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1.1 The Regulatory Authorities [Authorities’] of the respective Technical Professions [Architects, Engineers [C&S and M&E] and Quantity Surveyors] [‘Consultants’] have prescribed Model Forms of Memorandum of Agreement incorporating the Terms and Conditions for provision of Professional Services to Clients [‘Clients]. In addition, these ‘Authorities’ have also prescribed Minimum Scale of Professional Fees [‘Fees’] that should be charged and the components that should be taken into account in the computation of the ‘Fees’.

1.2 The ‘Fees’ for services rendered by ‘Consultants’ are generally based on the following main components.

1.3 Cases are being provided of instances where the appointed ‘Consultants’ had computed their professional fees in a certain manner that resulted in either in wrong computation that were to the detriment of the ‘Clients’. The ‘Clients’ and the ‘Consultant’s’ Finance/Accounts Manager had presumably examined the claims prior to approval for submission or approval for settlement. Also the Internal Auditor of both parties may not have raised any observation on the basis or accuracy of the computation of the submitted and settlement of claims as both parties had depended on the computation as made by the ‘Consultants’.

1.4 The ‘Auditor’ of the ‘Client’ subsequently examined the method on which the claims had been computed. He was of the view that the ‘Fees’ had not been computed on the basis as provided and as prescribed by the ‘Authorities’ and had resulted in its wrong computation. The quantum of over claim was dollarized. The excess claims were subsequently partly recovered. However no further action was taken to recover the balance or the matters referred to the ‘Authorities’ for any possible action against the respective ‘Consultants’.

Case No. 1 – Cost of ‘Delays’ plus ‘Compensation’ included in “Cost of Works’

2.1 The project involved the construction of a modern high-rise office building that was to be constructed on a fast track method. The Piling Works Contract [‘Piling’] was valued at USD1.6m and was scheduled to be completed within six months. The Superstructure Contract [‘Superstructure’] was valued at USD52.0m and to be completed within eighteen months that would commence immediately on completion of the ‘Piling’. The whole project was to be completed within two years. All the critical dates were stipulated in the contract documents of the two contracts. The consolidated fees for professional services of the appointed ‘Consultants’ was negotiated and fixed as 10.3% of the total ‘Cost of Works’.

2.2 The ‘Piling’ commenced on the agreed date but suffered a setback due to underground caverns on the site resulting in all works being suspended pending a solution being found and design of a more suitable design. The Superstructure Contractor was advised to put everything on hold but the Client could not give a firm date when the site would be ready for handover to him. He was also advised that any additional costs incurred due to the delay would be reimbursed. The ‘Piling’ was finally completed in twenty-four months at a total cost of USD16.0m.

2.3 The Superstructure Contractor had commenced mobilization of his resources, as instructed by the Client. These included workers, supervisors, professionals, equipment, machinery, plant, the necessary building materials and the prescribed approvals of the relevant authorities. Orders were placed for some of the items that were to be manufactured and imported from overseas sources. Prior approvals were obtained from the client for any expenses to be incurred wherever necessary. The Superstructure Contractor was ready to commence his obligations on the original contractual date and regularly requested for advice on the date of site availability. Also the imported building materials and specialist equipment were expected to be delivered according to the original schedule and any delay would result in holding costs such as storage, security, insurance and possible remedial or replacement in some cases. The ‘Superstructure’ construction commenced immediately on completion of the ‘Piling’ and was completed on schedule within the extended and approved contractual period of twenty-four months. The final cost of the ‘Superstructure’ amounted to USD58.0m.

2.4 The Superstructure Contractor submitted an additional claim for USD24.2 that was attributed to delays.. that arose due to the delayed availability of the site. All these costs were fully supported by documentary evidence. In addition, further USD6.0 million was claimed being ‘Loss of Profit’ due to ‘Opportunity Losses’ The Client approved and paid the full claim of USD30.2 million. Thus the Total Project Cost amounted to USD104.2million.

‘Fees’ of ‘Consultants’

2.6 The appointment of the ‘Consultants’ was based on the prevailing approved Memorandum of Agreement. The ‘Consultants’ submitted interim claims for ‘Fees’ based on ‘Cost of Works’ that were inclusive of additional claims were paid as submitted by the Superstructure contractor. The Final Claim was based on ‘Cost of Works’ amounting to USD104.2 million. Scrutiny of the claim showed that the component that needed clarification was ‘Cost of Works’. The ‘Auditor’ was of the view that the ‘Cost of Works’ quantum of USD104.2 million was not in accordance with the definition of ‘Cost of Works’ as detailed in the Memorandum of Agreement as approved by the respective ‘Authorities’ and signed by all the relevant parties. The ‘Auditor’ was of the opinion that ‘Fees’ should not be paid on the additional claims totaling USD30.2 million as the cost of ‘Delays’ and the ‘Compensation’ should not be categorized as ‘Cost of Works’. The ‘Consultants’ disputed the ‘Auditor’s opinion. The Client also did not agree with the ‘Auditor’s opinion but did not want to seem to be in collusion with the ‘Consultants’ stand. The Client then sought legal opinion with the expectation that the ‘Auditor’s opinion was wrong. With this expectation they referred the matter to a local legal firm. However, the local legal firm’s opinion agreed with that of the ‘Auditor’. The matter was referred again to a Q.C. for a second opinion who also agreed with the opinion of the ‘Auditor’. Thus it was confirmed that the ‘Fees’ that had been computed on the quantum of ‘Cost of Works’, needed to be recomputed. All the respective ‘Consultants’, after protracted discussions, finally agreed with the ‘Auditor’s opinion that was now supported by two legal opinions. The total ‘Fees’ over claim was computed as USD3.1m. However, the over claimed ‘Fees’ could only be partly recovered in the form of outstanding fee of USD1.7m. The Client decided to abandon the balance of USD1.4 million for the following reasons:

[e] The publicity may adversely effect the reputation of the client who was a corporate leader.

2.7 Though the client lost USD1.4 million, the audit had resulted in savings of USD1.7 million.

2.8 In the case of ‘A’ above, the Client planned to construct a Four-Lane Highway [‘Highway’] that also included the construction of a R. C. Bridge [‘Bridge’]. A single Engineering Consultancy Firm [‘Consultants’] was appointed for ‘Highway’ and the ‘Bridge’. The scope of appointment covered full consultancy services i.e. from ‘Design’ to ‘Contract Construction Supervision’ [‘Services’]. However, for budgetary reasons, the Client signed two separate agreements with the ‘Consultants’. The professional fee [‘Fees’] was to be based on the Sliding Scale of Fees for a category two project as prescribed by the Regulatory Authority.

[Note: The Sliding Scale of Fees was 9% for the first USD50.0k with reduced percentages of 4.5% for the tenth million with further reduced percentages of 3.75% for the twentieth million and 3.5% for the subsequent ten million. The quantum of ‘Fees’ for cost up to USD10.0m was computed as USD472,937.50, for cost up to USD20.0m it was estimated at USD847,937.50 and for cost up to USD30.0m the ‘Fees’ was computed as USD1,197,937.50.]

2.9 The final cost of the ‘Highway’ was USD20.0m and that of the ‘Bridge’ USD10.0m respectively. The ‘Consultants’ computed ‘Fees’ on the basis that the project involved two separate assignments. Accordingly the claims that were computed and submitted amounted to USD847,937.50 in respect of the ‘Highway’ and USD472,937.50 in respect of the ‘Bridge’ or totaling USD1,320,875.00. However, the Internal Auditor [‘Auditor’] was of the opinion that the cost of the two contracts should be consolidated for purposes of computation of ‘Fees’. If agreeable, the total quantum of ‘Fees’ would have amounted to USD1,197,937.50. [USD847,937.50 for the first USD20.0m cost of works and 3.5% on the next USD10.0m] The change, if agreeable, would have resulted in reduction of USD122,937.50 of ‘Fees’. [The additional fees for ‘R. C. Works’ and ‘Bar Bending Schedules’ aspects would also have been reduced. However this has been ignored in this example.]

2.10 The above matter was referred to the ‘Authorities’ that held the view that as there were two separate agreements the ‘Fees’ should be independently computed. Accordingly there was no further objection on the computation method and the claims were settled. The ‘Consultants’ remarked during the closing meeting: “Auditor, You win some and you lose some. In this case, you lose”. The remark was taken in good humor and all parties ended the meeting and departed as friends.

2.11 The ‘Consultants’ firm that was appointed for Case No. 2- A above [Single Project with Two Contracts and with Two Agreements] was also by another client for a project that involved twelve contracts. In this case there was only a single Consultancy Agreement with Terms, Conditions and Remuneration based on Scale of Professional Fees as prescribed by the same relevant ‘Authority’.

2.12 Here again, the ‘Consultants’ computed the ‘Fees’ separately for each of the twelve contracts. The Cost of Works for each of the contracts was between USD1.0m and USD9.0m. The project was in its final stage of completion and almost 90% of ‘Fees’ had been paid when the same ‘Auditor’ selected the claims for detailed audit. The ‘Auditor’ questioned the basis of computation of ‘Fees’ on individual contract basis. He was of the opinion that as there was only a single consultancy agreement, the ‘Fees’ computation should be based on the total consolidated cost of USD30.0m for the twelve contracts. The ‘Consultant’ initially objected to the ‘Auditor’s view. However, when reminded about the earlier case [as referred in paragraph 2.10 above] he agreed with the Auditor’s opinion. The re-computation of the ‘Fees’ resulted in a reduction of about USD200.0K. Consequently, the other ‘Consultants’ [Architect, Quantity Surveyor & M & E Engineer] also re-computed their claims that had been earlier computed on individual contract basis resulting in a further reduction of ‘Fees’ totaling USD400.0K. Thus the total savings amounted to about RM600.0K. Now, it was the ‘Auditor’s turn to say to the ‘Consultants’ at the closing meeting “Gentlemen, You win some, you lose some. In this case, you lose”. All parties departed the meeting again as friends and remain so to this day.

2.13 A Client appointed an Architect for a Project [‘Project’] estimated to cost USD16.0m. The Project involved:

The individual contracts of the ‘Project’ were constructed by competitive tender and successfully completed in accordance with the signed Contract Documents.

2.14 The appointment of the Consulting Architect [‘Architect’] was based on Terms, Conditions and Remuneration as approved by the relevant Authority [‘Authority’]. In addition, the Client had requested for a 10% discount as the ‘Project’ as had been agreed for ‘Projects’ that wasere financed by Government funds. The ‘Architect’ agreed to reduce his ‘Fees’ by 10% and this was provided for in the Agreement. The signed Agreement also prescribed that the project would be under Class 1 for computation of ‘Fees’ and total ‘Project’ cost would be consolidated for ‘Fees’ computation purposes. The ‘Architect’ submitted his claims for ‘Fees’ that were in accordance with the ‘Scale of Fees prescribed for Class 1 Works and the Cost of the Four Contracts Consolidated’.

2.15 The ‘Project’ was subjected to audit by the ‘Auditor’. Examination of the claims showed that the agreed 10% discount had not been taken into account in every interim claim invoice received by the Client and had been paid in full. The ‘Architect’ admitted the ‘oversight’ and agreed to refund the estimated over claim payment amounting to USD100.0K.

2.16 The ‘Auditor’ was also of the view that the usage of Class 1 Scale of Fees in respect of Works pertaining to the ‘Construction of the 2-storey R. C. Building, Covered Shed and Resurfacing of the Car Park and the Repainting of Existing Buildings with a Total Cost of USD6.0m’ was not appropriate. He was also of the view that the ‘2-storey R. C. Building’ should be more appropriately be under Class 2 and the Covered Shed Component should be under Class 3 as provided for in the ‘Categorization of Buildings’ by the ’Authority’ whereas ‘Resurfacing the Existing Car Park and Repainting Works’ would not need any Architectural Services. Accordingly, it was suggested that the total ‘Fees’ be re-computed. This suggestion was rejected by the ‘Architect’ with the reason that the usage of Class 1 Scale of Fees was agreed to by the Client and prescribed in the Agreement. The classification of the works should have been negotiated prior to the Agreement being signed. The Client had relied on the advice of the ‘Architect’ and agreed to the Class 1 Scale of Fees

2.17. The avoidable excess claim that could not be recovered was estimated at USD300.0K. It may be assumed that the ‘Architect’ had not acted ethically/professionally when advising the Client on the ‘Class’ of ‘Works’. The advice of the ‘Auditor’ to refer the matter to the ‘Authority’ that constituted of peers of the ‘Architect’, for advice was rejected by the Client to avoid an embarrassing situation.

3.1 The main reasons for the above cases of errors in computation of ‘Fees’ and over/excessive claims could be attributed to, among others, the following:

[a] Total trust in the perceived honesty, integrity and ethics of the professionals;

[b] Lack of knowledge within management and those responsible for examining the claims and computation of ‘Fees’.

[c] Inability/unwillingness of management to question on technical aspects the professionals who may be highly placed, influential with decision making level management and/or Board of Directors;.

[d] Ignoring procedures and internal controls in respect of claims from professionals.

[e] Reluctance to refer the cases to the relevant ‘Authorities’ to avoid personal embarrassment.

[f] Absence of any vested interest in the Client’s management/BOD that makes the decision for not recovering the over payments as financial losses are borne by the Shareholders/Taxpayers.

It is not intended to imply or suggest that situations similar to the above are widely prevalent. However, it is not possible to ascertain the extent of such situations. Nevertheless, the growing increase in white collar crimes does indicate that Clients need to be vigilant and ensure enforcement of procedures/effective internal controls to avoid such abuses that may be deemed to be fraudulent.

4.1 It is highly recommended that the Management of Organizations, especially those involved in Construction Works [Buildings & Infrastructure] and Procurement of Consultancy Services should take appropriate measures to protect themselves. These should include, among others, the following:

[a] Equip themselves and their Staff, who are involved in the selection of Technical Consultants, with awareness pertaining to financial implications and opportunities for vague claims that exist in the Terms, Conditions, etc. that exist in the signed Agreements.

[b] Upgrade their knowledge pertaining to Construction Contracts and Technical Consultants’ Terms, Conditions, Fees, Scope of Appointment, etc.

[c] Have self confidence to enquire when in doubt regardless of the status of the Professionals and their connections.

[d] Management to provide support for officers and encourage them to be proactive and prevention oriented.

4.2 The above recommendations should be applicable to project managers, technical officers responsible for planning, implementing, supervising, monitoring, post completion management, occupants/users, finance/accounting officers and internal/external auditors and anyone else involved in the construction industry.

4.3 The most important lesson to be learnt is that financial/accounting/audit professionals and the management should possess the relevant knowledge that would enable them to verify independently the basis of claims and the financial implications of Terms & Conditions on which those claims are computed instead of accepting them on trust.

BEST PROTECTION IS KNOWLEDGE AND AWARENESS

#TRUST NOBODY BUT YOURSELF TO PROTECT YOUR MONEY#

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‘Fees’ of ‘Consultants’

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