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COLLABORATIVE CONSULTING

BY ADAM BARKER

 

ABSTRACT

Consultants often sub-contract work to other consultants in order to complete projects. Reasons include access to relevant expertise and bringing in extra manpower. When project budgets are fixed this creates questions of how income should be shared. This article proposes two rules of thumb for consultants undertaking collaborative work.

 

RULE OF THUMB ONE: AWARD A PROCUREMENT FEE

Often one consultant (Consultant A) is responsible for winning a project and then sub-contracts work to another party (Consultant B). In such cases it is reasonable for the consultant who won the work to be rewarded for this. We propose that this reward takes the form of a Procurement Fee which is a fixed percentage, typically 20%, of the Total Fee charged for a project (see Example 1). The remaining 80%, the Contribution Fee, becomes available for distribution according to the relative input of each party.

 

RULE OF THUMB TWO: SHARE THE RISK OF TIME OVERRUNS

Often the time needed to complete a project exceeds the budget. If excess work by sub-contractors is fully absorbed by the lead consultant this may considerably erode the lead consultant’s reward from the work. We propose that the risk of cost overruns should be borne by all the consultants collaborating on a project. In such a situation, the available earnings would be distributed in proportion to how much work each party contributed towards the project (see Example 2). Differences in the hourly rates of consultants can be accommodated by adding the appropriate weightings to the calculations (see Example 3).

 

EXAMPLE 1:

Consultant A has won a $20,000 project that she estimates will to take 100 hours to complete. Her hourly rate is $200.

 

Total Fee = 100 hours × $200 per hour
= $20,000

 

To complete the work Consultant A hires Consultant B who normally also charges $200 per hour. In return for securing and managing the project Consultant A is entitled to the Procurement Fee of 20% of the Total Fee:

 

Procurement Fee = 20% × Total Fee
= $4,000

 

This leaves $16,000 to be divided between Consultants A and B in relation to their relative contributions (denoted by hours worked) to the project. This results in an effective hourly rate for both consultants of $160. If the consultants spend 50 hours each delivering the project their fees would be:

 

Consultant A Fee = 50 hours × $160 per hour + Procurement Fee
= $12,000

Consultant B Fee = 50 hours × $160 per hour
= $8,000

 

EXAMPLE 2:

 Suppose the project in Example 1 took 150 hours to complete rather than the 100 hours budgeted. Again, both Consultant A and B spend an equal amount of time to ensure its completion (75 hours each). If Consultant B is paid for all of his hours in full Consultant A is paid less in total despite working the same hours and winning the work: 

 

Consultant B Fee = 75 hours × $160 per hour
= $12,000

Consultant A Fee = (Contribution Fee - Consultant B Fee) + Procurement Fee
= ($16,000 - $12,000) + $4,000
= $8,000

 

We propose instead that the consultants scale back their effective hourly rate equally. In this case both end up working for an effective rate of $106.67 per hour:

 

Scaling Factor = Hours worked (budget) / Hours worked (actual)
= 100 / 150
= 66.67%

Consultant B Fee = 75 hours × $160 per hour x Scaling Factor
= $8,000

Consultant A Fee = 75 hours × $160 per hour x Scaling Factor + Procurement Fee
= $12,000

 

Note that only the Contribution Fee is scaled. The Procurement Fee is not affected by the cost overrun.

 

 EXAMPLE 3:

Finally, suppose that Consultant A contracts a junior consultant (Consultant C) that charges a lower hourly rate (full rate $100 per hour) but intends that Consultant C will spend more time (100 hours) on the project. Again the project overruns but in this example we assume that the overrun is not equal; Consultant A puts in 25 hours more than budget while Consultant C does the planned 100 hours: 

 

Budget Contribution Fee = 50 hours × $160 per hour + 100 hours x $80 per hour
= $16,000

Nominal time cost = 75 hours × $160 per hour + 100 hours x $80 per hour
= $20,000

Scaling Factor = Budget Contribution Fee / Nominal time cost
= 80%

Consultant C Fee = 100 hours × $80 per hour x Scaling Factor
= $6,400

Consultant A Fee = 75 hours × $160 per hour x Scaling Factor + Procurement Fee
= $13,600


Note that in this final example we make no effort to determine if the extra 25 hours put in by Consultant A is caused by her performance, required to cover for Consultant C or caused by factors outside either consultants’ control. The risk in any of these cases is shared equally. If either consultant feels they are unfairly treated by the calculation they should avoid working together again in the future.