requires 60% — meaning $20,000 of additional income may need to be accrued at year end beyond what was billed.

HST: Fixed fee invoices attract HST as issued. Where revenue is recognised before a corresponding invoice is issued (the WIP accrual), the HST obligation arises only when the invoice is issued — not when the income is accrued.

Percentage of Construction Cost

Many architectural services agreements for large projects set the fee as a percentage of total construction cost — typically 8%–15% for residential and institutional work, varying by service level and complexity. As the project's estimated or actual construction cost evolves, the total architectural fee changes accordingly.

Income recognition: Percentage-of-construction-cost fees raise the same percentage-of-completion principle, complicated by the fact that the total fee itself may not be certain until construction is complete and final costs are known. For projects with estimates that change significantly (value engineering reductions, scope additions), the fee forecast changes and the income recognised to date may need to be adjusted.

HST: HST is charged on the fee as invoiced, at each billing milestone. For a percentage-fee project where invoices are issued at specific project phase completions, HST applies to the amount invoiced at each phase.

The contingent final fee problem: Some percentage-of-construction-cost arrangements have a holdback on the final portion of the architectural fee, similar to the construction holdback. This creates the same income-recognition and HST timing considerations discussed in Article 45 — with the HST on the held-back portion deferred until the holdback is released.

Choosing a Billing Model With Tax in Mind

No single billing model is inherently superior for tax — what matters is that the billing model is applied consistently, that income is recognised correctly under the applicable accounting standards, and that the HST treatment of each invoice is correct.

Fixed fee projects require the most active management of the gap between billing and income recognition. Percentage-of-construction-cost projects require ongoing monitoring of the fee estimate as construction costs evolve. Hourly billing is the most straightforward from an income recognition perspective.

When to Speak With a CPA

For an architectural firm with projects spanning fiscal year ends under different billing models, a year-end review of project status and income recognition ensures the T2 reflects the correct income position — not an over- or under-stated version of it.

Rotaru CPA works with architectural and design firms on income recognition, HST compliance, and corporate tax. Book a consultation to review your billing and income recognition approach.