Fee arangements 7

[RDK]

I know that the engineering business is traditionally based on a hourly fee plus disbursement basis.

I have found that some clients, especially those unfamiliar with the industry balk at this type of fee structure. I have found that for them a fixed fee works best.

I have some advantages in this type since as a small company I can better control my expenses. I had one client who was hesitant to sign on a hourly basis, they were concerned that the hours would become excessive. I suggested a fixed fee arrangement (based on the usual hourly basis and a generous estimate of the hours per month for all employees dedicated to the project). This was acceptable and work proceeded.

The upside was no meetings to explain why x hours were required on each task. This was beneficial since the client was 2,500 kms from the job site.

Does anyone have experience with different fee structures?


Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[ludvik]

I worked in Australia for a while where the normal fee structure for a structural engineering jobs is fixed fee. It generally worked well for both parties.

I would certainly add a caveat about variations to scope though. Variations are sometimes carry larger fees than the original "fixed" fee. Variations are normally priced on hourly rates where each staff members hourly rate is a relatively generous multiple of salary (3.5-4 depending on client). Variations can also be new fixed fees.

More often than not, whether a piece of work is outside the original scope is debatable. In the client's eyes, you have contracted to do all of the design for a fee. In the consultants eyes you have been forced to put up with indecisive clients, lack of information, and changes in basic design decisions throughout the project which deserve an increase in fee.

I witnessed an abitration case where a consulting engineer spend $800,000 on legal fees to win $600,000 in variation fees. Expert witnesses and $400/hour lawyers stack up real fast.

Michael Ludvik
Hardesty & Hanover LLP
mludvik@hardesy-hanover.com

 

[pmkPE]

RDK and ludvik:

I believe the key to lump sum proposals is detailing what the project entails from the customers stated perspective (included in writing) and then defining what you will provide and how and when. In lump sum projects the consulting engineer must have in mind what the problem is and how they will design the solution. If this can not be done up front before the (design) work starts then a study should be proposed stating again what the customer's idea of their problem is and what they would like to accomplish followed by the consultant's proposed efforts to provide additional information, based on field reviews, surveys, research and possible design alternatives with cost estimates, etc. If you don;t know the solutions to the problems up front you will never meet your budgets and be able to stay in business.

When I said that the consultant should propose what they will do for their client, under the heading of SCOPE, we include each effort such as Field Investigations of.... and ...... followed by Analysis/Evaluation/Design for "X" scenarios. If we think the customer is extremely conscience of costs we give as much detail as possible including the number of drawings, including their names per catagory (Civil, Structural, Mechanical, Electrical, Controls, etc.) so that if they do question the necessity of a portion of the work we have the ability to trim out scope and reduce our requested compensation and still provide a solution to the CUSTOMER's satisfaction.

The DPIC (Design Professionals Insurance Company's) have several manuals available that review what Professional Design Firms should be aware of, and wary of, when submitting proposals and contracts. I strongly recommend that you contact them and obtain their available literature; you will not regret it.

Overall you should document each and every change in what you, the consulting engineer, considered the original agreement. (The entity that controls the writing has a better position in any future discussions or even litigation). Change orders should be done in such a manner that it promotes goodwill between you and your client and can be shown to correlate with your agreed to proposal and/or contract. They should be prepared as the requested change or knowledge of different conditions occur, don't wait until the end of the project to submit change orders, nobody likes surprises of this nature. Besides it is much harder to collect after the job is complete and your client's upper management has been told the job is settled. In our proposals/contracts we should tell our clients, in sufficient detail, what we think they expect, what we will deliver based on whatever variables we consider to be fundamental to the success of the project. If their are exclusions then we include those also in our proposal. Again see DPIC, they can be found on

http://www by

searching through google or some other search engine.

Other thoughts that I like to remind engineers of are very well summarized in a recent article in the August issue of Structure magazine. I don't have it with me but it relates to the changes in the engineering and architectural communities abilities to set fees based on project types and their magnitude of scale. (This ability I believe, allowed us more time to consider, research and explore alternatives for the projects and to the increased final value of our clients.) The Justice department in 1972 intervened to stop the practice that Engineers, Architects, and Accountants, but NOT Medical Professionals, used in setting fees in the manner described. The Justice Department considered the practice as price fixing. Why for the engineering profession, but not the medical profession was not addressed. But this is the point as it relates to our discussion, in time fees dropped for the listed professions. We are now considered as contractors - the lowest bid gets the job. Perhaps this is better for society overall, but I see much of what various clients expect is that all engineers are the same and therefore the one with the lowest costs (fees) will provide the same service.

Such is not the case. The firm that lands the job, particularly with state and local/municipal government agencies will put their least experienced people on the job and let their clients train their people. Further reinforcing in the clients mind that what they are paying for (inexperienced people) is not all that great. Most of our Industrial clients have engineers, by education, in charge of selecting the professional engineering firm that they want to have on their project, and because of their background in engineering have a better grasp of the ramifications of choosing the "cheapest". They the engineers in industry, are responsible for making sure that they get the best job with the most value for a reasonable sum. They are paid well and they appreciate our abilities (and desires to be paid equitabley for our professional expertise).

 

[ludvik]

The problem is that at the beginning of a job you can not forsee all possible problems and design modifications that are going to arise in the course of the project. I agree that you should define the scope as best you can, and also define means of dealing with variations as best you can.

Lump sum fees work best when you are dealing with work that you have a lot of experience with. My old firm used to do a lot of small bridge plank jobs for the local road authority and local councils. They had done literally hundreds of them before, and a manager who had been around for a few years would know what was going to come up.

I did some historical assessment of old bridges which at the time was completely new for the firm, in addition to being a relatively new industry. At the beginning of one project we recieved a scope of work from the client which was over 100 pages thick because they wanted to define everything and we were going for a fixed fee arrangement. This notwithstanding, the thrust of this very impressive document was basically to "do what you think is right". We replied with an equally impressive submission that proved we understood the principles of historical analysis, and more importantly were going to do what we thought was right. It was impossible to say what work needed to be done at the start. We finished up winning 2 awards for the project.

As it turned out we had to do more work than anyone initially recognized, and we finished up getting a fee variation of about 80%. That is to say, a time based fee would have been more sensible.

In an ideal world, you would have lump sum fee for simple or predicatable projects, and a time based fee for less definable projects.

The nature of design and other intelligent or analytic work is that frequently it is unpredictable, and often in a very productive way. It is part of the creative process. My feeling is that a good relationship with your client and trust will see you through any problems with fee. We are not lawyers. We are not going to unbundle a whole bunch of costs right at the last minute to maximize our fee. The client understands that good design can save them a lot in construction cost, and a little extra design cost is nothing in the scheme of things.

I also object to doctors being allowed to have a scale of fees while engineers aren't. Is medicine really so much more important than engineering that doctors are allowed to flaunt the principles of fair business practice?

Michael

 

[sc]

In Australia we are allowed to operate on a scale of fee arrangement. Our company usually sets a percentage for design work based on a project estimate (calculated on completion of design). The percentage of contract management/supervision is set on the contract cost. So if there are allowable variations on works then the engineer is reimbursed for the extra management/supervision.

We also work on a mix of fixed fees and hourly rates depending on the client. I usually offer hourly fees and advise the client that a fixed rate would be a conservative estimate of time required and at the end of the day may actually cost them more for our work.

At this stage we seem to have found a mix of fee structures that works for our clients.


sc

 

[RDK]

The problem that I have with a scale of fee arrangement is that there is little or no incentive for the designers to design lower cost solutions to the clients needs.

For example, a design could use the tried and true but expensive method. The designer would expend less time and the client would pay more, but the designer would earn more. If an innovative design solution, one that takes more time to refine but results in a lower cost to the client would result in a lower fee paid to the designer.

I know that there are other forces that will act to prevent this from becoming excessive. The designer with the lowest total cost will get more work and the ethics will also prevent this from being too blatant. But the potential is still there and the end result is higher costs to the client.

I have a friend who had worked for some school boards where the norm is the scale of fee system. The designers (mostly architects) would approve any controversial claims for additional work and increase their fee by 4%. There was simply negative incentive for the designers to argue the clients case and dispute the claim.

I like a fixed fee but know that this is not always viable, especially for design, which I do not do very much. It does work for construction management and inspection as the costs can usually be accurately estimated. (Especially if some costs are treated as disbursements.)

I don’t think that there is any perfect arrangement. Local practice is probably the best as everyone understands it
Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[sc]

Another interesting point about fees is the concept that the lowest fee will win the job, this is not always the case! Our company has long had a policy of setting the right fee to get the job done, without undercutting the fees of others. Over time this has meant that our client base has varied in size due clients going to other engineers for the cheaper fee.

This has also enabled us to maintain a good and loyal client base because they know that at the end of the day they will get a good job for a reasonable fee and not a cut price job that is barely adequate.

Remember cutting your fee is cutting into your reputation as well.

sc