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Emerging trends in computation of consultancy fees

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DOI: 10.13140/RG.2.2.31763.07207

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 EMERGING TRENDS IN THE COMPUTATION OF CONSULTANCY FEES

By

Oke, Ayodeji E. Ph.D(Qs), MNIQS, RQs

Department of Quantity Surveying,
Federal University of Technology Akure, Nigeria.

Being a Paper Presented at

A 3-Day Seminar and Workshop organised by Edo State Chapter of Nigerian

Institute of Quantity Surveyors (NIQS) with the theme "Emerging Trends in
Construction Project Delivery: The Challenges of Construction
Professionals" held at Bishop Kelly Pastoral Centre, Airport Road, Benin
City, Edo State on 10th - 12th June, 2015

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1.0 Introduction
The calculation of fees is a complicated and controversial subject (Designing building,
2015). The term ‘fees’ generally refers to payments made by the client to consultants for
services under the terms of an agreement. They are generally paid in instalments based
on regular dates or at pre-defined stages of completed work.

A Professional, according to the Bureau of Internal Revenue (U.S.A) is classified as self-

employed, and refers to an individual or a group, practicing his or their profession or
calling, with or without license under a regulatory board or body (Taxpayer Assistance
Service, Taxpayer Information and Education Division, 2011). - All over the world, every
non-volunteered service rendered by an individual to another person, project, group of
persons etc. must be paid for by the recipient of the service. So it is, even in the
construction industry. Therefore payment made to professionals that have offered
different services of their expertise on a project is a reward in exchange of their
individual services offered to the success of the project (Taxpayer Assistance Service,
Taxpayer Information and Education Division, 2011). This payment after work is what
is known as “Professional fees”.

With respect to the practice all over, the intention is to ensure the provision of
competent professional services in compliance with the Code of Ethics of the industry
which requires regulation to give a uniform basis of pricing and negotiating professional
fee payment known as the “Scale of Professional Fee” (IESL, 2010). This Scale of
Professional Fee is prepared for the benefit of clients who propose to procure
consulting professional services, and for consulting professionals proposing to provide
a service to a client. It is intended to serve as an aid for use in selecting a Consulting
Professional, for defining the Consulting Professional services being contracted for and
in selecting the basis of fair remuneration for those services (RIBA, 2010). Consulting
Professional’s fees are determined by the Scope of Services to be provided. The Scope of
services may be determined by the Client in consultation with the Consulting
Professional and in so doing, it is advised to discuss the project and Fee Guidelines so
that both parties thoroughly understand the project. Adopting a fee scale or scales set
out would enable a Consulting Professional to provide his Client a competent, reliable

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and high standard of service. These Scales and rates are not mandatory but guidelines
only and may by negotiation be adjusted upwards or downwards to take account of the
complexity of design, increase or reduction of the extent of services to be provided etc.
(CPA, 2011). The Terms of Reference for the consultancy assignment is of high
importance in the preparation of a fee proposal by a Consulting Professional. The more
comprehensive and precise the Terms of Reference are, the more consistent will be the
fee proposal. Therefore the Terms of Reference for any consultancy assignment should
be carefully drawn up in order to avoid ambiguities.

The Consulting Professional is understood to mean a Corporate and Registered

Professional with appropriate experience in the relevant field of consulting and is
entitled to use the scale of professional fee for remuneration of service rendered.

2.0 Constituents of consultancy fee

A Consulting firm must hold a Certificate of Authorization issued under the applicable
Act. The fee to a Consulting Professional should cover all his costs on completion of the
scope of services envisaged and a reasonable margin for profit. Such costs according to
IESL (2010) include;

2.1 Salary Costs

Salary costs include the basic salary and allowances such as cost of living allowances of
the technical staff of the Consulting professional deployed on the particular project.

2.2 Social Charges and Statutory Charges

Social Charges include costs incurred by the Consulting Professional in respect of;
Employees' Provident Fund, Employees' Trust Fund, Holiday and sick pay, Bonus,
Gratuity benefits, Staff Welfare, Taxes & other statutory charges, Miscellaneous benefits,
Taxes and others.

2.3 Overhead
Overhead are costs of administering the consultant's organization and include;
Administration, Salaries of non- technical supporting staff, Technical supervision, Rental

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of office, Electricity and water, Stationary, brochures and reproduction of documents,
Communications (fax, telephone) and postage, Insurance including professional
Indemnity Cover, Miscellaneous etc.

2.4 Reimbursable Costs

Reimbursable Costs include costs directly related to the particular assignment such as
Travelling, Per-diem and out of pocket expenses, Communication, postage and courier
service charges, Electronic data processing, Printing of reports, Tender documents,
Maps, photographs, aerial photographs, Site surveys, Site investigations, laboratory
services, testing charges, Hire charges of plan etc.

3.0 Variability of consultants' fees

Fees are entirely dependent on the nature of the project and the circumstances of the
appointment (RIBA, 2010). Large new building projects may attract lower percentage
fees than small works to existing buildings, commercial work may attract lower fees
than private residential work, works to historic or listed buildings may attract higher
fees and so on. Asian Bank Development (2013) observed that selection of the type of
contract between client and consultant will be dependent on the nature of the
assignment, whether the scope and output are definable and the distribution of risks
between the concerned parties.

Fees charged by consultants generally vary according to:

1. Size of project.
2. Type and complexity of project.
3. Scope of services. For example, full design and site inspection will attract a
higher fee than concept design that is then developed by the contractor.
4. Anticipated repeat and/or bespoke (to customers' specification) elements of the
design.
5. Location of site and other consultant practices.
6. Reputation of practice. For example, a signature architect might charge more
than one that is newly qualified.

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 7. Client organisation and track record. This will affect how much support is
required and the risk perceived by consultants.
8. Conditions of engagement. For example the requirement for collateral
warranties, partnering arrangements and so on.
9. Anticipated programme and resources. The outputs in a short or long
programme are the same, however a longer programme prolongs administrative
resources required such as attending meetings and responding to requests for
information. Thus percentage fees for a longer period will tend to be higher
(RIBA;, 2010).
10. Economic climate of supply and demand. Fees may be lower during recessions
and higher during booms.
11. Consultant workload.
12. Assessment of the competencies of other consultants.

4.0 Bases of Professional Fees Computation

There are two bases for computation of professional fees, i.e. Value-based and Time-
based (CPA, 2011). In the view of Roderick (2003), consultant’s fees are commonly
calculated on a time-charge, lump sum or percentage basis, although some work may be
dealt with on a retainer or term commission basis.

4.1 Time-Based Principle

Time-based billing had been very useful in the past in assisting the professionals in
charging the clients. However, under this method, there is a danger of arbitrary fixing of
charge-out rate due to erroneous recording of time sheets, resulting in undervaluing
professional fees being billed to the clients (CPA, 2011).

This approach considers time record incurred on the work, rate of staff per hour
calculated on an annual basis, salaries and related costs (such as the costs and fees paid
to recruitment agencies, and all direct training costs), mark-up factors (to include rents
and related costs, professional indemnity insurance, administration costs incurred in
running the practice, and the cost of continuing professional education), Partners’ rates
(advisory services, taxation, arbitrations, investigations, reconstructions etc. where the

4
work involves special demands on professionals' and associates' time and skill),
reimbursable expenses (Out-of-pocket expenses necessarily incurred in connection
with the engagement, e.g. travelling and accommodation expenses, specific stationery,
communication costs and any direct outsourced expenses should normally be charged
to the client in addition to the professional fees calculated in accordance with this
circular) and Provisions in financial statements (where it is not possible to determine
the final fee at the time financial statements are finalized, clients should be informed,
when appropriate, that the amount provided therefore should be regarded as being
provisional only).

It should be noted that all the set out provisions for charging client based on time
normally fall within the range set out by a regulatory agency.

4.2 Value-Based Principle

The computation of an appropriate fee for services involves value judgment. It should
take into account the value of service rendered by the professional and the benefit,
tangible and intangible, derived by the client (CPA, 2011). Value-based billing takes
cognizance of the knowledge and skills that a professional brought to bear on the
assignment and the professional judgment that he was called upon to make. At the same
time, the client who derived a certain value, be it functional value or emotional value,
must be reflected by a fair and equitable fee payable.

In the course of applying Value-based billing, a professional must uncover the value
drivers of his service. Value drivers are those elements that assist the professional in
satisfactorily and professionally discharging his professional obligation (CPA, 2011).
Generally, express and tacit knowledge, information technology hardware, quality of
internal processes and others can and are the drivers of value. In the course of his
professional work, the professional should and must impress upon his/her client the
‘value’ that is being ‘delivered’ and the ‘value-drivers’ that have been brought to bear in
satisfying the client’s objective. Fees charged for assurance engagements should be a
fair reflection of the value to the client. Therefore, for consistency and harmonization of
the fee levels, it is appropriate to determine fees using the Total Value of Project

5
(Project Cost) as shown in the contract documents and multiplying it with the
coefficient percentages as shown in the coefficient percentage table.

It is however recommended that professional fees should be charged based on value of

work delivered against the total cost of project rather than time expended on the
project by the professional.

5.0 Scale of fees

Professional institutes used to publish recommended fee scales expressed as a
percentage of construction costs for a range of different building types. However
legislation aimed at preventing anti-competitive behaviour forced some institutes to
abolish these scales, leaving fee negotiation to market forces. In the opinion of IELS
(2010), fee to a consultant should cover all his costs on completion of the scope of
services envisaged and a reasonable margin for profit. Such costs include salary costs,
social charges and statutory charges, overhead and reimbursable costs.

Consequently bidding for consultancy work has become a free for all in a highly
competitive market. Some commentators argue that this has driven down fees, however
it has also been suggested that it has driven down standards and led to much design
work being transferred from consultants to specialist contractors and suppliers who
include design costs in their building agreements. The design co-ordination issues this
has caused has had far reaching consequences and supplied the legal profession with a
constant flow of disputes about responsibility for disruption and delays.

6.0 New development in computation of consultancy fees

Bowbrick (2013) concluded that many consultants are undercharging, working too
long, and not spending enough time on personal development. In line with this,
Roderick (2003) noted that The Landscape Institute withdrew its mandatory Scale of
Professional Charges in 1986 and up to the first publication of a guidance in June 1995,
had no formal basis on which to advise clients and landscape consultants on fees.
Consultants fees are determined by the Scope of Services to be provided (IESL, 2010;
Asian Bank Development, 2013). The Scope of services may be determined by the Client
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in consultation with the Consultant and in so doing, it is advised to discuss the project
and Fee Guidelines so that both parties thoroughly understand the project.

There are different methods available for calculating consultancy fees amongst which
are time based; fixed fee & success based; contingency or performance based; demand
based; hourly fee rate; and a mix of the above.

6.1 Time based

Time-based contract is used when it is difficult to define the scope, output, and the
length of the services, either because the services are related to and await completion of
activities by others for which the completion period may vary, or because the input of
the consultants is difficult to assess. This type of fees computation is suitable for
complex studies, supervision of construction, advisory services, and most training
assignments. Payments are linked to inputs and are usually based on monthly rates for
personnel named in the contract, and on reimbursable expenses using actual expenses
and/or an agreed unit rate. This puts the risk squarely on the client, great for the
consultant but not so great for the client, in fact the worse you do the more you get paid!

6.2 Fixed fees and success based

Fixed fees are generally used where the value added is high but equally the risk to both
parties may be high. A fixed fee will often be negotiated as part of a tender.
Success based fixed fee – as above but is only paid out if agreed metrics are met, high
risk for the consultant and so needs a higher fee to compensate for this.

6.3 Contingency or performance based

Two decades ago it was mainly tariff analysts that used these types of fees. After years
of some consultants not meeting targets, more and more often fees are expected to be
charged in direct proportional to the benefit achieved. A performance-based fee is used
to enhance the delivery of consulting services outputs, thereby improving value-for-
money. Payments to the consultant are triggered on achievement of selected milestones
signifying that certain project deliverables (e.g., an outcome or outputs defined in the
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project design and monitoring frameworks) have been completed or achieved. Contract
milestones need to be clearly specified, sufficient in number to enable effective
monitoring and verifiable. Selection of milestones and the indicators for verifying
achievement of milestones are agreed with the consultant at the time of contract
negotiations. The ease with which milestones can be verified depends upon the nature
of the project.

6.4 Demand based

Demand based fees are the easiest to calculate – they are either based on a multiplier of
what it would cost the client to pay a salary (anywhere from 150-300%) or they are
based on what the competition/competitors are charging.

6.5 Hourly Fee rate

Hourly fee rate was developed by Department of Public Service and Administration
(2003). This Guide set standards for hourly fee rates for consultants, Planning and
budgeting of projects and appointing Consultants at the appropriate level and
remuneration to support the principle of competitive tendering.

The method for determining hourly rate fees for consultants will take into cognisance
the following:
1. Financial basis: using salary band as cost of employment for a consultant;
2. Overhead factors: such as, office accommodation, office equipment, consumables
items like paper and stationary, rental of premises including water, electricity
and rates, communication like email, telephone, fax;
3. Utilisation rates; The utilisation rate allows for time (to generate income) that
cannot be attributed to a specific project or consultancy work. This allows time
(after deduction of leave, sick leave, weekends and public holidays) for
management of practice, marketing and promotion, continued education,
capacity building, personnel development, mentoring, etc.
4. Mark-up for profit;
5. Type of service provided;

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 6. Comparative level with the Public Service: The following elements are
considered: Level of responsibility, Complexity, Liability, Risk associated with
the consultancy work, and Level of expertise, qualifications and skills; and
7. Duration of the appointment: Short term engagement of consultants is 60 or less
consulting days per calendar year

6.6 A mix of any or all of the above

The reality is a mix of two of the above approaches and it will often work well to balance
the risk to both client and consultant. This can also be affected by the nature of projects
at various times.

7.0 Other issues in consultancy computation and payment

7.1 Stages of payment of consultancy fees and percentage

The traditional stage of professional fee ranges from stage 1 to 3 as described:

1. Stage I Services: This includes the pre-feasibility studies to the time of

preparation of approximate quantities.
2. Stage II Services: This starts from preparation of all the Contract Documents
which Includes Invitation to Tender, Form of Tender, Articles of Agreement,
Preliminaries and General Conditions of Contract, Preambles to Trade, Work
Specification, BOQ and Appendices and Tender Evaluation and Tender Reports.
3. Stage III Services: These are post-contract services rendered which are Technical
Services, Site Meetings and Visits and other additional services.

Table1: Stages of consultancy payment

DelQS (2012) Roderick (2003)
Stage 1 Inception 5% Stage A to B Inception/Feasibility 15%
Stage 2 Concept and viability 15% Stage C Outline proposals 10%
Stage 3 Design development 15% Stage D to E Scheme and Detail design 10%
Documentation and Stage F to G Production information 40%
Stage 4 30%
procurement and Bill of Quantities
Stage H to K Tender action, project 10%
Stage 5 Construction 32%
planning and operation
Stage 6 Close-out 3% Stage L on site
Completion 5%

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According to DelQs (2012), the current trend indicate that there are now 6 stages. The
stages and percentage of consultancy fees payable are detailed in table 1. RIBA stage
payment to consultants and details of activities expected to have been completed before
disbursement of the fee in accordance with RIBA plan of work is also highlighted in the
table.

7.2 Professional Fees Management

The golden rules to effectively manage professionals fees according to RIBA (2010) are:
1. Have a comprehensive appointment agreement in writing
2. Check the name of the client in the agreement is the same as you anticipated?
3. State clearly the client’s requirements and the scope of the services to be
provided
4. Ensure the client understands the payment provisions
5. Don’t undertake work which is beyond the resources of the practice.
6. Identify separate work stages and get each stage signed off
7. Establish rigorous procedures for managing fee accounts, invoicing and chasing
debts and maintaining cash flow
8. Resist pressure to start any work until the agreement is signed

8.0 Conclusion
Fee arrangement is a matter for commercial negotiation by members. No Institute or
body prescribes the mandatory basis - but guideline - for calculating fees, nor does it
ordinarily investigate complaints relating solely to the quantum of fees charged. The
level of fee is to be mutually agreed between the professional and his/her client which
largely depends upon the skill and knowledge required, level of training and experience
of the staff involved, the time necessarily occupied and the degree of responsibility and
urgency of work involved. However, it is paramount that in negotiating professional
fees, professional ethics and standard must be maintained and preserved so as not to
bring down the integrity, value of the professional body and in extension, the reputation
of the construction industry.

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 References
Asian Bank Development (2013). Guidelines on the Use of consultants by Asian
Development Bank and Its Borrowers, Retrieved May 20, 2015 from
www.adb.org March

Bowbrick, P. (2013). Calculating a fee rate, Retrieved May 20, 2015 from
www.bowbrick.eu

CPA. (2011). Guidelines on Professional Fees. Kampala: Institute of Certified Public

Accountants of Uganda.

DelQs (2012). Professional fees (South Africa), Retrieved May 20, 2015 from
www.delqs.co.za

Department of Public Service and Administration (2003). Guide on Hourly Fee Rates for
Consultants, Retrieved May 20, 2015 from www.dpsa.gov.za/projects

Designing building (2015). Building design and construction fees, Retrieved May 20,
2015 from www.designbuildings.co.uk

Federal Government of Nigeria (2011). The Scale of Professional Charges. In C. P.

Nigeria), Federal Republic of Nigeria Official Gazette (Vol. 98, pp. B 1093- 1116).
Lagos: The Federal Government Printer. doi:FGP 123/102011/650 (OL 81)

IESL. (2010). Guideline Structure for Engineering Consultancy Fees. Colombo:

Institution of Engineers Sri Lanka.

RIBA;. (2010). Fees and Fees Negotiations, "Good Practice Guide: Fee Calculation,
Negotiation and Management". (R. Philips, Ed.) London: RIBA Publication Ltd.
Retrieved May 27, 2015

Roderick I. S. (2003). Engaging a Landscape Consultant, Guidance for Clients on Fees,

The Landscape Institute, Retrieved May 20, 2015 from
www.landscapeinstitute.org

Taxpayer Assistance Service, Taxpayer Information and Education Division. (2011). Tax
Guide and Easy Primer on Paying Your Taxes. USA: Bureau of Internal Revenue.
Retrieved May 27, 2015

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