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Technical Consultants’ Professional Fee - Re-Designed Projects
[Terms & Conditions – Financial Implications
1.0 Introduction
1.1 The Professional Fees [‘Fees’] claimable by Technical Consultants [‘Consultants] is generally based on system as approved by the relevant Authorities. The computation of ‘Fees’ is based on three main components as follows:
[a] Cost of Works,
[b] Class of Works and
[c] Rate of ‘Fees’
This is generally a standard practice. However there are occasions where an existing project is abandoned after some partial completion of works. In these cases the ‘Fees’ will be paid on the basis that the project is abandoned. Further there are cases where the projects may be abandoned after partial completion of design services. Here again the ‘Fees’ will be computed and paid on up to the stage the design service are rendered.
1.2 In the event the project is revived at some future date with the usage of earlier designs the interim payments of ‘Fees’ may be taken into account subsequently subject to relevant terms and conditions..
2.0 The Project
2.1 There are some cases where the scope of the project is substantially changed after the final design is finalized, tenders evaluated and bids received but awaiting award approval. Subsequently the project is awarded on a different design on ‘turnkey’ basis that incorporates the ‘Consultancy’ component with the existing ‘Consultants’ continue to perform the ‘Supervision’ of the new designed ‘Turnkey’ project. This would render the effective abandonment of the earlier design. The computation of ‘Fees’ would combine the aspects of both ‘completion’ and ‘abandonment’ of the project. The position is explained in the foregoing paragraphs by the use of an actual case involving a high rise commercial building project.
2.2 A Client proposed the Construction of a 36-Storey High Rise Modern Office Building Project that involved Piling [USD20.0m] and Superstructure Works [USD240.0m] Contracts with a Combined [Q.S. Estimated] Cost of USD260.0m. The Building was to be designed based on R.C. System and Constructed within a Pre-fixed Completion Period and the inclusion of Penalty & Reward provisions for Delays or Early Completion respectively.
3.0 The Technical Consultants
3.1 The Client appointed a Consortium of Technical Consultants [Architect, Engineers: C & S and M & E and Quantity Surveyor] to Design and Supervise the Construction. The Terms and Conditions of Appointment were similar to that Approved by the Respective Professional Boards. However, the Professional Fee Rate was negotiated at fixed 10.5% of the Final Cost of Works.
4.0 Audit of the Project
4.1 The Audit of the above Project involved a total of four months of the Auditor’s time inclusive of discussions with the Client, Technical Professional Members of the Consortium, the respective Boards, Technical Departments Officials and several Visits to the Construction Site. The Objective was to understand the Intricacies and complexities of the Project for an Effective Audit that would Add Value to the Organization.
5.0 The Works
A – Piling Contract
5.1 The Piling Works Contract was certified completed within the Pre-Fixed Completion Period with a saving of 58 days for which a Reward of USD2.9m was included in the Total Contract Cost of USD29.9m.
B – Superstructure Contract
5.2 Open Tenders were invited for the Superstructure Works from both Local and foreign Construction Companies. The Independent Tenders Evaluation Committee Recommended the Acceptance of the Lowest priced Tender Received that was based on the Drawings and had Fully Complied with all the Prescribed Terms and Conditions. The Lowest Tendered Sum was USD242.0m that included a Provision for Contingencies amounting to USD20.0m. In addition, the Recommended Tender was from a Widely Experienced leading Local Building Contractor with a Proven Track Record. Another Tender with a Price of USD342.0m was received from a Foreign Contractor who submitted a ‘Turnkey’ type of Contract using STEEL and Prefabricated Wall Panels as the Main Building Components. The Client rejected the recommended tender of USD242.0m [under directions] and approved the Acceptance of the USD342.0m tender that was then awarded. The Superstructure Works were certified completed within the Approved Construction Period and Net FINAL CONSTRUCTION COST was USD352.0m.
6.0 Technical Consultants’ Professional Fees – Computation
A – Piling Works
6.1 The Consortium submitted its Final Claim for Professional Fees of 10.5% for the Piling Works based on Cost of Works of USD29.9 million that was settled. The Auditor was of the view that the Professional Fee should be computed on COST OF WORKS of USD27.0 million only. It was his view that the Reward Amount of USD2.9 million for early completion should not be classified as ‘Works’ and thus should NOT be eligible for any Professional Fees just as there would not have been any Reduction in Fees in the event of any Penalty Deduction for any Delay in Completion of Works. The Client did not agree with the Auditor’s views and further chose NOT to refer the Auditor’s view to the relevant Board for any decision. Thus, Professional Fee amounting to USD3.1395m was paid in excess that could have been recovered. The opinion remained unresolved and no recovery was attempted due to decision of Client. However in another subsequent case later another client sought legal opinion where compensation paid for delays that had been accounted as ‘cost of works’ for computation of Consultants’ Professional Fees, were deemed not to be ‘cost of works’ and the resultant fees were rejected by the client.
B – Superstructure Works
6.2 The Consortium submitted its Interim Claims for Professional Fees of 10.5% based on Cost of Works of USD342.0m for the Superstructure Works. The Client settled all the Claims as they were presented. The Auditor was of the view that the Fee up to the Contract Documentation Phase should be computed on Cost of Works of USD222.0m [USD242.0m LESS ‘Contingencies Sum’ of USD20.0m]. The basis of the view was that the Original Design had been ABANDONED AFTER the Evaluation of Tenders and the Tender with a Value of USD242.0m had been recommended for Acceptance. Thus the Total Professional Fee should be 70% for Services up to the CONTRACT DOCUMENTTION PHASE. The Professional Fee for the CONTRACT IMPLEMENTATION PHASE should be 30% and based on the FINAL CONSTRUCTION COST of USD352.0m.
6.3 Thus the TOTAL PROFESSIONAL FEE would amount to USD27.405m [70% of 10.5% of USD222.0m = USD16.317m PLUS 30% of 10.5% of USD352.0m = USD11.088m]. The Consortium agreed with the Auditor’s views. The audit resulted in savings of USD9.555m in Professional Fees.
7.0 Conclusion
7.1 The Objective of the Audit was partially achieved with a Saving of USD9.555m in this one aspect. In addition, there were other aspects where minor savings were realized and the total sum was substantial.
7.2 There were other valuable lessons that were learnt in respect of Construction Contracts and Computation of Professional Fees. The most important was the ‘Interpretation of the Terms & Conditions contained in the Contractual Documents and their Financial Implications’. The Examining Officers should follow through and get an authoritative interpretation of any of the ‘Terms & Conditions’ that may be vague. The wrongly computed fee payment may have been prevented at the outset and avoided if the Project Managers and Financial/Accounting Professionals had been familiar with the Financial Implications of the Terminology used in the Contractual Documentation.
7.3 Finally, the savings, though partial, were only possible with the total support extended to the Auditor by the Superiors of the Auditor and those in the Client Organization. The experience gained and the lessons learnt would definitely benefit the Auditors [and the Client’s Professionals] with value added experience that would enhance their career opportunities and prospects and their Clients with financial gains of other Mega Projects in the future.
8.0 Recommendations
8.1 Financial/Accounting and Audit Professionals should acquire new knowledge and upgrade their existing knowledge in the field of CONSTRUCTION PROJECTS that is a much-neglected field though it involves hundreds of millions.. The Professionals in the Senior Management within the Client Company should also play their respective roles and give total support. The Securities Commission and the Stock Exchange also expect this of the Corporate Sector Leaders to make the Company’s Management and their Audit Committees to be more effective.
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COMPUTATION OF PROFFESSIONAL FEES [AND OTHER CLAIMS] SHOULD BE EXAMINED BY ALL CONCERNED, TO BE IN COMPLIANCE WITH APPROVED TERMS & CONDITIONS WITH THE RIGHT IMPLEMENTATION METHOD
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EFFECTIVENESS OF THE AUDITOR DEPENDS ON TOTAL SUPPORT
#FROM OWN SENIORS AND CLIENT’S MANAGEMENT# ***************************************************************
GSK/APR 06
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