10/2/2017 Types of Contracts Transactional Contracts versus - - PDF document

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NEGOTIATING PROFESSIONAL AGREEMENTS

FROM A CONSULTANT’S PERSPECTIVE

Nancie Boccio, MBA, JD

Senior Consultant, Parametrix

NOVEMBER 2017 Van Collins, JD

President/CEO American Council of Engineering Companies (ACEC)

SETTING THE CONTEXT VAN COLLINS

Preparing For Professional Services Contract Negotiations

Common Thoughts Often Heard In Approaching Professional Service Contracts

• “As a Procurement Officer, don’t I have a responsibility to get the

most I can for the least amount of money spent, or an obligation when purchasing goods or services with public dollars to see that the lowest price is obtained?”

• “Why is the likelihood of the success of a project reduced simply

because the services of the design professional for the project are

• btained with a lowest price in mind?”
• “How can it be detrimental to a project by merely shifting risk to

the design professional beyond its common law duty of care?”

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Types of Contracts

• Transactional Contracts versus Relational Contracts
• More Transactional Like Contracts

– Focus of Contract is on Specified Outcomes – Failure is Focused on Inability to Produce the Desired Outcomes (Expectation Damages)

• More Relational Like Contracts

– Outcomes are a Result of the Quality of the Relationship – Failure is Focused on Failure to Act in Accordance with a Certain Standard of Behavior in Similar Circumstances

Transaction Relational

Washington Public Works Contracts

RCW 39.80.010 Legislative declaration The legislature hereby establishes a state policy, to the extent provided in this chapter, that governmental agencies publicly announce requirements for architectural and engineering services, and negotiate contracts for architectural and engineering services on the basis of demonstrated competence and qualification for the type of professional services required and at fair and reasonable prices

Why Did The Legislature Enact QBS?

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• Axiom #1 – Performance of Architecture and Engineering Services is

Different Than Low‐Bid Construction Services – The Scope of Work is Most Often Uncertain at the Time of Selection. Determination is Often Iterative In Nature – Scoping, Consultation, Investigation, Evaluation, Planning, and Design are Best Accomplished in Collaborative And Innovative Processes – To Be Most Effective, Collaboration and Innovation Require A Positive, Partnering, and Creative Atmosphere Which Values Communication and Joint Respect

Why Did The Legislature Enact QBS?

• Axiom #2 – Good Planning and Design Save Money

and Provide the Best Value to the Public (i.e. QBS is for the Public Benefit, not the Engineering Community)

• WSDOT “Practical Design”
• Design‐Build – Alternative Technical Concepts (ATCs)
• Value Engineering

Why Did The Legislature Enact QBS?

• The Legislature Understood That QBS Is About Setting an

Innovative and Creative “Atmosphere” That Will Result In The Best Value And Outcome For the Public Interest. As a Corollary, Anything Which Negatively Impacts Innovation and Creativity Inherently Negatively Impacts Projects and the Public Interest

• Procurement of A/E Services Is Fundamentally Different Than The

Procurement of Construction Services Because The Nature and Performance Of The Work Is Fundamentally Different

• QBS Is Not A Mechanical Procedure to Be Followed Unthinkingly

What Are The Takeaways From The Legislature?

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• The Focus Is On Qualifications In The Initial Stage For A Reason

(i.e. Highest Likelihood of Creativity and Innovation)

• Price is not Irrelevant
• Procurement/Negotiation Cannot Become Adversarial Nor Can

Contract Terms Become So Inequitable That They Negatively Impact the Innovative and Creative Environment

• Requires Public Owners To Understand Consultants’ Business

Models And How Contract Terms (Both Risk and Pricing) Impact Them, Their Subconsultants, and Their Combined Performances

What Are The Takeaways From The Legislature?

• It Is A Give And Take Process
• Requires Both Sides To Actively Engage In Good Faith
• Requires Both Sides To Understand The Other’s Priorities and Needs To

Be Most Effective

• Trust Is An Essential Component
• “Non‐Negotiable” Terms Are Clear Signs Of Distrust And/Or Concern

About A Public Owner’s Own Proficiency At Negotiating

• “Non‐Negotiable” Terms Violate State Law and Defeat The Intent Of QBS

– Impairs Development of Relationships and Innovative Atmosphere

So, What is the Correct Attitude to Take Into Professional Service Contract Negotiations?

• They Want to Develop Strong Relationships
• They Want to Be Appreciated as Professionals
• They Want to More Than Meet Expectations
• They Want to Provide Innovation and Creativity
• They Want to Make a Reasonable Profit

So, What Are Consultants Thinking?

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48 U.S.C. § 15.404‐4. Profit . . .

• (1)

Profit or fee prenegotiation objectives do not necessarily represent net income to contractors. Rather, they represent that element of the potential total remuneration that contractors may receive for contract performance over and above allowable costs. This potential remuneration element and the Government's estimate of allowable costs to be incurred in contract performance together equal the Government's total prenegotiation objective. Just as actual costs may vary from estimated costs, the contractor's actual realized profit or fee may vary from negotiated profit or fee, because of such factors as efficiency of performance, incurrence of costs the Government does not recognize as allowable, and the contract type.

A Federal Perspective

• (2)

It is in the Government's interest to offer contractors opportunities for financial rewards sufficient to stimulate efficient contract performance, attract the best capabilities of qualified large and small business concerns to Government contracts, and maintain a viable industrial base.

• (3)

Both the Government and contractors should be concerned with profit as a motivator of efficient and effective contract performance. Negotiations aimed merely at reducing prices by reducing profit, without proper recognition of the function of profit, are not in the Government's

• interest. Negotiation of extremely low profits, use of historical averages,
• r automatic application of predetermined percentages to total

estimated costs do not provide proper motivation for optimum contract performance.

A Federal Perspective The Unreasonable Expectation Of Perfection

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`` Owners - Unmet Expectations Engineering Firms - Cost Risk

The Unreasonable Expectation of Perfection

• The Unreasonable Expectation of Perfection (i.e. Why Not Paying For an

Agreed Appropriate Amount of Perfection is Bad for Projects)

• A Lowest Cost Pricing Mentality Is Bad for Projects

– Places Pressure On Projects From The Start And Creates An Adversarial Rather Than Collaborative Atmosphere – Creates Incentives For A/Es To Cut Corners Or Use Less Experienced Personnel On Projects – Can Lead To More Claims, Errors, and Conflict – Will Often Create Hardship for Subconsultants

• In Contrast, Negotiating a Fair and Reasonable Price is Required For a

Reason

Things That Are Often Misunderstood Regarding Expectation of Perfection on Pricing

Owners - Unmet Expectations Engineering Firms - Liability Risk

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• How Many of You Have Insurance Requirements in Your

Contracts?

• How Many of You Understand What Errors & Omissions Insurance

Covers and What is Excluded?

• Coverage Related to The Performance or Non‐Performance of A/E

Services – Must Rise to the Level of Negligence – Requires a Breach of the Common Law Duty of Care

A Look at Errors and Omissions Insurance – Effects on Consultants

• Exclusions

– Contract Claims*

• Warranties
• Indemnities
• Contractual Assumption of Common Law Duty of Care
• Direct Liability is to the Professional Engineer. The Firm is Vicariously

Liable

A Look at Errors and Omissions Insurance – Effects on Consultants

• Examples of Concerning Provisions:

– “CONSULTANT shall indemnify OWNER for all liability, claims, damages, losses and expenses incurred by the OWNER, whether direct, indirect, consequential.” – “CONSULTANT warrants that its services will be performed with that degree of care and skill ordinarily exercised by professional consultants practicing in the same discipline and claiming a similar degree of specialization and/or expertise.”

A Look at Errors and Omissions Insurance – Effects on Consultants

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• RCW 4.24.115 – “Anti‐Indemnification Statute”

– Consultant can be made to indemnify an OWNER, his agents and employees to the extent of the Consultant’s own negligence – In addition, Consultant can be made to waive it’s immunity under Washington’s industrial insurance, Title 51 RCW, so long as this is mutually negotiated

• But, What About Contracts with Non‐Negotiable Terms and

Conditions? – Contracts That Do Not Clearly Comply With The Statute, at a Minimum, Create Doubt About Coverage and Negatively Impact Settlement Negotiations.

A Look at Errors and Omissions Insurance – Effects on Consultants

• Examples of Concerning Provisions:

– “Should a court of competent jurisdiction determine that this Agreement is subject to RCW 4.24.115, then, in the event of liability for damages arising out of bodily injury to persons or damages to property caused by or resulting from the concurrent negligence of the Consultant and the City, its

• fficers, officials, employees, and volunteers, the Consultant's

liability, including the duty and cost to defend, hereunder shall be only to the extent of the Consultant's negligence”

A Look at Errors and Omissions Insurance – Effects on Consultants

• The Unreasonable Expectation of Perfection (i.e. Why

Inappropriately Shifting Risk is Bad for Projects) – Inhibits Creativity And Innovation Because Firms Will React to the Imposition of Risk That They Cannot Mitigate Because of a Lack of Control or a Lack of Insurance Coverage

• Creates “Cookie Cutter”, “Tried And True Results” Which

Might Not Be The Best Solution For A Project

• Incentivizes “Overdesign” of Projects Which Creates Hidden

and Unnecessary Costs – Through The Flowdown Of Contract Terms, Often Create Even More Hardship for Subconsultants

Things That Are Often Misunderstood Regarding Expectation of Perfection on Risk

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The Unreasonable Expectation Of Perfection The Unreasonable Expectation Of Perfection

• Owners Should Not Expect (Nor Want) “Perfect Designs”
• Contracts That Include Warranties, Guarantees, Special Damage

Provisions Create Pressure Upon A/E Firms and are Illustrative of Perfection Expectations

– These are Transactional Contract Concepts

• Contracts Always Require Professional Liability Insurance Coverage

– E&O Coverage Provides Coverage in Line With Relational Contract Concepts – Contracts Often Contain Terms That Void or Put Into Question E&O Coverage

Things Public Owners Should Consider

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• What About the “Lowest Total Cost Point”?

– Negotiate in Good Faith – Understand The Nature of A/E Contracts – Understand What You Are Trying to Achieve – Respect the Opposing Party’s Positions – Be Willing to Compromise

Things Public Owners Should Consider

• What Provisions Will You be Negotiating?

– How Many Negotiate Price Terms? – How many Negotiate Risk Terms – What About Other Terms and Conditions?

• State Law Says “Negotiate a Contract for Architectural and

Engineering Services . . . at a Fair and Reasonable Price”

Things Public Owners Should Consider

• SMWBE’s Are Primarily Subconsultants
• Subconsultants Are Especially Hard Hit By QBS Procedures Or

Negotiations That Create Adversarial Relationships Or Result In Contracts Which Are Not Fair and Reasonable

• Prime Consultants Are Structurally Disincentivized From Using

Subconsultants In General And Especially Emerging Firms

Appreciating How Polices Can Create Unexpected Consequences

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52.4% 47.1% 44.5% 41.9% 39.3% 36.7% 33.8% 30.4% 28.7% 27.0% 25.3% 23.6% 0.7% 1.1% 1.4% 1.8% 2.1% 10.0% 15.0% 20.0% 25.0% 30.0% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 12.4% 10.3% 9.2% 8.2% 7.1% 6.1% 0 % 1 0 % 1 5 % 2 0 % 2 5 % 3 0 % PERCENTAGE OF CONTRACT AMOUNT SUBCONSULTANT UTILIZATION PERCENTAGE

BREAKDOWN OF CONTRACT REVENUE (1.5% B&O)

Overhead Cost Direct Labor Cost Subconsultant Administration Cost Subconsultant Payments 1.5% B&O Profit Margin

Appreciating How Policies Can Create Unexpected Consequences

• Unanticipated Effects of Prompt Pay

– Prime Consultants are Required to Pay Subconsultants Regardless of Whether the Prime Consultant Has Been Paid By the Public Owner – Smaller Prime Consultants Often Do Not Have the Cash Flow Necessary to Cover These Expenses – Small Firms (including most SMWBEs) Are Forced to Remain Subconsultants on These Projects

Appreciating How Policies Can Create Unexpected Consequences

• Procurement of A/E Services Is Fundamentally Different Than The

Procurement of Construction Services Because The Nature and Performance Of The Work Is Fundamentally Different

• QBS Procurement, Negotiation and Contracting Is Not A

Mechanical Procedure to Be Followed Unthinkingly. It takes Considerable Thought as to the Goals, Risks, and Complexity of a Project to Properly Implement

• The Focus on Qualifications in the Initial Stage is for a Reason (i.e.

Highest Likelihood of Creativity and Innovation)

• The Legislature Understood that QBS (All Phases) Is About

Promoting an Innovative and Creative “Atmosphere” that will Result in the Best Value And Outcomes for the Public Interest.

What Are The Takeaways?

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• As a Corollary, Anything Which Negatively Impacts Innovation and

Creativity Inherently Negatively Impacts Projects and the Public Interest

• Price is not Irrelevant, BUT
• A/E Firms Will React to Pricing Risk Or Liability Risk
• Procurement Processes and Negotiation Cannot Be Allowed to

Become Adversarial Nor Can Contract Terms Become So Inequitable That They Negatively Impact the Partnering Environment that Promotes Innovation and Creativity

• Do Not Want to Create an “Us Versus Them” Mentality Rather

Than a “We” Team/Partnering Mentality

What Are The Takeaways?

• Fair and Reasonable” is Synonymous With Balance and Equitable

Conditions

• Requires Public Owners to Understand Consultants’ Business

Models And How Contract Terms (Both Risk and Pricing) Impact Them, Their Subconsultants, and Their Combined Performances

• Requires Public Owners to Be Clear as to Their Own Priorities and

Goals and to Clearly Articulate Them to the Consultant

What Are The Takeaways?

• “What Goes Around, Flows Down.” Public Owners Can Negatively

Impact Subconsultant Utilization and Subconsultants’ Ability to Succeed When an Adversarial Relationship/Environment is Created

• r if the Contractual Terms and Conditions are too Inequitable with

the Prime Consultant

What Are The Takeaways?

10/2/2017 13 NANCIE BOCCIO, MBA, JD SENIOR CONSULTANT, PARAMETRIX

Purpose

• Discuss importance of understanding legal terms of contract

in order to allocate risk in a fair manner

• Understand Pricing Components that Affect Bottom Line
• Awareness of importance and knowledge of contract types

in the negotiation process

• Understand the benefits and risks of different types of

contracts to both Consultant and Client

Legal terms

• Standard of Care
• Consultant Personnel not Responsible for Means,

Methods, techniques

• Not Responsible for Health of Safety Precautions
• Opinions of Cost, Financial Considerations
• Record Drawings
• Contractor Indemnification and Claims

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Legal terms

• Consequential Damages
• Ownership of Work Product and Inventions
• Owner Furnished Data
• Timely Review
• Asbestos or Hazardous Substances
• Suspension, Delay, or Interruption of Work

Legal terms

• Litigation Assistance
• Changes
• Reuse of Project Documents
• Force Majeure
• Limitation of Liability
• Termination
• Insurance

Most Successful Negotiations

• Strong Relationships Change Outcomes
• Centralized Internal and External Communication Protocol
• PM had Full Support from Management
• All Parties were Respectful and Courteous
• PM had Enough Resources Throughout the Process
• Just Continued Working Through the Challenges
• PM Welcomed Assistance from Subject Matter Experts
• Client Viewed Role of the Consultant as a Partner
• Sense of Humor Maintained Throughout Process

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Strategies and Tips

• Holistic Approach
• Focus on What Matters
• Get the Right Resources to Help You
• Know the Decision Makers (Internal and External)
• Use Lingo both Parties Can Understand

Contract Type and Risk

High‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐Contractor‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐Low

FFP FPIF FPAF CPIF CPAF CPFF CR T&M/LH

Low‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐Government‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐High

Types of Contracts

• Time and Materials with a NTE
• Lump Sum
• Cost Plus Fixed Fee
• Bill Rate Schedule (a.k.a. “Per Diem)

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Time and Materials Contracts

• Pays direct labor hours at specified hourly rates that include labor,

profit, expenses at cost, overhead and agreed upon additional fees/costs

• Least risk for consultant, most risk for client
• Best to use when scope or schedule is uncertain
• Multiplier type pricing
• Benefits to client: if actual cost is lower than expected cost client

would achieve the savings, allows for flexibility in changes to scope, schedule and budget

Lump Sum (Fixed Price) Contracts

• Consultant agrees to do the described and specified

project for a fixed price

• Suitable if scope and schedule are sufficiently defined

to allow consultant to know costs upfront

• Can be riskier for Consultant
• Benefits to Client: Least risk of any type of contract

and easy to administer

Cost Plus Fixed Fee Contracts

• Consultant receives reimbursement of allowable

costs at established rates, plus fee (profit) as a fixed number or a percentage

• Client agrees to reimburse actual costs
• Benefits to Client: consultant profit set at fixed

amount and can put ceiling on total value of contract

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Bill Rate Schedule (Per Diem) Contracts/Negotiated Rate

• Consultant and client agree on billing rates by labor

category or individual staff working on project

• Billing rates are not actual rates; they are negotiated

and agreed upon between the parties

• Benefits to Client: they know exactly what they will

pay for for each labor classification or individual, can plan work around budgets, simple to review invoices, can remain constant throughout multiple years

Pricing Components Impacting Profitability

• Original Scoping Not Well Defined

Leading to Non‐Reimbursable Labor Costs to Re‐Scope

• Caps on Annual Salary Increases
• Caps on Direct Salary Rates
• Unreasonable Low Profit/Fee
• B & O Tax
• Cost for Paying Subs Before Prime

Gets Paid

• No Additional Fee for Prime Taking

On Subcontractors

• Client Unwilling to Reimburse for

Administrative Support

• Local Travel
• Other Client Specific Unallowable

Costs

• Late Payments
• Time Adjustments for all Rates
• Retainage

Scoping

• How to Eliminate Scope Creep?
• What is the Right Level of Scoping?

– Minute Detail – Room for Flexibility

• How do you Scope for a $50K/$500K/$5M Project?
• Well Defined Scoping Leads to Reimbursable Change Orders
• No Reimbursement for Scoping Change Orders
• No Reimbursement for Overhead for Scoping

10/2/2017 18 Salary Caps

Caps on Annual Salary Increases

– “Our Salaries Have Been Frozen for Two Years” – “No One In Our Organization Gets More Than a 1.8% Increase – “Consultants Make Too Much Money Anyway” – Tied to Cost Price Indices

 Employment Cost Index (ECI)  Federal Index  Consumer Price Index (CPI)

Caps on Direct Salary Rates

– We Want your “A” Team but we Can’t Pay for your PM – Impact on Consultant Personnel

Justification for Salary Increases

Market Based Rates – Watson Data Services: General Industry Salary Budget Planning Survey – Mercer: Global Compensation Planning Report (quarterly reports) – Hewitt (occasionally but with limited data for our particular countries) – Blended Value for Salary Increases – Using Current Inflation Figures – Average Increases by Employee Group/Industry Other sources of data: – Government statistics on inflation and employment (regularly available on the internet) – Puget Sound/Seattle Consideration – Industry Specific data on trends (most are annual, but some are semi‐annual) e.g. ACEC Salary Survey

Agency Approach to Profit

• FAR 15.404‐4(b)
• Structured Approach
• Factors to Consider

– Complexity of Work and Resources Required – Cost Risk (Type of K) – Federal Socioeconomic Programs – Investments Facilitating Efficient Contract Performance – Demonstrated Ability

• Each Agency Must Use

Structured Approach

• Exemptions May Be Authorized

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Profit/Fee

• What is a Fair and Reasonable Profit?
• Federal Acquisition Regulations (FAR)

Weighted Fee Guidelines

• Washington State Department of

Transportation (WSDOT) Fee Guidelines

B&O Tax

Washington Business and Occupation Tax (B&O)

• Gross Receipts Tax for Services is 1.5%
• Compounded Effect
• Tax is on Gross (not Net) Income
• Unique to State of Washington
• The State Collects $3 Billion from Businesses, Representing

Nearly 19 percent of Washington’s Tax Receipts

• Local B&O Tax Added
• RCW Requires Cost of Tax to be in Overhead

Additional Fee/Cost for Taking on Subcontractors

• In most cases, fee or profit is calculated on the basis
• f our labor. If the client wants to pay fee or profit on

the basis of total cost including subs, that is an acceptable alternative.

• According to the federal guidelines, handling fees and

even mobilization fees are allowable.

• The discussion is about risk, quality and liability.
• Many smaller subs are underinsured

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Pricing Profitability Analysis

• Impact of Non‐Reimbursables on

Profitability

QUESTIONS?

Van Collins | President/CEO American Council of Engineering Companies of WA 1621 114th Ave SE | Suite 115 | Bellevue WA (425) 615‐7885 direct (253) 906‐5158 mobile Nancie Boccio | JD | MBA President | Boccio Consulting Services, LLC Attorney and Strategic Business Consultant 9 Lake Bellevue | Suite 104 | Bellevue, WA 98005 Direct: 206‐669‐7696 | nancie@bocciolegal.com