The cost of engineering is typically a small percentage of the full life capital and operating cost of a developed facility. The most cost effective solution to a Client's needs may not coincide with the lowest cost engineering services. Care should be taken not only to select the best qualified Consultant but also to select a basis of fee that fully complements the services required to meet the needs of the project and the desired quality of the completed work.
There are three concepts on which fees for engineering services are commonly based:
Each has distinct applications and frequently combinations of the concepts are applied to different stages of a project. Variations involving targets, bonuses and cost plus and agreed fee are also used to reward the Consultant for innovations and to encourage efficient performance.
The term Fee, as used in the following pages, represents the total charges for engineering services which includes disbursements incurred by the Consultant.
2.1 TIME BASIS
This fee basis is particularly applicable in circumstances where the scope of assignment is not well defined or where the Consultant does not have control over engineering manhours and disbursements required on specific stages of a project. It should be used for:
1. Consultative and Advisory Services
It is also appropriate for:
1. Detailed Design Services
and, for these latter two categories of service, can be supplemented with a target or upset fee in circumstances where the scope of the assignment is firm.
Fees on a Time Basis are determined by multiplying the number of hours each member of the consultant's staff expends on the project by their respective hourly billing rates and adding the disbursements listed in Section 4.
The formula for Fees on a Time Basis is:
Fee = (Hourly Billing Rates ´ Hours Expended) + (Disbursements ´ Factor)
— the above Payroll Factors are based on normal conditions where the overhead cost items described in Appendix A are borne by the Consultant. In circumstances where some of the overhead items are provided by the Client, this should be taken into account in negotiating the Payroll Factor
• Fringe Benefits — As described in Appendix A
2.2 FIXED FEE BASIS
This fee basis is applicable only to projects or components of projects where the scope of the work is clearly defined and where construction, if applicable, will be completed over a known schedule. The Fixed Fee for such assignments should be negotiated following preparation of a comprehensive estimate of the engineering manhours and overhead costs.
An agreement defining the services to be provided in detail and all categories of cost included in the Fixed Fees is essential. The agreement should cover schedule, time limits, inflation and other identifiable items that influence costs. Changes in the scope of the work after the Fixed Fee has been established should be compensated for on a Time Basis or by a negotiated Fixed Fee adjustment for each change.
The formula for Fees on a Fixed Fee Basis is:
Fee = (Negotiated Fixed Fee) + (Disbursements Factor)
• Negotiated Fixed Fee — the amount included in the agreement which covers specified scope of assignment and cost items
• Disbursements — reimbursable expenses incurred on the project. See Section 4.
• Disbursement Factor — typically 1.1 but subject to negotiation for special circumstances and conditions
On some projects the cost of engineering services in Categories 3 and 4 as described in Section 1, are relatively predictable as a percentage of the estimated construction cost. A graph illustrating this relationship is shown in Appendix C. The range of percentage fees shown on the graph corresponds to varying levels of project complexity as described. The graph may usually be used as a guide to determine if the Fixed Fee, resulting from the engineering cost estimate for these two categories, is reasonable.
2.3 COMBINATION TIME BASIS AND FIXED FEE BASIS
Projects frequently require several Categories of Service; some can be accurately quantified at the commencement of the project and others vary with schedule and conditions that cannot be predicted. In these circumstances the services that can be accurately described and quantified can be appropriately covered by a Fixed Fee and those that are unpredictable should be on a Time Basis.
A judicious combination of the Time Basis and Fixed Fee Basis for different engineering phases permit a variety of innovative fee concepts that encourage execution efficiency without sacrificing quality of service. These concepts include targets, bonuses, cost plus fixed fee and other variations.
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