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SERVICES OF TECHNICAL CONSULTANTS
[For Infrastructure and Building Construction Contracts]
1.0 Introduction
1.1 The traditional understanding of Consultancy Services referred to employment of
-Architects
-Engineers [C&S/M&E]
-Quantity Surveyors
Or commonly known as Technical Consultancy Services
1.2 Laws, Procedures and Guidelines have been formulated and been in existence for many decades in most countries. These cover, among others,
- Scope of Services to be provided
-Terms & Conditions of Appointment
- Responsibilities of Clients, Consultants and Contractors
-Basis & method of computation of professional fees & other claims
-Categorization of various types of Projects [Buildings/Infrastructure]
1.3 Regulatory authorities were established to monitor the services of the technical professionals to ensure that all involved parties complied with the provisions of the laws. There were provisions for protection of clients and they had recourse for redress in the event of any disputes. The extent of the provisions may differ for the various countries due to differing laws and practices.
2.0 Specialist Consultants
2.1 Consultants in specialist disciplines within the construction industry made their appearance in this country about three decades ago. Among the disciplines which became popular are:
-Project Management
-Landscaping
-Interior Decoration
-Environment Impact Studies
- Risk Management
2.2 Clients were at a disadvantage as there were no set standards or guidelines prepared by any independent authority to monitor the activities of these specialist consultants and to safeguard the interest of the involved parties. It had been generally left to the integrity and ethics of the professionals [or their professional organizations, if any] to ensure the quality of the expertise and the fairness of the quantum of professional fees and reimburseales that may be claimable.
2.3 The Board of Directors, management and auditors or any other person appointed within the client’s organization, had a near impossible task to ensure that the client’s interests were protected. This was due to absence of any measurable scale of quality of service and equitable quantum of fees.
3.0 Consultants for Projects
3.1 Government financed mega projects, the cost of which is in billions. [E.g. Airports, Highways, Power Projects/Plants, Bridges, Harbors, Railway Systems/Tracks, Naval Base, Integrated Facilities and University Campuses] were implemented managed and supervised in the past by in-house expertise that existed in government departments with relevant expertise. External expertise was engaged when the work load exceeded the in-house capacity or the required relevant specialized expertise did not exist within the government’s organization. Even in such cases the specialized expertise obtained from the private consultants was under the direct control of the respective government agency
4.0 Privatization and Outsourcing of Projects
4.1 With the advent of political independence after the second world war the underdeveloped and developing countries wanted to accelerate the rate of development but did not have sufficient and relevant in-house expertise it became necessary to either totally outsource or privatize these multi-million dollar projects or to go into partnership with the private sector by having joint ventures.. In some cases the government agencies and other authorities at federal/central, state and local government level also embarked on similar implementation methods as it had jurisdiction over large land banks but lacked finances and expertise to develop these strategically located but grossly unutilized or under-utilized extremely valuable assets. Further they were reluctant to dispose off these assets by outright sale, as they wanted a permanent source of continuous income to finance their social projects without increasing tax/levies rates.
4.2 The high value of the land made it imperative for the private sector to come with innovative ideas. These included multipurpose projects which included residential, commercial and industrial, complete with integrated facilities such as parking, sports, recreational, entertainment, accessibility to public transport (rail/mass transit/buses) and a host of other aspects.
4.3 The complexity of the projects brought in the third player in the implementation of these mega projects. In addition to the existing two players i.e. client (land owner) and private sector (proposals and finances) the third player was the contractor with the expertise to design and implement the project. The method of construction generally chosen was “turnkey” type of implementation. Other methods used were ‘design & build’ and ‘build-operate-transfer’.
5.0 Implementation Methods
‘Turnkey’
5.1 The ‘turnkey’ concept requires the client to state their needs whereas the contractor designs and upon approval, constructs the project within the cost and time frame agreed. No changes to agreed designs/cost/time frame are generally permitted as any change to any component of the agreement may cost the client dearly. To ensure that their interests are adequately protected all the three players appoint their own teams of consultants. Unless the terms, fees and scope of services are properly and clearly demarcated in terms of responsibility, there is a great possibility that there will be over lapping of services resulting in differences of opinion among the three sets of consultants and increase in fees quantum which will not be in the best interest of the project or the client.
‘Design and Build’ and ‘Build-Operate-Transfer’
5.2 Similar to the ‘turnkey’ system, the role of the client was limited to scrutinize and approve the designs and method of construction prior to the award of the works and commencement of the projects.
Financial Responsibilities
5.3 The financial aspect under the ‘turnkey’ and ‘design and build’ method was the responsibility of the client and full costs were to be borne by the client and settled by the time the project was completed and handed over to the client unless there was other alternative financing arrangements.
5.4 However, in the case of ‘build-operate-transfer’ method, the project was to be financed by the appointed contractor with the project being handed over to the client at the end of the agreed [‘concession’] period during which the concessionaire would be able to have use of the project either for own use or for purposes of earning revenue. The concessionaire would enjoy occupancy and rental income [on building projects], tolls income and other ancillary income [for highways and services provided therein], port charges [for ports], proceeds from sale of power [for electrical power generated], wale of water [for treated water supplies], etc for the pre-determined period as agreed by both parties. In addition there may be other financial guarantees/rebates/facilities provided by the client that would effect the quantum of costs and the related professional fees and other allowances that may be payable to the various consultants.
6.1 Professional Fees for Technical Consultants’ Services
Building Projects
6.1 The total estimated fees payable under the traditional system, which involves architects/engineers/quantity surveyors, would be about 8%-12% of the final project cost. This rate can be used as a guideline for budgetary purposes under the joint venture system using ‘turnkey’ method of implementation. However, it has been observed that the percentage rate under ‘J.V. turnkey’ system can exceed 20% (and may go up higher). In addition there may, in all probability be a project manager for whom additional fee will be payable. The fee basis may be on percentage of cost, monthly rate or other negotiated basis. However as the three partners pay only their own teams of consultants it may not be realized that the combined quantum of consultants’ fees might have exceeded the norms. The main loser in such cases will be the Client who pays for all and whose interest needs the most protection.
Infrastructure Projects
6.2 The professional fees and other claims for infrastructure projects are generally based on a man-month basis whereby the basic salary of the personnel is multiplied by a percentage known as ‘multiplying factor’. This multiplying factor would be added to the basic salary of the individual and could be between 50% [for lower level administrative persons] to 300% in respect for the head of the implementation team as he may be from a developed country such as US/UK/Europe/Japan/Australia/NZ.
7.0 Fraudulent Opportunities/Possibilities
7.1 The rapid pace of development and the lack of relevant expertise/experience within the client’s management could create opportunities/possibilities for over claim professional fees and other claims that may be based on wrong basis and computations. They further create opportunities/possibilities for fraudulent claims for all including the technical professionals. to enable the professional fees and other claims for the various technical consultants
7.2 The trend to outsource is being extended further and also spread to the corporate sector. Consequently clients are now only the financiers and do not get directly involved in the implementation of projects. In addition the clients may not be able to effectively monitor the costs and activities of the parties to whom the works have been outsourced due to various constraints. These constraints could include shortage of supervisory manpower, logistics due to distances of the countries, differences in language, cultures laws, work practices/procedures/ethical standards, etc. This has substantially increased the possibilities for high costs that could also be attributed to excessive claims of fees and other reimbursable charges due to fraudulent practices and mismanagement that result in self-enrichment of those in authority and/or losses.
7.3 Another major contributor to fraudulent opportunities in respect of ‘turnkey’ projects where they may be delay in decision making process by the client that would provide an opportunity to install machinery/plant/equipment that was the latest at the time of the award of the works but machinery/plant/equipment may have now become obsolete with newer items being available at lower cost and with better facilities at the time of installation. This is another source of excess unjustified fees and fraudulent opportunities and possibilities.
7.4 Construction of projects that are implemented on the ‘design and build’ and ‘build-operate-transfer’ types of implementation methods also a ‘goldmine’ provides opportunities for unauthorized excessive claims and fraudulent opportunities/possibilities.
8.0 Conclusions
8.1 The responsibilities of the examining officers [financial/accounting/audit professionals] has increased substantially and more challenging. The possible lack of interest/knowledge/expertise of these examining officers in the financial implications of the various aspects of the construction industry and the absence of strong support from the client/management to provide relevant exposure and training could result in major over payments and frauds that could have been avoided but for the short-sightedness of those concerned in decision making positions.
8.2 Thus, the examining officers/auditors/appointed managers [with full client support and commitment] should go beyond the narrow confines but look at the total picture to ensure appointments are made based on need so that payments are not paid for services that may not be required and also not provided fully. Small-perceived savings could result in large losses. This aspect should be kept in mind when any project is being constructed under any method of construction especially in the ‘turnkey’, ‘design and build’ and ‘build-operate-transfer’ method of construction due to the high monetary quantum that could be in hundreds of millions. The responsibilities of the Examining Officers [Financial/Accounting/Audit Professionals] has increased substantially and more challenging.
“Advance Detailed Planning, Prompt Decisions, Monitoring and Knowledge can result in Cost-Efficiencies and Prevention of Fraudulent Opportunities
GSK/Dec 05
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Note: The above article is the introductory article in respect of ‘Technical Consultancy Services’. Articles on the following specific aspects will be provided in the coming issues of the ‘Auditnet Newsletters’
[a] Professional Fees Computation – Relevancy of Terms & Conditions and Financial Implications
[b] Dangers of Fee Negotiations – Financial Implications to Consultants and Clients
[c] Re-Designed Project – Terms & Conditions – Financial Implications
[d] Services of Technical Consultants - Evaluation and Selection Criteria
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The author welcomes any comments and criticisms with a view to share and enhance knowledge for common benefit..
The opinions, beliefs and viewpoints expressed by the various authors and forum participants on this web site do not necessarily reflect the opinions, beliefs and viewpoints of AuditNet®
