Development through partnership

construction procurement and delivery

Board: Pepi Silinga (Chairperson) Nonhlanhla Mjoli-Mncube (Deputy Chairperson)
Brian Bruce Trueman Goba Carmel Marock Savannah N Maziya-Sandanezwe
Nazir Alli Mandla Ndlovu Prof Raymond Nkado Dr Sean Phillips
Shaun Webber Michael Wylie CEO: Ronnie Khoza
inform practice note
construction industry development
Issued by the Construction Industry Development Board
Content

Synopsis:

cidbs inform practice notes provide
guidance and clarity in achieving client
objectives in construction procurement and
delivery. Practice notes inform clients and
practitioners on how to embrace best
practice and to deal with issues that may
arise. They are aligned with, but do not
replace regulation.













1. Introduction .............................................................................. 2
2. Lump sum fees......................................................................... 2
3. Time charge fees ...................................................................... 3
4. Percentage fee ......................................................................... 4
5 Expenses.................................................................................. 6
5 Target cost contract ................................................................... 7
6 Guaranteed maximum price contract ........................................... 7
7 Term service contract................................................................. 8
8 Standard pricing strategies provided for in Standard
forms of Contract ...................................................................... 8





Professional service providers (PSPs) may be remunerated for
their services in a number of ways. The selected method of
payment is dependent upon how well the scope of services is
defined. Frequently such providers are paid time charges and
expenses or a percentage of the construction works cost where
the percentage varies for each discipline. Tender assessment
schedules need to be included in tender documents to enable
tenders based on such methods of payment to be compared and
evaluated.

This practice note presents an overview of the different methods
that are used to remunerate professional service providers and
indicates, where relevant, how such methods may be reduced to
a comparative offer to enable tenders to be compared. It also
indicates which payment methods are provided in each of the
standard forms of contract for professional services that are
included in the CIDB Standard for Uniformity in Construction
Procurement.
REMUNERATING PROFESSIONAL
SERVICE PROVIDERS
Draft Practice Note # 8
November 2007
(Version 1 - November 2007)
Fee competition amongst professional
service providers who are competent
to provide a service is not about fee
cutting. It is all about competitive
advantage those who have extensive
experience or context specific
knowledge require less time to
perform the service than those that
dont.

Practice Note # 8 2 of 8
1. Introduction
Professional service providers (PSPs) are usually paid for their
services on the basis of one or more of the following:

a lump sum for a completed activity or task
time charge
a percentage of the cost of
construction
expenses
The contract documents need to:
clearly state the basis upon which
payment is to be made; and
document the agreed lump sums, time
charges, percentage and expenses,
as relevant.

Professional service providers need in a
competitive selection process to tender
lump sums, time charges, a percentage,
expenses or a combination thereof, as
relevant,. Employers and their agents in
turn need to be able to reduce these
tendered parameters to a comparative
offer to enable an equitable and fair
comparison to be made.
2. Lump sum fees

Lump sum fees are due whenever an
activity (or an agreed output or
deliverable) is completed. The tenderer
takes the risk of being able to provide
the service at the prices in the activity
schedule (lump sums). The employer, on
the other hand, carries some of the risks
associated with changes in the scope of
work necessitated by events and
circumstances beyond the professional
service providers control.

This method of payment may only be
used where the scope of work at tender stage:

is fully known and is capable of being priced and programmed;
or
contains the employers objectives and sufficient information to
enable the tenderer to develop a scope of work and a
programme for the project which may then be priced.

The activity schedule may be developed by either the employer or
the professional service.

Example of an activity schedule

Stage Activity
#
Activity description Price
(Rand)
1.1 ... .
1.2 .. .. . . . . . .. . .
1
1.3 .. .. . . . . . .
2.1 .. .. . . . . . .. . .
2.2 .. .. . . . . . .. . .
2.3 . . .. . .
2
2.4 .. .. . . . . . .. . .
3.1 .. .. . . . . . .. . . 3
3.2 .. ... .
4.1 .. .. . . . . . .. . . 4
4.2 .. .. .. . .
Total

CIDB Standard Conditions of Tender

comparative offer means the tenderers financial offer after the factors of non-firm
prices, all unconditional discounts and any other tendered parameters that will affect
the value of the financial offer have been taken into consideration

F.3.11.2 Scoring Financial Offers

Score the financial offers of remaining responsive tender offers using the following
formula:
N
FO
= W
1
x A where:
N
FO
= the number of tender evaluation points awarded for the financial offer.
W
1
= the maximum possible number of tender evaluation points awarded for the
financial offer as stated in the Tender Data.
A = a number calculated using either formulas 1 or 2 below as stated in the Tender
Data.

Formula Comparison aimed at achieving Option 1 Option 2
1 Highest price or discount A = (1 +( P - Pm))
Pm
A = P / Pm
2 Lowest price or percentage
commission / fee
A = (1 - (P - Pm))
Pm
A = Pm / P

where:
Pm = the comparative offer of the most favourable tender offer.
P = the comparative offer of tender offer under consideration.

3 of 8 Practice Note # 8
Lump sum (or activity based) contracts are easy to administer as
they are linked to the completion or an activity. The total of prices
(sum of all lump sums) may be readily used to compare tender
offers.

It is advisable to require tenderers to submit a schedule containing
the names of staff proposed for the project together with their
anticipated time inputs and applicable time charges. This will
enable the reasonableness of the total of prices to be established
and provide the basis for establishing additional fees due in the
event that the scope of work is changed.

Alternatively, the reasonableness of the total of fees can be
benchmarked against an applicable guideline tariff of fees
published by a built environment council (see percentage fee).
3. Time charge fees

Time charge fees are based on agreed
hourly, weekly or monthly rates for staff
named in the contract or defined
categories of staff and the time worked
by such staff. Fees are usually due on
an agreed date every month.

The financial risk is largely borne by the
employer who has complete flexibility in
determining the precise scope of work.
The professional service provider has
little incentive to contain costs.

This method of payment is commonly
used where it is difficult to define the
scope and length of services, e.g. when
work is done on an ad hoc basis or has
a high research or development
component.

Time-based payments need to be closely
monitored and administered to ensure
that the assignment is progressing
satisfactorily and payments claimed
present value for money.

A tender assessment schedule needs to
be drawn up to enable tendered time
charge fees to be compared. Parameters
such as assumed time periods and total
annual cost of employment should be
stated in this schedule to allow a
comparative price for tender evaluation
purposes to be calculated.

The Guidelines on hourly Fee Rates for
Consultants as published by the
Department of Public Service and
Administration, or if relevant, guideline
tariff of fees or indicative time based fee
Tender Assessment Schedule
The rates tendered in the Pricing Data shall be reduced to a common base for
comparative purposes as follows:
1 2 3 4 5
Tendered
rate, R/h
Assumed
no of hours
Total price
(col 3 x col 4)
1 Lead professional / discipline specific team leader
1.1 Professional architect 300
1.2 Professional Engineer /
Engineering Technologist (civil)
200
1.3 Professional Engineer /
Professional Engineering
Technologist (structural)
275
2 Professional staff with adequate expertise and relevant experience who
carry direct technical responsibility for one or more specific activities
related to a project.
2.1 Professional architect / senior
architectural technologist

1200
2.2 Professional Engineer /
Engineering Technologist (civil)
800
2.3 Professional Engineer /
Professional Engineering
Technologist (structural)
1100
Subtotal A
3 Salaried professional or technical staff (all disciplines) with adequate
expertise and relevant experience performing work of an architectural or
engineering nature with direction and control provided by any person
contemplated in categories 1 or 2.
Tendered cents
per hour for
every R100 total
annual cost of
employment
Assumed
total
annual
cost of
employm
ent
Assumed
rate, R/h
(col 2 x col
3) / 100
Assumed
number of
hours
Total price
(col 4 x col 5)
R250 000 3500
Subtotal B
4 Site staff (all disciplines) with adequate expertise and relevant
experience who are responsible for construction monitoring activities on
a full time basis
Factor Total annual cost of
employment for duration of
contract
Total price

R650 000
Subtotal C
Subtotal A R. . . . . . . . . . . . . .
Subtotal B R. . . . . . . . . . . . . .
Subtotal C R. . . . . . . . . . . . . .
Total (comparative price) for tender evaluation purposes R. . . . . . . . . . . . .

Practice Note # 8 4 of 8
rates published by a statutory council, should be used as a
benchmark to evaluate the offered time charge fees and to
determine the reasonableness thereof.

Note: The Department of the Public Service Administrations Guidelines for the
hourly fee rates are accessible from the website www.dpsa.gov.za (click on
Documents archives; click on all documents and scroll down to Guidelines on
Hourly fee rates for Consultants)
4. Percentage fee

The percentage fee is based on the estimated or actual cost of
construction works. Guideline tariffs of fees are published by the
Engineering Council of South Africa, the South African Council for
the Architectural Profession, the South African Council for the
Quantity Surveying Profession and the South African Council for
the Project and Construction
Management Professions for work
performed by persons registered with
such councils. All these councils base
their guideline tariffs on the following
formula:

Total fee payable = (PF + SF) x f
where:

PF = primary fee (tabulated amount in
Rands based on the range within which
the cost of construction works falls

SF = secondary fee (tabulated
percentage based on the range within
which the cost of construction works
falls multiplied by the portion of the cost
of construction works above a stated
value or the cost of construction works
divided by 100)

f = ECSA: factor by which fee is
to be multiplied to reflect nature and
complexity of the work, e.g. rural roads,
alterations to existing works, reuse on
duplicated works,

= SACQSP: appropriate
percentage, apportioned in relation to
the service which reflects the nature
and content of the required service

= SACAP: adjustment for partial
service, repeated buildings, reuse of
drawings and related documents on
other projects etc

= SACPCMP: factor to make
fees more appropriate

Structural engineering services pertaining to building projects (normal
services)
Cost of the Works Basis of Fee Calculation
For projects up to R 340 000 A Lump Sum or on a Time Basis
Range of brackets
Where the
cost of the
works exceeds
But does not
exceed

Primary Fee

Percentage
R 340,000 R 910,000 R 42,500 12,5% on the balance over R 340,000
R 910,000 R 4, 570,000 R 113,750 10,0% on the balance over R 910,000
R 4,570,000 R 9,700,000 R 479,750 9,0% on the balance over R 4,570,000
R 9,700,000
R
22,200,000 R 941,450 8.0% on the balance over R 9,700,000
R 22,200,000 R 1,941,450 7,0% on the balance over R22,200,000
Guideline tariff of fees published by the various
Built Environment Councils
0
2
4
6
8
10
12
14
16
1 10 100 1000
Cost of works (R million)
P
e
r
c
e
n
t
a
g
e

f
e
e

(
%
)
Architect Construction project manager
Quantity surveyor Engineer 1
Engineer 2 Engineer 3
Engineer 4
Guideline fees published by the various Built
Environment Councils (f = 1,0)

5 of 8 Practice Note # 8
The fee payable, expressed as a percentage of the total cost of
works reduces as the cost of works increases.

The fee due at any point in time is usually a percentage of the
total fee payable, in proportion to the stage
of services that has been completed.

This method of payment is commonly used
to pay professional services providers for
their services where the scope of work is ill
defined or the scope of services and
project definition at tender stage is very
broad. It allows the professional service
provider to develop the scope of work as
the project unfolds.

It should be noted that:

this method implicitly lacks incentives to
produce an economical design or other
service;
the cost of construction is largely a
function of the market and bears no
relation to the cost of professional
services; and
the final cost of construction (and
therefore the final fees) is not
established until after the construction
is complete, whilst most professional
costs are expended much earlier and
even before construction starts.

There are a number of ways in which
tenderers may tender a percentage fee,
including the tendering of:

option 1: a percentage fee in relation to
the final cost of the construction works
contract
option 2: a percentage fee adjustment
from a published guideline tariff of fees
option 3: the factor to be applied to the
primary and secondary fee provided for
in a published guideline fee

Each of these options has merit in
particular applications.

Option 1 allows professional service
providers in multi-disciplinary projects to
tender a single percentage to cover all
fees applicable to the project. This option
not only enables comparisons to be readily
made when tenders are evaluated, but
also simplifies the calculation of fees due.
The approximate value of the construction
works, however, needs to be stated as the
percentage fee reduces as the
Option 2
Tender Data

The financial offer will be reduced to a comparative basis using the following formula:
Comparative offer = 100 + Fee Adjustment contained in the Pricing Schedule
The score for financial offer is calculated using Formula 2 (option 2) where W
1
is the
percentage score given to financial offer and equals 100 minus W
2
.

Pricing instructions
1 The fee for services rendered in accordance with the Scope of Work shall be
calculated in accordance with the TARIFF OF PROFESSIONAL FEES, effective 1
January 20..., issued in terms of the Quantity Surveying Profession Act, 2000
(Tariff of Fees).
2 The fee payable shall be calculated in accordance with the following formula:
Fee payable = ( 1 PFA) FC
where FC is the fee calculated in accordance with the Tariff of Fees and PFA is
the Fee Adjustment contained in the Pricing Schedule.
3 The fee payable in terms of 2 shall include all disbursements and travelling
expenses referred to in the Tariff of Fees relating to work remunerated on such a
basis, save those for the cost of printing drawings and documents.

Pricing schedule

The Project Cost Based Fee Adjustment (PFA) is:
Plus +. % or minus -..% (complete or delete that which is not
applicable)
Option 1
Tender Data
The score for financial offer is calculated using Formula 2 (option 2) where W
1
is the
percentage score given to financial offer and equals 100 minus W
2
.

Pricing instructions
The fee for services rendered in accordance with the Scope of Work inclusive of all
expenses shall be calculated in accordance with the following formula:
Fee = cost of works x fee percentage stated in the pricing schedule
where the cost of the works is the total amount, exclusive of value added tax, certified
for payment to contractors (irrespective of who actually carries out the works) in
respect of the works designed, specified or administered by the consultant, before
deduction of liquidated damages or penalties, including the costs of new materials,
goods or equipment, or a fair evaluation, of such material, goods or equipment as if
new whether supplied new or otherwise by, or to, the employer.

Pricing schedule
The fee percentage is .%.
Option 3
Tender Data
The score for financial offer is calculated using Formula 2 (option 2) where W
1
is the
percentage score given to financial offer and equals 100 minus W
2
.

Pricing instructions
The fee for services rendered in accordance with the Scope of Work exclusive of all
time based fees and expenses and costs shall be calculated in accordance with the
following formula:
Fee = basic fee x factor stated in the pricing schedule
The basic fee shall be calculated according to the Guideline Scope of Services and
Tariff of Fees for Persons registered in terms of the Engineering Profession Act, 2000,
(Act No. 46 of 2000), Board Notice 30 of 2006: item 3.2.1: Civil and Structural
Engineering Services pertaining to Engineering Projects.

Pricing schedule
The factor by which the basic fee is multiplied is
Examples

Practice Note # 8 6 of 8
construction works is increased.

Option 1, however, does not compensate the client or the
professional service provider should the final cost of construction
works be significantly different from the estimate provided at
tender stage as the percentage is fixed.

A tender evaluation schedule will need to be developed and
included in the returnable documents for tender evaluation
purposes where Option 2 and Option 3 are used in the
procurement of multidisciplinary services. An assumed breakdown
of the costs of works relating to each discipline should be included
in such a schedule so that a total fee for comparative purposes
may be calculated.

The use of the following formula in Option 3 compensates for
significant differences between the final cost of construction works
and that provided at tender stage and obviates the need for
breaking down the costs of work relating to each discipline:

Percentage fee = 10 x f x C
-0,1


where
C = cost of construction works in millions of
Rand, excluding VAT
f = factor by which the percentage fee is to
be multiplied to reflect the nature and
complexity of the work or content of the
required service (or both).

Consideration should be given to capping
fees payable when estimates of construction
works are developed at the time that the
concept report is finalised. The percentage
fee should be based on the estimated cost of
construction and only adjusted should the
actual construction cost be less than the
estimated cost.
5. Expenses

Professional service providers may not at the
time of tender be able to forecast and price
some of their expenses or costs. As a result,
the contract may make provision for the
payment of such items separately from the
fee.

Recoverable expenses and costs include
those relating to the production and
reproduction of documentation, maps, models, presentation
materials and photography requested by the Employer, travelling,
accommodation, payments made for specialised services and
studies in the provision of the service and the provision of staff to
verify that the works are being completed in accordance with the
requirements of the contract, that the designs are being correctly
interpreted and that appropriate construction techniques are being
utilized (construction monitoring services).
Tender Assessment Schedule
The parameters tendered in the Pricing Data shall be reduced to a common
base for comparative purposes as follows:

Normal services
The estimated cost of the works, excluding VAT equals R1,5 million

Percentage fee = 10 x f x C
-0,1
= 10 x .. x (1,5)
-0,1
= ..
where C = cost of construction works in millions of Rand, excluding VAT
f = factor by which the percentage fee is to be multiplied to reflect
nature and complexity of the work or the content of the required
service (or both).

Fee = Percentage fee x R 1 500 000 / 100
= . x R 1 500 000 / 100
= (subtotal 1)

Additional services
Provide level 4 construction monitoring service:
R../ month x 15 months (subtotal 2)

Expenses
Description Unit Quantity Rate
(Rand)
Amount
(Rand)
Printing: size A0 No 100
Printing: size A1 No 100
Printing: size A2 No 1000
Printing/copying: size A4 (reports and
tender documents only)
No 5000
Compilation and binding of reports /
tender documents, books of drawings
No 50
Subtotal 3

Summary:
Subtotal 1: R. . . . . . . . . . . .
Subtotal 2: R. . . . . . . . . . . .
Subtotal 3: R. . . . . . . . . . . .
Total for comparative purposes R . . . . . . . . . . .

7 of 8 Practice Note # 8
Expenses may be paid on the basis of invoiced amounts from
service providers or suppliers, provided that such amounts are at
open market rates, or at the applicable rate stated in a published
document e.g. the National Department of Public Works
document entitled Rates for Reimbursable Expenses as
published on their website.

Alternatively, professional service providers may be required to
tender rates for expenses, in which case, assumed quantities
should be provided in a tender evaluation schedule to establish a
common base for comparative purposes.
6. Target cost contract

A target cost is agreed by the employer and the professional
service provider before the work commences. (The professional
service provider may be required to tender a target cost at
tender stage or be required to negotiate a target after the award
of the contract and preliminary services have been performed
on a time charge basis to fully scope the project or prepare a
concept report which sets out the integrated concept for the
project.) The professional service provider is paid for services
performed on a time charge basis and is paid his share of the
difference between the final cost of the services and the target
cost, adjusted for any changes in the scope of work, in terms of
a pain (share of cost overrun) and gain (share of savings)
formula that is set out in the contract.

A target cost contract is accordingly a contract in which the
financial risks are shared by the employer and the professional
service provider in agreed proportions. It provides an incentive
to professional service providers to minimise their time charges
and depending upon its formulation, may ease the pain on
professional service providers where cost overruns occur or the
target is difficult to establish with certainty. It also provides an
incentive to the client to support the professional service provider
in the performance of his or her service.

This method is used when fairly good estimates of price can be
made at tender stage or when the design concept has been
developed after the award of a contract. The adjustment of the
target for changes in scope allows the impact of such changes to
be readily taken into account. It needs good management
resources to manage and open book accounting.

Tender assessment schedules will be required to reduce tenders
to a comparative basis at tender stage. Where the tenderer is
required to tender a target cost, the target cost and the time
charges need to be considered and combined in the assessment
sheet as changes in scope of work will be assessed on the basis
of time charges.
7. Guaranteed maximum price contract

A guaranteed maximum price contract is one in which the
professional service provider is paid time charges and expenses
7
PSPs
Gain (share
of savings)
R
a
n
d

Target cost (initial)
Target cost (final) adjusted for
variations in the scope of work
PSPs final cost
PSPs
Pain (share of
cost overrun)
Target cost concept
The client may require the
professional service provider to
assume all risk relating to cost
overruns i.e. require that the PSP
assume 100% of the pain. This
approach may result in the PSP
taking a conservative approach to
the setting of the target.

Practice Note # 8 8 of 8
up to a ceiling price. In this arrangement, the professional service
provider is at risk should the total time charges exceed the ceiling
price.

There is no incentive in a guaranteed maximum price contract for
the professional service provider to offer the client a savings in the
provision of the service.
8. Term service contract

A term service contract is one in which various items of work are
priced as a lump sum or stated to be on a time charge basis. Thus
the risk of being able to perform the instructed tasks at the agreed
rate or staff rates is borne by the professional service provider,
whilst the employer retains control over the individual tasks that
are to be carried out.
9. Standard pricing strategies provided for in
Standard forms of Contract

The CIDB Standard for Uniformity in
Construction Procurement requires
that use be made of the following
standard forms of contract for
professional services:

CIDB Standard Professional
Services Contract
NEC3 Professional Services
Contract

The CIDB Standard Professional
Services Contract provides for activity
based payments as a default option
and requires that any other pricing
strategy be described in the Pricing
Data.

The NEC3 contract makes provision
for the following standard pricing
options:

A: Priced contract with activity
schedule
C: Target contract
E: Time based contract
G: Term contract


We would like to hear from you about
your progress, challenges and ideas.
Contact us:
E-mail: infocus@cidb.org.za
Fax: 012 343 7153

CIDB Switchboard 086 100 2432
Registers Helpdesk 086 010 3353

Registers Post Private Bag x14
Brooklyn Square
0075
CIDB Post: PO Box 2107
Brooklyn Square
0075
inform
practice note
construction industry development
cidb website: www.cidb.org.za
Development through partnership
Example of Z clause for Percentage fee contract to be included in the NEC3
Professional Service Contract

Option P: Percentage fee contract

Identified and
defined terms
11 The Price for Services Provided to Date is the fee
determined in accordance with the provisions of the
Pricing Data for a stage that has been completed or in
proportion to the work completed towards the
completion of a stage.
The
Consultants
obligations
21 The Consultant prepares forecasts of total expenses for
the whole of the services and submits them to the
Employer. Forecasts are prepared at the intervals
stated in the Contract Data from the starting date until
Completion of the whole of the services. An explanation
of the changes made since the previous forecast is
submitted with each forecast.
Acceleration 34 When the Employer accepts a quotation for an
acceleration, he changes the Prices, the Completion
Date and the Key Date accordingly and accepts the
revised programme.
Accounts and
records
52 The Consultant keeps accounts and records of his
expenses and allows the Employer to inspect them at
any time within working hours.
Quotations
for
compensation
events
62 The cost of preparing quotations for compensation
events is not included in the assessment of
compensation events.
Implementing
compensation
events
65 The changes in the Prices, the Completion Date and
the Key Dates are included in the notification
implementing a compensation event.

Note: Reference should be made in the contract data to the effect that the expenses and
staff rates are as provided for in the Pricing Data.
Draft practice note 8 November 2007