RE: Fixed Price Quote for Engineering - Thoughts and Comments

From: <Steve>
Date: Tue Jan 13 2004 - 22:20:00 EST

The posting is a rather gloomy one.

First, fixed price is a reality in many areas. The fixed price is normally a lump sum or a percentage of the installed cost. There is a tendency to the former as management increasingly tends toward an accounting driven practice. Everyone is in the same boat; you have to get over it, or work for someone else who will give a fixed price and pay you an hourly rate.

Where the scope is clearly defined there should be no problem; just work out the hours,hourly rate, materials, disbursements, fees, profit and risk. Then you guestimate what the market will stand, and decide what discount will get you the job. From these two sums you come up with a bid price. If you dont know how long it will take to do something, guess generously. Uncertain things usually take longer to do than anticipated. A client will have little confidence in your capability if you cannot tell him the effort involved. Where the scope is not clearly defined, then write your own and include it as a condition of your bid. This is quite a strong position to be in. I believe it is acceptable to include provisional sums for unclear work; although it is essential to ensure the client knows what a provisional sum is, and that he will be paying for the actual effort required, not the provisional sum.
State clearly that deviations from scope will incur extra cost, and state the basis for the extra cost; normally hours worked at stated rate plus marked up materials/disbursements. I always state required client turnaround times for approvals etc because there is always time wasted in waiting for late information, or trying to work around it. Also state your quality requirements for example what file formats you require.

Fixed price can have a downside for the client, for example. In a fixed percentage job, the fee is proportional to the total project cost. There is an incentive for the engineering to specify high capital cost solutions. Fixed percentage jobs can be expected to have expensive equipment and unnecessary overdesign. By overdesigning, any uncertainty is reduced by large safety factors instead of detailed design investigation. Similarly for fixed lump sum, there is no incentive for the engineer to do any work other than the bare essentials. If, for example a smart low capital cost solution for a particular problem is discovered, but significant engineering input is required, then the lump sum engineer may choose to avoid this and go for the solution which is more capital cost intensive but involves less engineering design work.
Neither of the above examples are necessarily bad things, they are commercial realities imposed by others.

Some types of work, such as troubleshooting and scope definition, are not suited to lump sum bidding. If a client is stupid enough to insist on a lump sum in this case, always write your own scope of works, and stick to it. If the clients expectations are not satisfied when the scope has been completed, then extra work can be negotiated, normally on a rates basis.

As far as getting paid you are in a strong position until the deliverables are issued. Some contracts have payments tagged to milestone deliverables. No pay, no more deliverables issued. End of story. With variations/ scope changes, ideally they should be agreed and signed off as they arise. This is not always practicable, but there is nothing worse, from a clients viewpoint, than an engineer turning up with a bundle of claims near the end of a job, and expecting payment for them. Get in early with claims and they stand a good chance of being paid in full. How you go about this depends, in part, on how well you know thew client.

Quality and comprehensiveness of deliverables is a perennial. It pays to look over the fence every so often, to ensure your output approximates that of your competitors. It is bad form to complain to the potential client about the work of others, however, especially if you missed out.

I dispute that design and analysis is vastly superior nowadays. Slighty better perhaps but not vastly superior. More use of software, often by semi-skilled operators who have little insight. Some reduction in safety/design factors, and perhaps costs. Simple numerical methods have, in the large, displaced higher mathematics - when was the last time you used integral calculus seriously?

You will really have to learn how to provide fixed price bids, however you should feel free to write your own scope or tag the clients scope so you are not unnecessarily exposed. In my opinion a bid is a commercial tool more than an engineering one, and should be treated accordingly, just like contractors do.

Cheers

Steve

-----Original Message-----

From: Paul Bowers [mailto:pbowers@pipingdesign.com] Sent: Wednesday, January 14, 2004 11:55 AM To: PipingDesign@yahoogroups.com
Subject: [PipingDesign] Fixed Price Quote for Engineering - Thoughts and Comments

A message from a listmember who prefers to remain anonymous:

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I was recently berated for being unwilling to provide a fixed price quote for engineering.

these are my thoughts which i would like commentary from the group on.... could you post this for discussion... I beleive it is a subject of great concern

i'd prefer if it was posted without my email/name since there are clients and others reading this forum that shouldnt know the author/source.

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• to do bid fixed price jobs the scope has to be clear and concise; otherwise the problem is that there is virtually unlimited potential for never-ending scope.
• it is cited that some firms have to give fixed price bid. The difference is if one is building and applying standard hardware and materials essentially unchanged for 50years. In engineering analysis the extent and nature of the work can be complex, changes constantly and is widely varied. Analysis and design is vastly more superior (and more complex) now to even a few years ago. The appearance is the opposite due to push button software. This appearance is deceiving. (refer to Machine design 1986 - "don't trust the pretty pictures" and Mechanical Engineering." the elements of design" to name a few.)
• the variability and risk is far larger than the value of the work..
• purchasers of services generally do not want to spend the time and money developing clear concise and detailed scopes and packages. This was traditionally the case .it no longer is. Often now they do not have the specialized detailed knowledge to do this properly (and no longer can really be expected to have). What is desired is a "performance contract".
• design creep. Because the cost of a detailed bid process (except on large jobs) is not warranted the opportunity (and occurance) of abuse is far greater. This is one reason engineering forms do not want small jobs and invariably target larger jobs. Other reasons include reward/effort/risk ratio.
• engineering analysis is variable and the same product from all sources cannot be specified and contractually detailed. To do this would cost more that the value of the job and nobody would accept the work. In fact you seek to be satisfied it is properly performed and meets standards and requirements. This is a nebulous criteria unlike fabrication.
• many details that may or may not affect the outcome are often not detailed. There is a substantial time factor in even determining IF these have an impact or consequence, let alone accounting for them or having sufficient knowledge and information to determine the impact and consequence. They can be inconsequential, but often peripheral or "swept under the carpet" issues are the ones that fall between the cracks and blow up to bite you later. A competent engineer will address those issues , usually to pecuniary disadvantage against those who do not and are not obliged to.

-Much of the work is done by other than professional engineers. there is no
obligation on them to solve or account for all safety and engineering issues, and no accountablility if they do not. Yet they are equally able to bid , seek and undertake such work . The outcome is "apples and oranges". 90% of our WORK is fixing screw ups after the fact. Usually when the time and money has run out.

• the size of the job has to be sufficiently large in order that the variable or risk content is in reasonable proportion to the total value of the work. This rarely happens in engineering, and is grossly imbalanced in risk.
• on fabrication and construction jobs the risk content and uncertain elements are either a). excluded form scope b). separeately priced c). have high bonus and risk cost adders to cover downside Even item a) cannot be excluded from engineering as once the work is accepted the ENGINEER cannot waive any relevant or potential issue off. Other non-professional engineering parties can ignore any non-contractually obligated issue they choose.

The minimum as mandated by Fixed price bid, is contrary to the interests of the client , and has far greater downside for all parties ( as opposed to construction to a specified scope)
- prior to bid , engineered packages already have the downside (and many
scenarios evaluated).

Largely the whole purpose of the engineering step is to assess downside or compliance risk. This is not an essential requirement of construction/fabrication having been determined by the Customer prior to order.

• when bidding you add reasonable and expected profit and where necessary upset adder, so there is an upside. If engineers added expected profit with upset adder they would get no work.
• at the same time as being expected to worked for (or close to) specified/agreed manhours there is unlimited downside , but no upside. You can lose (manhours) but you cannot get more compensation than hours worked or controlled by budget at fixed/expected rates. It is all controlled by a ceiling of rates. On bulk quotes (bid jobs) there is no ceiling on payment for hours in conjunction with rates other than being competitive and efficient. In this there is upside as well as downside. IN engineering getting done faster usually means something (or many things ) were not done that should have been. No company will reward suppliers for NOT doing work.

-IN fixed bid Forced rates are sometimes quoted but have little bearing on
awards. Bid price (total cost) is the criteria . The only variable is scope of work and that is where the disputes arise although the minumum specified is all that is provided and legally required. This is the opposite to engineering done by Engineering professionals.

• IN quoted fixed price jobs , unspecified items, upsets , changes or additional items which might have either been anticipated or not are argued for extra's. In engineering , these variations apply to all the work (most of the time) and leave little opportunity for additional ("extras") compensation. Essentially this leaves the supplier at the mercy of the purchaser for payment not only for the base work , but the adders.
• in fixed price jobs there are progress payments . This is not possible in engineering other than on very large jobs because the cost of administration is too great. This leaves the supplier "financially exposed" for all (or much of) the work.
• payment risk is far greater. Once the work is turned over there is little chance of recovery. If payments lag on construction or fabrication it can be withheld , liened or seized.. 100 x $1000 jobs do not add up to a $100,000 job. The former is a formula for business failure.
• in engineering the cost of litigation or risk is far higher (by multiples of hundreds of thousands) than the work value. Any sort of "involvement" is unrecoverable (because of fixed/ceiling engineering rates) whereas in fabrication this "overhead" cost is built in and has some potential for recovery in other work.. The risk / reward ratio is nowhere near as extreme. (usually multiples of 10-100). This ratio is more characteristic of most business protocols except medicine.
• quality of product is a huge issue. On the surface two drawings can look the same. Lines on a page. One drawing can have engineered background, to an optimized level, containing resources and content that are cost effective to buy, everything fits, there is a database with intelligent data. The other drawing (which may outwardly appear adequate or the same has none of the above) , the lines are not even to scale, no dimensions can be picked off the drawing because it is "dumb content", it is incompatible, it is incomplete , costly to build and full of errors. Both meet the requirement of supplying "drawings or design". How do you price / safeguard the differential.

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