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Strategies for Fee Structures in Consulting Engagements

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Yet another vendor seminar last month, and the idiosyncrasy of the day was an abnormal amount of focus on the fee structure (they were presenting their expertise on a certain platform, and talk of fees was a tad disconcerting).

The vendor is, of course, railing against the fixed fee – puts all the risk on them, artificially constrains the project, etc. They didn’t mention how the fixed fee enables an upside on their part – if the Vendor (contractor/consultant/them) pads the estimate and comes in under, the Customer (client/company/me) still has to pay. Admittedly, this is a rare event – but I, too, am not a fan of fixed fee agreements.

The Vendor-preferred alternative is time & materials (T&M), but that’s no good either. T&M gives the Customer little control over scope. And don’t talk to me about project reviews – most Customers don’t have the project implementation experience to know when the consultants are stretching things out, adding features, etc. – and consultants aren’t readily going to point out when a Customer’s lack of discipline will drag out the billings. Another big problem with this approach: in most Customer companies, it’s painful to go to the well and ask for incremental budget.

I prefer a structure that “chunketizes” the investments, allows me to speak in terms of phases, and brings a higher amount of predictability, not a blank checkbook. Cast the project’s Statement of Work such that the billings for this project are not to exceed a certain amount. Billing under a given Statement of Work is done on a time and materials basis, but capped at a maximum; if the work finishes early, there is no requirement to pay up to a final amount.

Professional fees for services to be rendered are proposed on a “time and materials” basis as detailed above; [contractor] agrees that it will only bill for the effort expended. This is a not-to-exceed services arrangement; total billings for the project deliverables above will not exceed [$$$$].

This works because it forces a certain amount of rigor on the consultant up front, to come up with a budget for the project that has enough detail to support a commitment to the figure. Chances are good that it won’t be a low-ball amount (so they don’t get stuck), or a sandbagging (high) amount (because they might not get the bid).

The best reason for this arrangement is that it puts the issue of scope management right up front. Most consulting firms, when faced with such an agreement, will immediately decry it as unfair because of the inevitable scope creep – how will we control this? I love to hear them identify this problem [especially when they don’t propose a solution] because they are admitting a huge lack of project management skill and rigor. If scope creep is inevitable, they are telling me that T&M is exceedingly beneficial to their side, and they base their profitability on out-of-control projects that keep their people billing for weeks and months beyond the original estimates.

Ok, maybe that’s a tad too cynical … but that doesn’t mean this problem is difficult to solve. It’s actually quite simple – just put some language in the agreement that gives the Vendor and the Customer explicit visibility of changes in scope.

Total billings for the agreed-upon scope are not to exceed the committed Project Budget without prior written approval.

That’s it – and think about what that will bring to the project … regular communications between stakeholders, process owners, and consultants … clear and complete requirements … managed expectations through delivery … what a revolutionary concept!

If you structure thinks well, the Statement of Work can address how a project is delivered, not just what gets delivered.

There’s a lot more opportunity to make good things happen in your relationships with external vendors through these agreements (Statement of Work, Master Consulting Agreement) …

  • Clarity around intellectual property
  • Confidentiality, non-disclosure, and control over the use of your company’s name
  • Malware protection from contractor PCs not under your control
  • Risk-sharing agreements that put the consultant’s skin in the game

Let me know if you’re interested in any of these areas …

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