Not to Exceed Proposal 3

[SteelPE]

I am fairly new to the consulting business. Was forced into the position due to a job loss a few months ago. As I go about trying to drum up new business I am constantly asked to do different things.

Yesterday I was visiting a potential new client, an architect, who has two projects that need structural engineering. We went over the projects and what he wanted in terms of a proposal. At the end he said that he wanted the work to be done hourly but he wants the proposal to state a guaranteed not to exceed price. Now most of the projects I have done have just been straight proposals. While I understand the concept, it almost seems like a loose-loose situation on my end. If I underestimate the time it takes to complete the project I take a bath. If I overestimate the project I loose out to my competition (which I am not really worried about) or I don't make up for the jobs I underestimated (I have taken baths on a few projects).

I have discussed this with a few peers and they suggested to slightly inflate the price and hourly rate to try and "cover" myself. The client was referral so they do have access to what my current hourly rate is, so this may be a little difficult. I'm also assuming that they are going to want to see a breakdown on my invoice in terms of hours and days. Since I am a one man shop, this is going to be more of an inconvenience than anything else. How do others handle this situation?

 

[strucguy]

We are loosing money because of this very famous line "Total fee not to exceed...$ XXX". I am glad you are giving it a serious thought to this. Yes having an upper limit to the fee is reasonalble. Equally reasonable is having an properly defined scope of work and limit of changes that the architets can make. Have a very well drafted scope of services. Any deviation from that or any additional effort on your part because of someone else's screwup, you are entitled to get compensated. We had enough fun with architects casually moving gridlines, wall locations that had a signification effect on our design time. Why do you have to bear the burden of someone else's inefficiency.

 

[JedClampett]

A long time ago, I wnet to a seminar where contractual and management issues like this were discussed. Different types of payment agreements were compared. One of the biggest losers was "not to exceed" Other ones that didn't fare too well were "cost plus" and "fee schedule". The best agreement for making money is "lump sum."
I think it's easier to manage a lump sum contract. You work the scope, and if it's not in the scope, you don't do it. The others are more subject to scope creep (not to exceed) or limited profits (cost plus or fee schedule). We used to shy away from lump sume contracts, but now try to get it whenever possible.
Adminstration is also easier for both you and the client. You give a percent complete and bill that. Once the client agrees, you get paid. There's no looking behind the curtain ("why did this guy work on the project?"; "why are you billing this mileage?") and your efficiency is rewarded.

 

[MiketheEngineer]

I kind of use a "not to excede" price but if you change the scope - all doors are open!!

 

[msquared48]

Knowing that I can lose my shirt if I do not bid high enough on the not to exceed amount, I always give my self plenty of wiggle room in the bid and define the scope as well as possible. There will always be some unknowns, and that's what the wiggle room is for.

If the client does not like the bid, then he can either redefine the scope, or seek another engineer. I am not licensed as a charity. What I am is a licensed, and seasoned, consulting structural engineer.

Mike McCann
MMC Engineering

http://mmcengineering.tripod.com

 

[SteelPE]

Great information.

On this particular project I think the architects engineer tweaked the owner in some way and the owner is ticked. I was referred to the owner (who I have never met or ever even spoken to) though one of my clients. So, I think the architect is not really on my side and is viewing me as more of an inconvenience.

Oh the joy.

 

[SteelPE]

How do you set up payment terms for a contract like this?

I have basically noted that invoices are to be submitted upon completion of each stage of the project (design, construction set and CA). I also noted that invoices are to be calculated based upon the number of hours worked multiplied by the hourly rated of $xxx/hour. Forgetting about overages and late payments (which are included) is there anything else that should be included?

 

[IRstuff]

I'm not sure how "lump sum" differs from "firm fixed;" they seem to be the same, a fixed contract value, heavily dependent on no scope growth or requirements changes.

Aerospace and defense live on cost-plus, particularly for development contracts. You simply have to keep track of and document scope and requirements changes and make sure your customer is badgered into accepting the fact that he's induced baseline changes to the contract.

One thing that is supposed to help, which no one does, is to maintain detailed and accurate records of what was done on previous contracts, along with their costs. Hypothetically, given that historical information, you can estimate your scope and costs more accurately. This requires nearly superhuman discipline, but if you manage to do that, you'll have extremely accurate bids that include EVERYTHING.

One other thing to do, whether fixed or cost plus, is to increase granularity of your bids. This provides two benefits:
> The increased level of detail will ghost your competitors by creating doubt in the customer as to whether your competitors have adequately scoped and estimated their bids
> The increased level of detail makes it harder for customer to challenge your bid, e.g., a bid of 400 hrs for a nebulous set of tasks could be easily challenged for a 10% or 20% reduction, but a set of 20 tasks, each on the order of 20 hrs, is much harder to challenge for excessive padding.

TTFN
faq731-376

 

[msquared48]

For the payment method I require 25 to 30% of the maximum not to exceed amount down and bill monthly after that unless agreed upon differently with the client due to the length of the project.

Mike McCann
MMC Engineering

http://mmcengineering.tripod.com

 

[strucguy]

Check the document below. I found it very useful. Apart from this, CASE has a list of documents that you can buy. They are very good investment.

http://www.apeg.bc.ca/ppractice/documents/ppguidelines/guides_struc_eng_serv.pdf

 

[msquared48]

Oh, and in the contract, include a clause to the effect that if the billing is not paid within a certain time frame of your choosing, work will cease until payment is received.

Mike McCann
MMC Engineering

http://mmcengineering.tripod.com

 

[SteelPE]

msquared48

I don't like down payments. I have stayed away from them since I have started. I don't like having to "owe" other people besides. It helps keep my books straight to this point too. When my last company got in trouble, they started requesting down payments.... which is fine until you start using the down payment to pay vendors for jobs you have currently going.... which is what they did.... and down the drain they went.

 

[urgross]

It sounds like a simple matter of all risk being pushed on to you. I would personally have no problem with inheriting risk if commensurate incentive is provided. One possibility is using the "not to exceed" with hourly rates, as long as if the amount under (hoepfully) that maximum is split in some equitable fashion. Having a stick without a carrot doesn't seem like a good model for repeat business. If you are to assume more risk, more reward should be available as an incentive. If this will be long term, either hourly billings or progress payments might be acceptable.

 

[KENAT]

The couple of 'not to exceed' contracts I worked in defense were basically done as a way to get us some interim funding while the accounting folks took several years to approve our full bids etc.

Basically meant we could spend up to that amount but no more. It did not guarantee we would complete the project for that amount.

Posting guidelines faq731-376

http://eng-tips.com/market.cfm?

(probably not aimed specifically at you)
What is Engineering anyway: faq1088-1484​

 

[msquared48]

SteelPE:

I have always used it to test two things:

1. The client's ability to pay quickly let alone pay, and

2. To test just how sewrious he is about the project.

If they balk at paying any money up front, so do I.

Mike McCann
MMC Engineering

http://mmcengineering.tripod.com

 

[urgross]

On federal contracts, a unilateral can be easily done, typically not to exceed 50% of independent government estimate. Scope changes are a nightmare. Federal contracts are somewhat different, as you have the Brooks Act. If the contract starts out under the audit limit, then crosses over to above the limit, then everything freezes at 50% of orginal IGE until audit is completed and approved. If audited numbers don't match with numbers on the orginal proposal, then a prospective redetermination would be required. The took about 17 months of my life which would have been better off watching paint dry.

 

[GregLocock]

"Aerospace and defense live on cost-plus" , not where I worked. We lived on an agreed hourly rate and estimated hours to completion. We made out like bandits on scope creep.

Cheers

Greg Locock


New here? Try reading these, they might help FAQ731-376

http://eng-tips.com/market.cfm?

 

[Ron]

STOP BIDDING ON ENGINEERING WORK!!!

 

[msquared48]

Yea... Let's bid on vacations!

Mike McCann
MMC Engineering

http://mmcengineering.tripod.com

 

[IRstuff]

"We made out like bandits on scope creep."

To that extent, cost plus isn't that different. I was working on a three-lettered program where change requests numbered into the HUNDREDS, and these where the ones coming directly from the prime. Sadly, that gravy train got axed after 3 yrs.

TTFN
faq731-376