PURPOSE
The purpose of this procedure is to provide guidelines for understanding the two types of compensation used in contracts for Consultant services.
REFERENCES
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RESPONSIBILITIES
Project Manager (PM): It is the responsibility of the PM to make a recommendation to the Program Manager about the type of contract to use and to include the necessary documentation in the project files supporting the decision made.
Program Manager: It is the responsibility of the Program Manager to review and approve the PM’s recommendation on what type of contract to use.
Personal Services Contracts Section of Project Award & Control Division (PAC): It is the responsibility of the Contracts Section of PAC to update and maintain the standard form of the personal services contracts for both the Cost Reimbursement and Lump Sum version. The City Attorney’s Office issues the Standard Provisions for a personal services contract and these Provisions must be included as Articles in the contract. Also, the City Council may adopt Ordinances that affect personal services contracts. It is the responsibility of the Contracts Section to update the standard contract form for these new Ordinances.
PROCEDURE
Consulting contracts are characterized by the City as being personal services contracts. This title is meant to differentiate them from construction contracts (contracts to build something—usually publicly bid and awarded) and procurement contracts (contracts to purchase goods and recurring services which are bid through the Purchasing Agent of the Department of General Services). This Chapter deals with consulting contracts.
Consulting contracts are generally described by the two types of compensation methods: Cost-Reimbursement or Lump Sum. Their differences and the most appropriate use of each type are described below.
The PM should choose the type of contract most appropriate to the scope and nature of the work. The PM should check the Standard Personal Services Contracts website for the most current version of the applicable contract.
Cost-Reimbursement Contracts
Cost-Reimbursement contracts compensate the consulting firm based upon the actual number of hours worked and Other Direct Costs. The contracts always contain a cost ceiling. Invoices are generally submitted each month and they list each person who charged to the project, the number of hours they charged, and how much the firm should be compensated for this work. The hourly compensation rate is calculated one of two ways:
Hourly Billing Rate is an all-inclusive rate, including the person’s salary, overhead, and profit for each “classification” of person charging to the project (i.e. Senior Engineer = $140/hr, Engineer = $110/hr, CAD Operator = $85/hr), OR
Overhead or Multiplier Rate includes a Billing Salary Rate + Overhead percentage (%) + Profit percentage (%) for each person charging to the project. It is based on a formula that adds a percentage for overhead and a percentage for profit to a person’s actual hourly salary as paid by the consulting firm. The overhead and profit percentages are negotiated and stated in the contract. Once negotiated, the overhead rate is fixed in the contract and is neither provisional nor variable. Sometimes overhead and profit are combined into a single percentage value and called “mark-up” or "multiplier."
In an overhead type contract, it would require that for each hour worked on the project, the firm would be compensated for each individual employee’s actual hourly salary plus 120% of direct salary for overhead and 10% of the sum of direct salary and overhead for profit. If an employee’s Billing Salary Rate is $100 per hour, overhead would be $120 per hour, and 10% profit would be $22 per hour. The Consultant would be compensated at ($100 + $120 + $22) = $242 per hour. In a mark-up or multiplier type contract, it would require that for each hour worked on the project, the firm would be compensated for each individual employee's actual hourly salary plus a "mark-up" of 142%. This would be considered a contract with a "multiplier" of 2.42... in other words, for each hour worked on the project, the firm would be reimbursed an amount equal to the hourly salary X 2.42. If an employee’s Billing Salary Rate is $100 per hour, the hourly rate including the mark-up or multiplier would be $242. The Consultant would be compensated at $100 x 2.42 for a total of $242 per hour.
When to Use Cost-Reimbursement Contracts: Cost-Reimbursement contracts are most appropriate when the specific level of effort that will be needed to perform the tasks is very difficult to ascertain at the beginning of the contract. Examples where this could be the case would be when the initial task is to perform an analysis which will allow the City to determine the final scope of the project or the scope is very likely to change during the life of the contract. Another example where this type of contract is most appropriate is when the Bureau is using the Consultants to supply staff to supplement a City team and the staffing needs are likely to be variable. By its very nature, it is inherent on the Bureau’s PM to closely monitor the activities, costs, and progress of the Consultant with this type of contract. This is easiest to do when Bureau staff is co-located with the Consultants, although it certainly can be used when the Consultants are working from their home offices.
Lump Sum Contracts
Lump Sum contracts compensate the Consultant a fixed amount for the performance of the work. This amount is negotiated with the Consultants and stated in the contract. It is typically paid out at various milestones during the life of the contract and is most often associated with a deliverable from the Consultant. The specific milestones and the amounts to be paid for each are also negotiated and stated in the contract.
When to Use Lump Sum Contracts: Lump Sum contracts are most often used when the specific scope of work of the project is well defined and understood by both parties. This contract is less risky for both the City and the Consultant. A Lump Sum contract "locks in" the cost of the service, which aids in holding a project within budget. It is the most commonly used form of contract for architectural services. The nature of that work, i.e., a certain square footage of a facility to be built for a construction cost of a not to exceed amount, lends itself well to this type of contract.
Documentation
Once a decision has been made to utilize a specific type of contract, it should be documented in the Project Files. The documentation should include any project specific details that support the selection made.
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