Verification of percentage based payment for engineering services 4

[SRO]

I have landed my first project where the payment is based off a percentage of the total construction cost. How do other engineers verify the actual total cost to determine an accurate final payment? It doesn't help that the project continues long after we are done with our part. I feel getting the receipts from the owner of what they paid the contractor wouldn't cut it since they can "accidentally" for get to send you all of them. Does anyone have any recommendations?

Thanks

 

[WesternJeb]

My experience with these kind of projects is that the design team also covers CA (construction admin.) services. This should see you thru to the end of the project and then you have to have the tough conversation that no one likes to have - you need more money. Rarely do the architects (usually who our contracts are thru) want to volunteer this money unless asked.

If not, then you just have to keep up with the project on your own and at the end start asking questions.

 

[driftLimiter]

What does your contract say? Ideally you would have this specified in agreement otherwise your subject to not having an official mechanism to determine costs.

In the past I worked on a project where the bank had to verify the incremental construction costs. The owner was beholden to them though so there was a mechanism in place to verify costs. The contractor had to provide monthly expenditures and prove each of them was actually paid for, material was accounted for, and labor was logged.

 

[JStructsteel]

So if they add some nicer windows, you get more money??

 

[canwesteng]

Forget nicer windows... someone is getting a building with a bunch of stiffeners and web doublers.

 

[WesternJeb]

someone is getting a building with a bunch of stiffeners and web doublers.

You didn't have to say it out loud, LOL! It does require a certain code of ethics operating under these type of contracts. Usually, these are projects in which a clients budget is established up front and the design team isn't to go over that budget. That is the "check and balance" with these type of contracts. Then if it does, it gets VE'd to death.

 

[SRO]

@driftLimiter - I have this in it (see below), but I feel I already underestimated the total cost.
"Unless receipts, invoices, or other evidence of payments are provided to this office, the total construction cost will be defined as this offices’ opinion of all probable construction costs for labor and materials required to construct the proposed house

@JStructsteel - Essentially, yes it does.

@canwesteng - I was actually thinking about inventing window stiffeners..

 

[SWComposites]

Why would you not agree on the "construction cost" to use to calculate your fee up front before starting work??

 

[human909]

To answer the original question. I think it comes down to trust. You need to have trust in the other party/parties. If that isn't there then this is a disaster waiting to happen from both sides. They could hide things and cheat you, and you could massively overengineer and cheat them.

Business and life in general can work really really well if there is TRUST.

Why would you not agree on the "construction cost" to use to calculate your fee up front before starting work??

Some project start off in a state and flux and continue to be so. Cost plus or percentage cost is a reasonable approach to handling these things. There has to be trust between the parties though. I've seen contractors work on cost-plus projects milk every penny $100 bill. I find it disgusting and grossly unethical. But some people just play the game. Personally I build trust with my clients, I want them to save as much money as they can, I want them to trust that I offer economical but suitable for purpose designs.

I have landed my first project where the payment is based off a percentage of the total construction cost.

Do you mind giving us an approximate range of this percentage value? I am curious, and I'm sure other are too. (For confidentiality reasons I wouldn't ask for the exact value.)

 

[dik]

The contractor should be able to provide you with this, including all his extras to contract. This may not be available of a year or so after start of construction and you might be able to base your initial fee on 90% of estimated construction costs, to be adjusted when a final price is determined.

-----*****-----
So strange to see the singularity approaching while the entire planet is rapidly turning into a hellscape. -John Coates

-Dik

 

[human909]

On a side note. Do most people here work off fixed price/hourly/or other..?

I'm asking as I am moving gradually toward more independent work (I still have a salary role that isn't 5 days a week.). Most jobs are fixed price but a current one that I've picked up the client is happy with a $/hr rate.

 

[SRO]

@SWComposites - It's my first rodeo billing like this. I have no idea what I'm doing.

@human909 - I'm charging 2% of the total construction cost.

@dik - I thought about that, and I'm not opposed to it, but it feels like going around my clients back. Honestly, I don't fully trust my client, so I might have to. Have you ever had to approach a contractor for something like this?

@human909 - Typically I give an estimate for custom houses, but bill hourly. A couple of my long time clients don't even ask for estimates. Other smaller projects where there is less variability I'll do a quoted fee. Lately I've instituted a $1,000 / site visit fee to avoid keeping track of mileage and travel time. I'll adjust it up or down if the job is really close or really far, but all in all this has done wonders for my bottom line. I am from the Boston area though, and things are very expensive here, so you might have to adjust the value depending on your local economy.

 

[JStructsteel]

@ Human909, I do fixed fee, with DETAILED scope. that way if any scope creep happens, I can ask for more. Also, At this point I have plenty of design tools and cad details that I can knock out a simple building really quick. That puts more money in my pocket.

 

[dik]

Not at all... let your client know that will be the process you are using, right up front.

-----*****-----
So strange to see the singularity approaching while the entire planet is rapidly turning into a hellscape. -John Coates

-Dik

 

[phamENG]

OP - afraid I can't help with your specific situation. I will say, though...2% is pretty good. I base fixed fees on estimated construction costs, and it comes out to about 1.5% of construction costs for a typical building. (12-17% of the overall design fee, overall design fee is about 6% of construction costs). In your situation, I would tie it not to 'construction costs' but to the cost of structural components. This does two things - 1) if the owner decides to go with nicer windows or other non-structural upgrades that don't impact you, you don't unfairly profit from it and 2) you can get a bottom line number when your work is done. As soon as the structural punch list is done, you can put in your final invoice. Then have a provision to cover other incidentals hourly (the new windows need you to review a screw connection, signing the statement of special inspections at CO issuance, etc.).

human909 - I prefer fixed fee. My final work product provides value to the project. Whether that's the ability to get a permit, or find a more economical solution to a problem, or something...there is a cost to not having my drawings/letter/whatever. Figuring that out can be tough, but the AEC market in general seems to have landed on percentage of construction cost as a decent proxy.

So I try to balance that cost of not having my work (could range from a couple thousand dollars to not being able to build the building, which in turn could be a blank check's worth of costs because a business can't open, etc.), the time it will take to get it done and what I need to pay myself and cover other fixed or floating costs, and what my competitors may do it for.

The last one holds the least weight. As you said, this business is all about trust. Walking up to somebody and saying "hey, I'll screw over that other guy and do this for 80% of his fee" isn't a good way to engender trust...just makes you look like a sleazy cutthroat. But the market is the market, and if I price myself out of it I won't have any work. So I can't ignore it.

But as JStructsteel mentioned...if I've invested time and or money into building or purchasing design tools to make the project more efficient, I should be able to generate a profit from that investment. So you either have to keep raising your hourly rate to reflect it, or you charge the same lump sum fee and grow your margins as you spend less time on each one. While the hourly rate adjustment may feel 'cleaner' and even more ethical in some respects...it's not a great business move to constantly dial up your rates every other proposal. That will get noticed, and could alienate clients. But if I'm always doing the same job for the same price (indexed to construction costs), the client stays happy.

 

[Brad805]

When we have done this the fee is usually based on an agreed cost at some point in time. The fee is usually linked to the work we did, and not the overall project. What you have described would take a detailed contract, and that is not common in the residential world unless this is a large developer.