Module 5

• Determination of charges for services such as resident project representation during construction, where the civil engineer’s costs may be significantly affected by the contractor's performance, can be accomplished more equitably by one of the methods based on the actual cost of service.
• Occasionally, a civil engineer has unique qualifications and/or expertise that is not readily available and/or computer programs that materially decrease the time required for project execution. In some instances, the civil engineer may demonstrate that his or her proposal will make the project easier, faster, safer, or less expensive to achieve the client's objective.
• Similarly, the client may wish the civil engineer to undertake a project characterized by an accelerated schedule, non-routine services, and/or high-risk activities. Under these circumstances, charges for engineering services may be based on “value pricing, which reflects a premium rate not tied directly to the civil engineer’s cost but based on the civil engineer's unique qualifications or the extenuating circumstances. One of the more common value-added tasks is providing expert witness services.
• Compensation on the basis of the salary cost times an agreed multiplier is a frequently used method of determining charges for engineering services. With this method, charges for engineering services are based mainly on direct salaries.
• Regardless of the method utilized as a basis for compensation, a provision in the agreement should state that payments will be made to the Civil Engineer during the progress of the services, based on monthly invoices, and within a reasonable time after billing.
• Direct non-salary expenses are a separate item for reimbursement, usually with a service charge. The following factors are pertinent to the salary cost times multiplier version of this method (they may also apply to other methods of charging for civil engineering services).
• Salary cost is defined as “direct salaries plus employee benefits” and includes salaries for partners or principals and for technical, professional, administrative, and clerical staff directly.” Chargeable to the project: sick leave, vacation, holiday, and incentive pay; unemployment and other payroll taxes; and the contributions for social security, worker’s compensation insurance, retirement, medical, and other group benefits
• Multiplier, which is applied to salary costs, is a factor that compensates the Civil Engineer for overhead (as defined hereinafter) plus a reasonable margin for contingencies, interest, or invested capital readiness to serve, and profit. The size of the multiplier will vary with the type of service, the nature and experience of the civil engineering firm, and the geographic area in which the office is located.
• Direct non-salary expenses usually incurred in engineering engagements may include several things
• 1. Living and traveling expenses of principals and employees when away from the home office on business connected with the project.
• 2. Identifiable communication expenses, such as long-distance telephone, facsimile, telegraph, shipping charges, and special postage charges (for other than general correspondence).
• 3. Expenses for services and equipment directly applicable to the project, such as specialized technical equipment, special legal and accounting services, special computer rental and programming services, computer run time and file storage, CAD charges, subconsultants and subcontractors. Commercial printing and binding, and similar services that are not applicable for inclusion in general overhead.
• 4. Identifiable drafting supplies, stenographic supplies, and reproduction work (blueprinting, photocopying, and printing charges to the client’s project) as distinguished from such supplies and expenses applicable to several projects.
• 5. Expenses for unusual insurance, specialized health and safety programs, and special clothing for projects with extraordinary risks, such as toxic and hazardous waste conditions. Such projects may require special insurance, which is also normally billed as a direct cost to the project. Such expenses are normally reimbursed by the client at the actual invoice cost plus an administration charge to compensate for associated accounting, purchasing. Contract administration, risk liability, etc
• The Civil Engineers overhead, which comprises a major portion of the compensation generated by the multiplier on salary costs, includes indirect costs
• a.Provisions for office expenses-light, heat, telephone depreciation, rental furniture, rent, drafting equipment and engineering instruments, transportation expenses, and office and drafting supplies --- are not identifiable to a specific project.
• b. Taxes and insurance other than those included as a salary cost.
• c. Library and periodical expenses and other costs of keeping abreast of advances in engineering, such as attendance at technical and professional meetings and continuing education courses.
• d. Executive, administrative, accounting, legal, stenographic, and clerical salaries and expenses (other than identifiable salaries included in salary costs and expenses) plus salaries or imputed salaries of partners and principals to the extent that they perform general executive and administrative services as distinguished from technical or advisory services directly applicable to particular projects. These services and expenses, essential to the conduct of the business, include preliminary arrangements for new projects or assignments and interest on borrowed capital.
• e. Business development expenses, including the salaries of principals and employees so engaged.
• f. Provision for the loss of productive time of technical employees between assignments, and for the time of principals and employees on public service assignments.
• g. Costs of acquiring and maintaining computers, developing software, and training staff are not billed as direct costs.
• Accounting records.

  The Civil Engineer who performs services under a salary cost times multiplier agreement or other cost-based agreement must provide the accounting necessary to segregate and record the appropriate expenditures. Adequately detailed hourly time records must be maintained for principals, engineers, and other employees who devote time to the project.
• Applicable payroll records, together with receipts of other documents to substantiate chargeable expenditures, must be available for inspection audit by the client if required by contract.
• The hourly billing rate method of compensation is very similar to the salary cost times multiplier method in that the hourly billing rate includes all direct personnel expenses, overhead, and profit. Direct non-salary expenses (as defined under the salary cost times multiplier section) are a separate item for reimbursement, usually with a service charge. Civil engineering firms may elect to utilize this method of compensation on projects where the scope of service is not well defined or to simplify accounting and record keeping
• The term per diem normally refers to an eight-hour day. This basis is particularly suited to expert witness or other legal-type services and to other short-term engagements involving intermittent personal services.
• Where per diem services are furnished, the Civil Engineer should be compensated for all of the time devoted to providing them, including travel and standby time.
• The per diem charge should be based on the complexity, risk, and importance of the services and on Civil Engineering's professional standing, expertise, and breadth of experience. The Civil Engineer is also reimbursed for travel and subsistence costs and for other out-of-pocket expenses incurred when away from the home office.
• For engagements in which the Civil Engineer is to appear as an expert, a per diem charge is considered to be earned for each day of such appearance, even though the Civil Engineer is not called to testify or, if called, may finish testifying in only a part of the day.
• Per diem rates can vary widely, depending on employee classification, regional location, and period of service. Rates for consultation in connection with litigation and appearances before commissions and courts are normally higher than the standard rates.
• On occasion, the urgency of the engagement requires the Civil Engineers to work regularly for periods longer than the normal eight-hour day. In such cases, an understanding should be reached with the client, and the per diem rate should increase accordingly.
• Under a cost plus fixed fee agreement, the Civil Engineer is reimbursed for the actual costs of all services and supplies related to the project, including:

  • Salary costs, as previously defined.
  • Overhead, as previously defined (The Civil Engineer should be prepared to support the basis for the overhead charges).
  • Direct non-salary expenses, as previously defined.
  • Fixed fee, an amount to compensate the Civil Engineer for contingencies, interest on invested capital, readiness to service, and profit.
• The cost plus fixed fee method can also be used when the Civil Engineer is required to start providing service before the detailed scope of services can be determined. In such cases, the following considerations apply:

  1. The general scale and intent of the project should be fairly well defined, even if the full scope is indeterminate; for example, the number, size, and character of buildings or other facilities, the type of utilities, and other such essential information should be available.
• The fixed fee amount varies with the complexity and scope of the engineering services required. It is frequently calculated as a percentage of the salary costs, overhead, and direct non-salary expenses.
• The cost plus fixed fee method can also be used when the Civil Engineer is required to start providing service before the detailed scope of services can be determined. In such cases, the following considerations apply:

  2. The types of services to be performed by the Civil Engineer should be agreed upon and fully set forth. The agreements should also provide for appropriate adjustments to the fixed fee. In the event that the physical scope of the project, time of completion, or level of effort and services required are materially changed over those contemplated during the negotiations.
• Agreements for cost-based methods should provide for reimbursement of all costs to be incurred directly and indirectly in connection with the project, including but not limited to those foreseen when the agreement is negotiated. The list of reimbursable items should be as complete and detailed as possible. One advantage of the cost plus fixed fee method is that it eliminates any suspicion that the costs have been allowed to grow in order to increase the Civil Engineer’s fee, which by definition is a fixed amount.
• Because the entire fixed fee amount is due to the Civil Engineer, whether or not the estimated project costs have been reached, the Civil Engineer has an incentive to complete the service promptly
• The fixed price method of compensation is frequently used for investigations and studies and for basic services on design type projects where the scope and complexity of the assignment are clearly and fully defined. The fixed price amount can be calculated as the sum total of estimated engineering costs for salaries, overhead and non-salary expenses, an allowance for contingencies, interest on invested capital, readiness to serve, and a reasonable amount for profit.
• A fixed price agreement should contain a clearly stated time period during which the services will be performed and a provision for adjustment of compensation if the project is delayed for reasons beyond the Civil Engineer’s control.
• For design services, there should be a provision for changes required after approval of the preliminary design, with a clear understanding as to where the final approval authority lies.