4. Fees and expenses
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4. Fees and expenses

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Some basics
Australian Government requirements
Tips and Traps

Some basics

There is no magic formula for determining the level of fees that will provide ‘value for money’. Hence the need for competitive bidding as an indicator of ‘market price’.

Large, established firms are likely to charge more. But the trade-off is that they may be able to respond better to any problems that arise during the project, so that overall risk to the Government agency is reduced (although they may charge extra for solutions). This may not be apparent from the bid (submission) itself, but should be taken into account in gauging value for money.

Small consulting firms may be more responsive to client needs than large ones. Assuming the same level of skill as larger firms, they may therefore provide better value for money. However, they may represent a greater risk in terms of availability of personnel and ability to meet unforeseen needs and problems.

Fees can provide a lever for influencing a consultant’s performance. A graduated, incentive-based scale that reflects differing degrees of performance is better than an ‘all or nothing’ penalty approach.

Payment schedules should be based on carefully defined and specific milestones. Of particular importance is that the milestones are easily measurable. Smaller firms may need more frequent milestones to ensure adequate cash flow for them.

If consultants are not registered for GST, then the agency that hires them will not be able to claim an input tax credit for the fee paid. To maximise cash-flow benefits to the agency, the contract should specify that tax invoices will be required for any payment to the consultant.

In some cases, it may be difficult to specify clearly the extent or quality of work required. Providing a ballpark figure (maximum, or a range) for the value of a job in tender documentation can ‘signal’ bidders to compete primarily on quality, with less emphasis on cost. Value for money is encouraged because excessively expensive bids, as well as superficial proposals are avoided without eliminating price competition entirely.

Travel and accommodation expenses are usually charged at cost at non-SES rates. Consultants do not normally receive a travelling allowance, so the contract should specify that expenses are to be acquitted on the basis of receipts. A further option is to place a contractual cap on total expenses, in order to minimise costs.

Various payment arrangements are possible. Shenson (1990, ch. 9) identifies a number, including the following:

Daily or hourly fee: there is little incentive for the consultant to minimise the time spent on the job and the client bears all the risk.
Fixed-price fee: the consultant bears the risk and is likely to have allowed a contingency margin in the bid, although it is unlikely to be apparent to the client. In an arrangement of this kind, it is important to have well-defined outputs.
Fixed fee plus expenses: the most common form of contract used in the Australian Public Service. While the consultant bears the risk for the fixed fee, the client bears the risk of expenses unless the contract specifies that expenditure for expenses is subject to prior approval.
Fixed-price plus incentive: if a special condition is met (for example, early delivery) an additional pre-specified fee may be paid to the consultant. An alternative form is to base the fee on an estimate by the consultant (for example, $50,000) with a capped fixed price of $70,000. It can be agreed that any costs above the $50,000 threshold (but not exceeding $20,000) will be borne by the client at a rate such as 75 per cent, and the remainder by the consultant. This approach provides an incentive to the consultant to minimise costs above $50,000, but without necessarily compromising the quality or extent of the contract outputs.
Graduated incentive fee: if the consultant estimates that the contract will require $50,000 of work, a range of $20,000 can be set on either side. The consultant may be required, for example, to bear 25 per cent of costs above $50,000 up to a maximum of $70,000. Similarly, the consultant may receive 50 per cent of any savings below the estimated project cost of $50,000.
Fixed-price with re-determination: Where the scope and nature of the work is very vague, the parties may agree to proceed for a fixed fee to a defined milestone, by when the requirements will have been better defined and a fixed fee for the remainder of the work can be agreed.
Cost contract: where the consultant will acquire technology or knowledge which can be used to earn profits elsewhere, it may be possible for the client to agree to pay some portion of the consultant’s costs, but no fee (to reflect the revenue potential of the technology). This approach may be suitable for dealing with intellectual property.

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