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Technical Consultants – Danger of Fee Negotiations
[Financial Implications to Consultants and Clients]
1.0 Introduction
1.1 The Regulatory Authorities [ Authorities’] representing the Architects, Engineers and Quantity Surveyors have prescribed the Terms, Conditions and Minimum Scale of Fee for Professional Services for their respective professions. These are incorporated in the approved Memorandum of Agreement and their compliance is mandatory. However, there are instances where the basis of professional fee [‘Fees’] is negotiated and agreed by both parties.
1.2 The objective of negotiation for the client [‘Client’] is to have a reduction in the prescribed [‘Fee’]. The technical consultants [‘Consultants’] may agree in some cases to ensure obtaining the assignment. This normally happens during a slowdown in the construction industry when there is excessive competition or when the ‘Consultants’ is entering the private sector on his own. The reduction in the prescribed ‘Fees’ may contravene the approved Scale of Fee even though it is unethical but this is a fact of commercial life.
1.3 In some cases the negotiated rate may ultimately exceed the quantum of the prescribed rate of ‘Fees. There have also been cases where the ‘Consultants’ have been on the losing end when their workload exceeded the original expected cope of Services without any commensurate increase in quantum of ‘Fees’ Some cases that will illustrate these positions are given in the following paragraphs.
2.0 Negotiated ‘Fees’ higher – Loss to the Client
Case No. 1
2.1 A Consulting Civil Engineer [‘Engineer’] had Agreed to a negotiated Fee of 6% on Cost of Works - Class 1 [‘Works’] estimated at USD2.5m. The negotiated quantum of ‘Fees’ amounted to USD150.0K compared to full ‘Fees’ amounting to USD150,375.00 as prescribed by the ‘Authorities’. However, due to unforeseen problems, the final cost of ‘Works’ escalated to USD10.0m. The quantum of ‘Fees’ payable by the client was computed as USD600.0K compared to USD500,375 that would have been payable according to the ‘Authorities’ prescribed scale of ‘Fees’ if the ‘Fees’ computation basis had not been negotiated. Thus negotiations resulted in the Client losing USD99,625.00.
Case No. 2
2.2 A Consulting Architect had agreed to a negotiated ‘Fees’ of 6% on Cost of Works [Class 1] estimated at USD16.0m. The negotiated ‘Fees’ amounted to USD960.0K compared to USD998,125.00 computed on the prescribed rate. Here again the final cost of ‘Works’ had escalated to USD26.0million due to variations to scope of works. The quantum of ‘Fees’ payable amounted to USD1.56m compared to USD1,473,125.00 that would have been due if the rate as prescribed by the ‘Authorities’ had been used. Negotiations resulted in a loss of USD86,875.00 to the Client.
3. O Negotiated ‘Fees’ Lower – Loss to the Consultant
Case No. 1
3.1 A Consortium of ‘Consultants’ comprising of Architect, C&S Engineer, M&E Engineer and Quantity Surveyor had agreed to a negotiated ‘Fees’ of 8% on Cost of Works [’Costs’] that was capped at USD80.0m for a High Rise Modern Office Building [‘Building’]. The quantum of ‘Fees’ was thus capped at USD6.4m. There was no provision in the Consultancy Agreement for any variance in ‘Fees’ quantum in the event of any increase in the ‘Costs’ though the ‘Fees’ would have been reduced in the event the ‘Costs’ were to decrease. Both parties were reasonably certain that the margin of change in the final ‘Costs’ would not be more than 5% and this was acceptable to both.
3.2 The final ‘Cost’ escalated to USD110.0m. The increase was due to problems encountered with the unique design and site conditions resulting in many changes to the design that caused delays to Piling works [‘Piling’]. Further there were many changes that were made by client to the specification pertaining to finishes, building materials, etc. Also there were may instances of delays in the decision making process within the Client’s organization. The ‘Consultants’ workload increased substantially due to the many revisions to the drawings caused by the changes that had to be made. The ‘Consultants’ requested the Client that the ‘Fees’ be re-computed and be based on the final ‘Costs’ instead of the earlier agreed capped ‘Costs’ of USD80.0m. The request would have resulted in an addition claim amounting to USD2.4m. The Client promptly rejected the request with the justification that it was not provided for in the Agreement.
3.3 The ‘Client’ and the ‘Consultants’ both proposed that the matter be referred to the external ‘Auditor’ who was then auditing the financial aspects of the ‘Project’ especially computation of ‘Fees’. Further he was known to both parties. The ‘Auditor’ agreed to give his unofficial view but it would not be binding on both parties, as he had no such authority from his Management.
3.4 The Auditor’s view was that the ‘Consultants’ could take the matter to arbitration, as provided for in the agreement but they may not be able to fully substantiate their claim of USD2.4m due to lack of documentation such as time sheets, idle time records, actual expenditure incurred, receipts, etc. As regards the position of the Client, there was sufficient evidence in the periodical reports and minutes of meetings about the delays, changes and slow responses/decisions on various matters by the Client that would have resulted in the Client having to pay part of the USD2.4m additional ‘Fees’ claim. Thus any reference of the problem for arbitration would have been embarrassing and may also adversely effect the reputations of all parties, as the dispute would have become public knowledge. It was suggested that both parties compromise midway. The dispute was settled with the payment of additional claim of USD1.2m.
3.4 The ‘Consultants’ were the main losers in this case to the tune of USD1.2m that could have been avoided if the ‘Authorities’ prescribed Scale of Fees had been followed. Alternatively, the ‘Consultants’ should have obtained prior written approval of the Client when it was first realized that the Scope of Services would increase substantially. In addition, comprehensive records should have been maintained to substantiate the claims in the event the dispute was to be referred to arbitration or the courts.
3.5 The ‘Client’ could have also contributed in keeping the ‘Costs’ from escalation and thus could have cost of ‘Project’ and ‘Fees’ by proper planning of specifications that would have reduced changes and prompt decision making as and when necessary. Though there was a prima facie savings of USD1.2m the ‘Client’ had substantial indirect losses in increased construction ‘Costs’ of the ‘Project’.
4.0 Recommendations
4.1 The ‘Fees’ Structure approved by the ‘Authorities’ representing the respective Technical Professions have endeavored to ensure that the ‘Fees’ payable for any professional services are commensurate with the scope of services to be provided. The ‘Fees’ quantum for full service is considered fair and reasonable to the Client and the ‘Consultants’ and also mandatory to be complied. However, in the event where either of the two parties proposes to negotiate the basis of ‘Fees’ computation, it is important that the risk be realized and financial implications are identified and quantified in monitory terms in the event there are any variations to the components on which the fees are generally computed. It is highly recommended that comparison be made between the ‘Fees’ payable under the prescribed rates and based on negotiations and also the financial implications due to possible variations to any of the components. The four main components are ‘Category of Project’, ‘Cost of Works’, ‘Completion Period of Works’ and ‘Rate and Basis of Fees Negotiated’. This will ensure that there are no unpleasant surprises for either of the two parties in the event there are any variances to any of the above-mentioned components.
5.0 CONCLUSION
5.1 The responsibility of ensuring that the objective of negotiations is achieved rests with the decisions makers who should obtain prior advice from their In-House technical and financial experts. The financial experts would include the Finance/Accounting professionals and the ‘Auditors’. In addition, these financial professionals with their vast experiences should be proactive and prevent losses rather than wait and then identify the causes of such losses.
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NEGOTIATIONS MAY NOT NECESSARILY BENEFIT.
ALWAYS DOUBLE CHECK.
DOLLARISE THE FINANCIAL IMPLICATIONS OF POSSIBLE VARIANCES.
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GSK/Feb 06 - Auditnet
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