How Smart Consultants Protect Their Pricing
Guest contribution by Gemma Nugent, Founder of Gemma Nugent Legal
When consultants lose money it’s often not because they underpriced their work, but because they failed to protect the price they set.
Scope creep is one of the biggest commercial risks in consultant fee proposals, particularly where the proposed fee is a fixed lump sum. Lack of definition around scope causes endless angst in consultant projects. It puts profitability at risk by eroding margins. Worse, it sours relationships, because it complicates variation management and leaves the buyer feeling like they haven’t realised the value that they signed up for.
Consultants know this, so it always surprises me to see fee proposals that pay scant attention to assumptions and exclusions. Very often I review consultant fee proposals where the assumptions and exclusions are either completely missing or mixed up together in a way that creates risk. Ignoring assumptions and exclusions means a missed opportunity for improving profitability, enhancing project outcomes and building stronger commercial relationships.
To do this well, however, we need to understand what assumptions and exclusions are and why they matter.
What are assumptions?
The assumptions are the conditions that a consultant’s price is based on, especially a fixed lump sum price. The assumptions describe the world that needs to exist for the fee to work, so that the consultant makes a profit and the consultant’s client walks away satisfied. For example, the price might assume things like:
the project is going to start by a certain date
third party information is going to be provided by a particular time
the development of the scope or applications for approvals will follow a particular pathway
the client will review and comment on a draft report or design within an agreed time after delivery.
The fee proposal should clearly communicate that if those assumptions change, the fee must necessarily change to reflect the additional work that will be required to reach the desired project outcome.
What are exclusions?
Exclusions are different to assumptions. They aren’t conditions of performance. Rather, they are the tasks and activities that the consultant hasn’t priced for at all, although they may be able to add them if necessary or if instructed by the client. The consultant is telling the client “I haven't allowed for this in my fee; I may be happy to do it, but if I do, it's going to attract an additional cost”. I usually recommend that the consultant include a schedule of rates or proposed fees for excluded items to support conversations about additional costs.
I sometimes see consultants attempting to manage things like delay or timing issues using exclusions (e.g., “work after x date is excluded from the fee”. I think those are better dealt with as an assumption (e.g., “information is provided in time so that all work can be completed by x date”). This way, the consultant sets changes to scope or timing up for a variation or an extension of time, rather than saying “Oh sorry, I didn't allow to do this”.
Either way, being transparent about what is excluded helps to manage the client’s expectations about what is in and what is out of scope.
Why does it matter?
Critically, setting limitations to the scope in this way gives the consultant clear basis to recover costs that they may not have priced into their fee. Without that clear basis, the consultant risks being forced to absorb additional costs at the expense of their margin.
Clearly stated assumptions and exclusions also communicate professionalism and value to clients. They help the client to understand what the consultant brings to the project, and strengthen the relationship so that the client wants to re-engage the consultant in future.
Importantly for competitive tenders, clear assumptions and exclusions help the client to make a value based decision about the consultant’s proposal rather than a price-based decision, particularly if the consultant’s proposed fee is higher than the lowest tender.
This is because assumptions and exclusions clearly explain what the consultant has allowed for. It means the buyer can compare apples with apples in the pricing and see that the proposed fee is more realistic because it allows for more eventualities. The buyer can make an assessment that the consultant with accurate pricing is probably going to do a better job of delivering the project.
Prevention is better than cure
Scope creep rarely happens all at once. It happens one undocumented assumption at a time. A well-crafted set of assumptions and exclusions won't prevent every variation, but it will mean that when change does come, the consultant is protected, the client isn't surprised, the project is delivered successfully and the relationship is strengthened.
Gemma Nugent is a construction and engineering contract lawyer with more than 18 years' experience helping project owners and businesses in construction, engineering, and mining services to create and negotiate clear, practical contracts. Through her practice Gemma Nugent Legal, Gemma works with principals, contractors, subcontractors, and consultants across major infrastructure, mining, and commercial projects. Her focus is on plain English contracts and advice, so all parties are aligned from the start and commercial relationships are built to last. Gemma regularly speaks and facilitates workshops on contract risk management and is a Fellow of the Australian Institute of Management WA.
Read more of Gemma’s practical insights on her website and connect with her on LinkedIn.