There are four basic types of fee structures used by consultants depending upon the types of services rendered and the conditions under which services are to be performed. These are man-month or time-based fees, lump-sum fees, percentage fees or cost plus fixed-fee.
Whatever fee structure is used by the consultant, the remuneration should cover all salary, social benefits, overhead, profit and out-of-pocket expenses. The salary, social benefits, overhead and profit are dependent on the efficiency and employment policy of the individual firms. These are also determined by the past experiences of the firm in similar projects, enabling the firm to propose fees which are competitive as well as financially sustainable. Very often audited vouchers are produced to justify the fee structure. The out-of-pocket expenses are actual expenses incurred during the performance of the services other than salary payments and are reimbursed to the
consultant on actual expenditure basis after submission of actual vouchers e.g. payment for air travel after submission of air tickets.
Man-month Contracts
This is also commonly referred to as time-based or “cost plus fee” contracts. This is the most preferred contract by the multilateral agencies. Fees are paid as per agreed rates per man-hour, man-week or man-month and are paid for the time the consultants actually spend on the job. In addition there are other expenditures such as per diem, travel costs and out-of-pocket or direct expenses for equipment, printing etc. The advantage of this type of contract is that it most closely reflects the actual costs incurred by the consultants during the performance of the services. This contract generally has a “ceiling” and is accompanied by an explicit obligation of the consultant to complete the given task within the stipulated amount and time. The disadvantage is that payment is done according to consultant’s inputs rather than outputs so that there are chances the desired output is not obtained within the given period and greater client monitoring is required.
Lump-sum Contract
In lump-sum contract a fixed amount is negotiated for a specified output. Its biggest advantage is that it is simple to administer and payments are made at specific intervals according to the work progress. The client also has the advantage of transferring the risk of price rise and need for doing more than the anticipated amount of work to the
consultant. In this case the consultant has to take these into consideration while estimating the contingencies in his quoted price. The fixed amount to be charged is normally derived from man-month type of calculations or alternatively from percentage type calculations.
Percentage Contract
This has been the traditional type of fee structure where the consultant is paid an agreed percentage of the actual construction cost. The percentage to be charged for each type of work is based on a scale drawn up by a national association of engineers or architects and normally ranges from 2.5% to 10%. The percentage scales are supposed to be the
minimum fees and the consultant is free to charge higher fees if necessary. More accurate concept of the actual fees to be charged can be developed as the consultant gains more experience and knowledge over the years. It is simple to administer and the advantage to the consultant is that fees automatically increase as the cost increases. The disadvantage is that the consultant is not motivated to achieve the best design or reduce cost. However, this type of fees is one of the least favoured by the multilateral funding agencies.
Cost Plus Fixed Fee Contract
In this type of contract the consultant is paid a fee based on time-based rates for the design and management plus a fixed amount of fee, usually for his expertise and know-how. It is quite similar to the man-month contract except that in a month contract the consultant’s fees are built into the man-month rates whereas in this type of contract it is calculated as a separate fixed amount of fee. This type of contract is generally used for the design and construction of industrial plants or research and development works where the degree of input cannot be estimated or the output specified with any confidence.
5.2 PREPARATION OF A COST PLUS FEE FINANCIAL PROPOSAL
The cost plus fee type of financial proposal is the most favoured by multilateral agencies.
The proposal clearly shows the breakdown of the different costs in a standardized format.
Not only does this make it easy for the consultants to prepare the financial proposal, it also makes it easy to conduct item-wise negotiations. The following steps are taken in the preparation of the financial proposal:
Preparation of the Activity Chart
The activity chart is normally a simple bar chart showing the proposed sequence and duration of all the different activities of the project. One of the two axes of the matrix shows the different activities and the other the time in months. The proposed activities should cover all the different aspects of the TOR. The amount of time allotted for each activity is usually an estimate based on the architect’s earlier experience in similar works.
Because of this, the time estimates tend to differ from firm to firm.
Staffing Schedule
Based on the activity chart a staffing schedule, also in a bar chart format, is prepared. The input of each professional is checked against each activity of the activity schedule and the sequence and duration of his input is then determined. This is done for all the different staff required and the total man-month requirement of each staff is identified. It is preferable to separate the staff inputs required during the design and the construction phase.
Determination of Man-Month Rates
The man-month rate for each type of staff is then calculated. The man-month rate should include i) base salary ii) social costs iii) overhead iv) fees and v) overseas and
inducement allowance if applicable. The base salary is the salary to be paid to the individual but does not cover any other allowances. To justify the base salary the consultant should be able to produce vouchers of salary being paid to the individual or someone comparable to him.
Social costs are additional costs the consultant has to pay to his staff because of
legislation, work agreements of established practice. This includes sick leave, vacations, medical and life insurance, providend fund, pension or gratuity etc. This can vary according to the practices and regulations of the different countries as well as the management practices of the consulting firms. Social costs typically range from 20% to 60% of the base salary. If required, the consultant should be able to justify the percentage of the social costs proposed through vouchers of actual payments as social costs.
Overhead includes the consultant’s cost of doing business. This includes office rent, office supplies and equipment, secretarial and clerical staff, travel expenses,
communication expenses, supporting technical staff etc. The overhead cost is also expressed as a percentage of the base salary and typically ranges from 65% to 150% of the base salary. The overhead cost is often an indication of the consultant’s efficiency and the consultant has to justify the cost if necessary.
The fee represents the consultant’s gross profit before taxes and is usually expressed as a percentage of the sum of the base salary, social costs and the overhead. This can vary between 5% and 20% depending upon the policies and practices of the consulting firm.
The overseas or inducement allowance is paid to staff on overseas assignment and varies according to the nationality of the firm and the country of assignment. This is not
applicable for in-country assignments.
The sum of the base salary, social costs, overhead, fees and, if applicable, overseas allowance forms the man-month rate to be charged. This calculation is done for each staff. If there are international staffs, it becomes necessary to calculate the man-month rate in foreign currency.
Other Expenses
Apart from these, out-of-pocket expenses and contingencies also need to be worked out.
The out-of-pocket expenses are estimates of the per diem allowance, travel costs, project office rentals, vehicle and equipment rentals, report printing and reproduction etc.
Contingencies are normally allocated to cover any unforeseen expenses or shortages, if any, in any of the other categories and ranges from 5-10% of the sum of remuneration and out-of-pocket expenses.
The total sum of all the remuneration, out-of-pocket expenses and contingencies is normally the ceiling figure for the cost of consulting services.
5.3 SCHEDULE OF PAYMENT
The payment schedule depends upon the type of remuneration structure adopted. In the man-month type of fee structure monthly bills are submitted indicating personnel time inputs and reimbursable costs. The same method applies for the cost plus fixed fee contracts.
In the case of percentage fee structure, payment is made according to the different phases of the services rendered. Different percentages are agreed upon to be paid after each phase is completed and paid after the work phase is completed. Different phases are agreed upon for both the design and the construction phases. Since the percentage fee is based on the final project cost, final adjustment has to be made once the construction is complete since the interim fees are based on the estimated cost and later on the bid amounts which are bound to change after the construction is complete.
For the lump sum fees, payment is made as per agreed percentage of total sum according to completion of different stages of completion of the project e.g. at contract signing, completion of 25% assignment, 50%, 75%, draft report and final report.
5.4 SCAEF’S RECOMMENDED BREAKDOWN OF SOCIAL COST, OVERHEAD AND FEES
In its guidelines SCAEF has recommended social costs to be 42% of base salary,
overhead to range between 75-100% of base salary and the fees to vary from 15-20% of the sum of base salary, social cost and overhead. The proposed breakdown of each cost is as follows:
Social Cost Breakdown
Paid Leave 15-21 days/year 5.40 – 6.00%
Sick Leave 7 days/year 2.50%
Provident Fund 10.00%
Dasain Salary 1 month/year 8.33%
Medical Allowance 5.00%
Life Insurance 2.50%
Pension / Gratuity 8.00%
Total 41.73% or 42%
Overhead Breakdown
Head Office Rent 16%
Head Office Utilities 7%
Adm. Salaries 14%
Non-revenue Earning Professional Salaries 15%
Printing and Reproduction 3%
Computer Costs 8%
Transport 6%
Business Promotion 16%
Depreciation 6%
Postage 1%
Insurance 6%
Library Materials 1%
Financial (bank commissions/interest) 0.5%
Advertisement 0.5%
Fees for Lawyers, Auditors Research and Development Staff Training and Education Professional Indemnity Insurance Social Activities
Total 75-100%
Fees
Reserves and Profits, Business Risk 15-20%
5.4 IIA’S STANDARD SCALE OF SERVICES FOR COMPREHENSIVE ARCHITECTURAL SERVICES
The IIA’s guidelines for charging professional fees are on percentage basis and could serve as a useful tool for architects of Nepal to determine appropriate fees for their
services. An analysis of a few consulting firms’ fees based on cost plus fee was found to range from 6-10% of the total project cost, whereas, the minimum fees recommended by IIA for comprehensive services including site supervision and certification of contractor’s bills is 6%. Thus there does not appear to be a major deviation in the total fees charged according to the different systems.
The IIA recommends architects to be engaged, as far as possible, in comprehensive architectural services and has designed a scale of fees for comprehensive services including pre-design study, architectural, structural, electrical and plumbing design, air conditioning, heating, acoustics and interiors and if required, detailed designs of external services including roads, drainage, sewerage, water supply, street lighting, landscaping and signage.
The fee structure is based on the tendered cost of the total project including repetition of designs. The fees recommended are the minimum scale and architects are free to increase the fees according to the type and complexity of the assignment. For works costing up to Rs. 5 lakhs and community development works such as community housing, slum upgradation etc. fees are negotiable between the architect and the client. For all other works the minimum rates as given below are to be followed:
Urban Design 1%
Site development, housing (excluding high rises) 2.5%
All Other Building Projects (comprehensive) 5%
Additions/alterations 7.5%
Interiors 10%
Site Supervision and verification of Contractor’s Bills additional 1%
Site Visits, models, presentation Drawings actual cost