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Building Principles: Consulting Agreements
In order for camp professionals to maintain their focus on their organization's mission, consultants are playing an increasingly important role in the operation, management, and planning of camps. Camp leadership looks beyond its in-house staff to address issues or solve problems that are beyond its internal knowledge base. Questions that are perceived to be too big, contentious, technically complex, or which have the potential to become risk management items should all be put into the hands of trusted specialists, familiar with your operation, program, goals, and staff.
There are a multitude of issues that will affect the final selection of the "right" consultant, but most often are concerns over what services will cost. Like so many other situations, the answer is almost always: "Well, it depends." Lump sum, percentage fees, hourly-not-to-exceed, and straight hourly are among the agreement structures that your prospective consultant may offer, each with its own set of benefits and limitations. This month, we'll look at several common pricing structures for consulting agreements and what you should expect to see with each arrangement. We'll try to compare the work of specialists you may have visit camp with the more familiar work of construction contractors. In the end, we hope that you'll have a better idea of what your dollars are purchasing.
"Lump Sum:" A Sure Thing?
Generally speaking a carpenter, roofer, electrician, or septic pumping company each has a very well-defined scope of work when they're called. That scope has been outlined by you or your staff, and the project intent is pretty clear. When you request a quote from them, drawings, sketches, or even a layout in the field, these items define for them what they are to accomplish, much like the "lump sum" proposal described below. You are typically much more familiar with their final product and so are more comfortable asking for, and comparing their services, work, and costs. Reconciling three quotes to roof ten cabins can be a pretty straightforward exercise, if you're certain that they're all offering to provide exactly the same services and product. (See the January/February 2002 Building Principles column in Camping Magazine.) So you're comfortable asking for and agreeing to a lump sum from contractors?
When you engage a consultant, you're buying his or her knowledge and time. A lump sum proposal is offered when the scope, objectives, and intent of the project are well defined and the time and effort required is reasonably estimated. The fee will probably be derived by considering each of the incremental steps, estimating the time required for each, multiplying that number by an hourly rate, and then creating a total. That bottom line figure may be adjusted slightly if it seems too high or too low for the services being proposed, but that adjustment should always find its way back into the estimate of hours required to deliver the work. That final figure is what appears in the proposal. From the consultant's perspective, it's critical to ensure that there is more than enough time budgeted to get the job done, so the rule of thumb is always to estimate high. In summary, the consultant is offering to deliver a specific product for a set fee, just like the construction agreement. What, then, is the trouble putting a lump sum agreement in place?
Most clients are reluctant to enter into a lump sum agreement. It seems that clients are unfamiliar with the product that they're requesting, and nobody likes to agree to buy a proverbial "pig in a poke." That being said, they're even less inclined to hand over a blank check.
The Hourly Agreement: An Open-Ended Guess
Intuitively, folks are OK with certain contractors who provide a quote that isn't a flat fee but is based on accomplishing a specific task. Well drilling is a great example of this. No well driller will tell you in advance how much a new well will cost or how much water you'll get, because nobody knows. He may provide a guess based on other wells in your area and knowledge of local geology (normally estimating high), and he'll declare how much he's going to charge per foot of depth. Most people understand that and put their trust (a key word here) in the driller and hope for the best. Ultimately, camp needs water, so it costs what it costs. Again, trust is the key, because few, if any, clients know how (or bother) to check to see how deep the well really is. From the ground surface, a 50-foot deep well looks exactly the same as a 500-foot deep well. (Incidentally, many well drillers have a provision that the client must pay for each dry hole, also based on depth.)
An hourly agreement is the ultimate expression of trust between the consultant and the client. It comes about under one of two situations. Either the project is too vague for the consultant to estimate the amount of time required or something unexpected threatens to derail your operation, and there isn't time to prepare a formal proposal. Although the arrangement is somewhat open-ended, the consultant tracks and spends time very carefully so that the cost is easily justified when questioned. Attorneys generally work hourly because they never know what they'll get into, and they need the flexibility to spend as much time as required to adequately represent their client.
A Really Bad Idea: Hourly, Cost-Not-To-Exceed
This arrangement has no equivalent in the construction industry, and in a minute, it will be quite clear why. In this situation, the consultant has agreed to provide a certain number of hours of work toward accomplishing a certain goal. The project is billed hourly, with a specific dollar value limit. Most often, this comes about after a lump sum proposal has been made, but it's too expensive for the client to afford. Stunned by "sticker shock," the client asks for a revised proposal combining the benefits of both the lump sum and the hourly work. This might look like a great way to go, but can you imagine why you'd never get a construction contractor to agree to this: "Gee. I can't really afford $200,000 for that building. Just get as far as you can for $150,000." In the same way, when the ceiling has been reached, the consultant stops, regardless of where the project stands. Imagine telling your attorney to prepare to defend the organization in the camper wrongful death suit, but we only have $10,000 to spend on the defense! It has been our experience that this sort of artificial security blanket delivers nothing but frustration and disappointment, and we do not offer this arrangement.
Lump Sum Fee As a Percentage of (Actual) Construction Cost or Cost Estimate
Most first-time clients expect us to prepare our fees this way, but nothing could be further from the truth. Many times, the vagaries of the project ahead prices architectural work on a percentage (7 percent) of either the final construction cost or the preliminary construction cost estimate, as determined by the agreement. The obvious shortcoming here is that there is no apparent incentive for the architect to contain costs, but there is another, less obvious problem. As "lead designer" on a project, the architectural firm is responsible for hiring technical subconsultants including civil, structural, electrical, mechanical, and fire suppression specialists. All of these designers are paid out of the architect's fee. Interestingly enough, while the architect has negotiated a percentage of cost fee, the subconsultant fees are always lump sum. With the architect being paid a percentage of the construction cost, and the engineers being paid lump sum, there's really no incentive to contain costs. Think about it: If lump sum is good enough for them, why shouldn't it be good enough for you?
Is There Anything Else We Need to Know?
Often times, the project scope is too difficult to budget all the way through, so it's unreasonable to expect a lump sum proposal at the outset. When that happens, ask your consultant to break the proposal into smaller tasks that are short term or well enough defined that a lump sum fee can be developed for the first step. That proposal should describe the tasks that follow and allow for a fee for each subsequent step. This way, the client limits the potential cost to smaller, more palatable pieces, and the project moves along smoothly. At the end of any task, the client is able to re-evaluate progress to date and redirect and regroup the effort.
Here's a simple example of how that works: A potential client recently called and told us that there were several buildings at camp that were, well, pretty rickety. His board had directed him to develop a plan to take care of the situation, and calling us was his first step.
As the fog of uncertainty clears at the end of each step, we were able to prepare a reasonable guess as to what the next step will be and what it will cost. It's true that at the outset, there is no warm feeling about "the final cost," but this is where the trust and mutual respect earned through a long standing relationship with your consultant pays big benefits.
To summarize, let's revisit the title question: "What exactly are you paying for?" Your consultant should provide you their best effort, expertise, and most reliable counsel for the agreed-upon fee. The better that you know each other and the longer you work together, the more likely you'll get that and much, much more.
Rick Stryker is a professional engineer with Camp Facilities Consulting, providing study, design, permitting, and construction consultation services to the camp and conference center community. Camp personnel may contact him at 570-296-2765 or by e-mail at email@example.com.
Originally published in the 2006 March/April issue of Camping Magazine.