PeakStrategy

Fees stated as a percentage of cost or dollar volume involved are commonly used by some consultants where this dollar figure reflects the extent of services rendered by the consultant.

1. This method is often used by consulting engineers in connection with construction costs and by financial counselors in connection with the amount of debts to be prorated.
2. The fee as a percentage commonly decreases as the dollar amount it is applied to increases. In a large volume situation, the client must be partially protected against a consultant's temptation to increase costs in order to increase his fee.
3. The costs or other amount to which the percentage is to be applied should be carefully defined. Where a cost of construction is involved, the definition usually excludes the cost of land, right-of-way, legal and engineering fees, and the owner's overhead and financing costs.
4. A stated maximum or minimum fee or both may be used in connection with this method of compensation.
5. The percentage to be applied must cover all of the consultant's direct and indirect costs as well as his profit.
6. This method of compensation is not favored in situations where the consultant can affect the amount of costs involved, since a consultant who does an excellent job and reduces costs is compensated in a lower amount than a consultant who causes or permits costs to be higher.

Compensation may be based on the consultant's costs plus a percentage of costs or a fixed fee.

1. Those costs which are to be reimbursable must be closely defined.
2. There is a wide variation in the definition of costs used, but such definitions often include all payroll and associated costs, out-of-pocket living and travel expenses, costs of communication services, the costs of services and materials supplied by third parties, indirect costs and overhead (including the prorated rent or depreciation on office or other space and on furniture, equipment, and instruments) and federal and state taxes.
3. The percentage of costs or the fixed fee must cover the consultant's profits as well as any expenses which are not included in the definition of reimbursable costs.
4. Compensation on the basis of cost plus a percentage of cost is disfavored, and in some cases illegal, because the consultant's profit factor will tend to increase as costs increase.
5. Compensation on the basis of cost plus a fixed fee, while not limiting the amount of expenditures included as reimbursable costs, does limit the fee (and profit) of the consultant to a fixed amount. This method is advantageously used by some government agencies where the scope of a project or the probable expenses involved cannot be accurately determined in advance.

A periodic retainer fee may be agreed upon in connection with any of the aforementioned methods of compensation.

1. The main purpose of the retainer fee is to cause the consultant to be available to perform services whenever needed by the client.
2. An additional fee is normally charged if the services provided by the consultant exceed a stipulated level.
3. It is sometimes agreed that the retainer fee is an advance payment which is set off against the charges that would have been made using any of the other methods of compensation. A good retainer is one which is predictable. If you have no idea at the start of the month whether you will be spending five hours or five days with the client, you have a bad retainer.

 A Time Retainer is one where you receive a set dollar amount each period (e.g., each month) for a predictable level of effort of service. Analysis of client financial statements might serve as a good example.

A Base Retainer is the one which you use if you are unable to determine in advance just how much service the client will require. An example: The client has claim to three days of your talent each and every month. You receive $4,500 in exchange. The client pays for the three days whether or not they are used. If more of your time is needed you get compensated at an agreed-to daily rate--say, $1500 per day.

An Availability Retainer is one which provides you with some measure of compensation for reducing your flexibility to make yourself available to the client in the event of a need. That is, the client is guaranteed that you will be available, if needed, for say, two days a month. In exchange, you receive a sum usually equal to 25-30 percent of the value of your time. If your daily rate is $2500, you might receive $10,000 per month just to be available. If you are used, you would either receive $2,500 plus $750, or just the $2,500, depending upon how your contract was written.

An Advanced Retainer is different than the above. It refers to the fact that you receive compensation prior to the delivery of your services. It is also called, by some, a start-up payment.