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CHAPTER 07:
CHARGING FOR CIVIL ENGINEERING SERVICES
LEARNING OBJECTIVES
After completing this chapter, you should be able to:
 Have the knowledge with the different methods in computing for the charges for Civil Engineering Services.
 Understand all the terminologies involve with engineering costs and professional charges.
 Develop the necessary skills in dealing with client-engineer negotiation/bidding for professional charges.

GENERAL

Charges for engineering services are usually computed using one of six methods:

1. Salary cost times multiplier plus direct non-salary expense (“Reimbursable”).

2. Hourly billing rates plus reimbursables.
3. Per diem.
4. Cost plus fixed fee ("CPFF').
5. Fixed price.
6. Percentage of construction cost (“Percentage”).

Combinations of methods of payment for different phases of the contract may be used. The
method or combination of methods used depends upon the nature, scope, and complexity of
services required by the client. The first four methods are based upon the Civil Engineers
costs to perform services. They are particularly applicable to assignments where the scope of
services is not self-defined. The fixed price and percentage of construction cost methods are
based upon a specific deliverable and do require that the project scope be well defined. The
cost plus fixed fee method provides more flexibility to accommodate both scope and fee
changes than do either the fixed price or percentage or construction cost methods.

The potential risks and problems faced by both the client and the Civil Engineer, when the
scope of services is not well defined, should be recognized and discussed during early
negotiations. Often, initial estimates of maximum engineering costs for projects of
uncertain scope are requested by the client for budgeting purposes. Such budget estimates
should state that they do not constitute an agreed-upon maximum and that they are to be
revised as the scope of services becomes better defined.

When a reimbursement method such as salary cost times multiplier, hourly billing rate, per
diem, or cost plus fixed fee is chosen because of uncertainty of the scope of services. It is
logical to propose that an upper limit (maximum amount) for these services be included in the
agreement.
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The inconsistency of such a proposal is proportional to the uncertainty of the scope. However,
these methods are used with a "not-to-exceed" amount. In this case, it is important for the
client and the engineer to agree beforehand on a method for adjusting the "not to-exceed"
amount when adjustment is warranted. One reasonable approach to compensation for
uncertain assignments is to require the Civil Engineer to inform the client when engineering
costs are approaching 75 percent of a stated budget figure and to forecast the probable total
cost. This provision gives the client and the engineer an opportunity to examine progress at
that point and, if appropriate, to revise either the original budget or not-to-exceed amount
or the scope of remaining services.

The charge for engineering services using the fixed price or the percentage of construction
cost methods is based entirely on the scope of services. These methods may be appropriate
where the scope of services is well defined and the Civil Engineer's costs are within his/her
control. Certain types of investigations and designs are well suited to these methods of
determining charges.

Determination of charges for services such as resident project representation during

construction, where the Civil Engineer's costs may be affected significantly by the contractor’s
performance can be accomplished more equitably by one of the methods based on the actual
cost of service.

Occasionally, a Civil Engineer has unique qualifications, and/or expertise that is not readily
available, and/or computer programs that materially decrease the time required for project
execution. In some instances, the Civil Engineer may demonstrate that his/her proposal will
make the project easier, faster, safer, or less expensive to achieve the client’s objective.

Similarly, the client may wish the Civil Engineer to undertake a project characterized by an
accelerated schedule, non-routine services, and/or high risk activities. Under these
circumstances charges for engineering services may be based on "value pricing, which reflects
a premium rate not tied directly to the Civil Engineer's cost, but based on the Civil Engineers
unique qualifications or the extenuating circumstances. One of the more common value pricing
tasks is providing expert witness services.

SALARY COST TIMES MULTIPLIER PLUS DIRECT NON-SALARY EXPENSE

Compensation on the basis of the salary cost times an agreed multiplier is a frequently used
method of determining charges for engineering services. With this method, charges for
engineering services are based mainly on direct salaries. It is therefore advisable that the Civil
Engineer reach an agreement with the client on salary ranges for each classification of service
applicable, as well as on the time period over which they can be guaranteed. This may help
avoid future surprises, misunderstandings, and disputes.

The salary cost times multiplier method may be utilized as either a multiplier times salary cost
(two multiplier version) or a multiplier times direct salary cost (single multiplier version)

The direct salary times multiplier: or as it is frequently called the direct labor times multiplier
version is very similar to the salary cost times multiplier with the exception that it applies a
single
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multiplier to unburdened direct labor costs, i.e., direct salaries without employee benefits., The
single multiplier includes costs associated with employee benefits, overhead, and a margin for
contingencies, risk, and profit. The direct salary times multiplier version of this method Is being
utilized more frequently due to the simplistic nature of utilizing a single multiplier. Of the two
versions of this method, the salary cost times multiplier is the more easily accountable due to
the basic premise of providing two separate multipliers. One multiplier is based upon definitive
costs. i.e, employee benefits end the other multiplier based upon costs which may vary from
project to project.

Regardless of the method utilized as a basis of compensation, a provision in the agreement

should state that payments will be made to the Civil Engineer during progress of the services,
based on monthly invoices, and within a reasonable time after billing. Direct nonsalary
expenses are a separate item for reimbursement usually with a service charge. The following
factors are pertinent to the salary cost times multiplier version of this method (they may also
apply for other methods of charging for civil engineering services)

1. Salary cost is defined as "direct salaries plus employee benefits" and includes salaries
for partners or principals and for technical, professional, administrative and clerical staff
directly". Chargeable to the project: sick leave, vacation, holiday and Incentive pay;
unemployment and other payroll taxes; and the contributions for social security, workers'
compensation insurance retirement, medical, and other group: benefits.

Note that salaries or imputed salaries of partners or principals, to the extent that they
perform technical or advisory services directly chargeable to the project, are to be
reimbursed in the same way as are other direct salary costs.

2. Multiplier which is applied to salary cost is a factor that compensates the Civil 'Engineer
for overhead (as defined hereinafter) plus a reasonable margin for contingencies,
interest or invested capital readiness to serve, and profit. The size of the multiplier will
vary with the type of service, the nature and experience of the civil engineering
firm, and the geographic area in which its office Is located.

The average multiplier should be between 2.5 and 3.0 times the average salary cost.
For some services, however, a higher multiplier is usually applicable for services
requiring recommendations based on extensive experience and special knowledge, or
for services involving expert testimony in legal proceedings. The Multiplier may also
Increase with the experience and special capabilities of the Civil Engineer's firm.

3. Direct non-salary expenses usually incurred in engineering engagements may include

the following

a. Living and traveling expenses of principals and employee's when away from the
home office on business connected with the project.

b. Identifiable communications expenses, such as long-distance telephone,

facsimile, telegraph, shipping charges, and special postage charges (for other
than general correspondence).
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c. Expenses for services and equipment directly applicable to the project, such as
for specialized technical equipment, special legal and accounting services,
special computer rental and programming services, computer run time and file
storage, CADD charges, sub consultants and subcontractors commercial
printing and binding, and similar services that are not applicable for
inclusion in general overhead.

d. Identifiable drafting supplies, stenographic supplies, and reproduction work

(blueprinting, photocopying, and printing) charged to the client's project) as
distinguished from such supplies and expenses applicable to several projects.

e. Expenses for unusual insurance and specialized health and safety programs and
for special clothing for projects with extraordinary risks such as toxic and
hazardous waste conditions. Such projects may require special insurance, which
is also normally billed as a direct cost to the project. Such expenses are normally
reimbursed by the client at actual invoice cost plus an administration charge to
compensate for associated accounting, purchasing, contract administration, risk
of liability, etc.

4. The Civil Engineers overhead which comprises a major portion of the compensation
generated by the multiplier on salary cost, includes the following indirect costs:

a. Provisions for office expenses-light, heat, telephone depreciation, rental furniture,

rent, drafting equipment and engineering instruments, transportation expenses,
and office and drafting supplies not identifiable to a specific project.

b. Taxes and insurance other than those included as salary cost.

c. Library and periodical expenses and other costs of keeping abreast of advances
in engineering, such as attendance at technical and professional meetings and
continuing education courses.
d. Executive, administrative, accounting, legal, stenographic, and clerical salaries
and expenses (other than identifiable salaries included in salary costs and
expenses) plus salaries or imputed salaries of partners and principals to the
extent that they perform general executive and administrative services as
distinguished from technical or advisory services directly applicable to particular
projects. These services and expenses, essential to the conduct of the
business, include preliminary arrangements for new projects or
assignments and interest on borrowed capital.

e. Business development expenses, including salaries of principals and employees

so engaged.

f. Provision for loss of productive time of technical employees between

assignments, and for time of principals and employees on public service
assignments.
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g. Costs of acquiring and maintaining computers, development of software, and

training staff when not billed as a direct cost.

h. Accounting records. The Civil Engineer who performs services under a salary
cost times multiplier agreement or other cost-based agreement must
provide the accounting necessary to segregate and record the appropriate
expenditures. Adequately detailed hourly time records must be maintained
for principals, engineers and other employees who devote; time to the project.

Applicable payroll records, together with receipts or other documents to

substantiate chargeable expenditures, must be available for inspection audit by
the client if required by contract.

HOURLY BILLING RATE

The hourly billing rate method of compensation is very similar to the salary cost times
multiplier method in that the hourly billing rate includes all direct personnel expense,
overhead and profit. Direct non-salary expenses (as defined under the salary cost limes
multiplier section) are a separate item for reimbursement, usually with a service charge.
Civil engineering firms may elect to utilize this method of compensation on projects
where the scope of service is not well defined or to simplify accounting and record
keeping.

PER DIEM

The term per diem normally refers to an eight-hour day. Direct personal services of the
type described in Section 2 of the PICE manual which are frequently charged on a per
diem basis. This basis is particularly suited to expert witness or other legal-type services
and to other short-term engagements involving intermittent personal services.

Where per diem services are furnished, the Civil Engineer should be compensated for all of
the time devoted to providing them, including travel and standby time. The per diem
charge should be based on the complexity, risk, and important of the services and the
Civil Engineer's professional standing, expertise, and breadth of experience. The Civil
Engineer Is also reimbursed for travel and subsistence costs and for other out-of-pocket
expenses incurred when away from the home office.

For engagements in which the Civil Engineer is to appear as an expert, a per diem charge
is considered to be earned for each day of such appearance, even though the Civil
Engineer is not called testify or, if called, may. finish testifying in only a part of the day.

On occasion the urgency of the engagement requires the Civil Engineers time regularly for
periods longer than the normal eight-hour day. In such cases an understanding should
be reached with the client, and the per diem rate increased accordingly.

Per diem rates can vary widely, depending on employee classification, regional location,
and period of service. Rates for consultation in connection with litigation and
appearances before commissions and courts are normally higher than the standard
rates.
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COST PLUS FIXED FEE

Under a cost plus fixed fee agreement, the Civil Engineer is reimbursed for the actual
costs of all services and supplies related in the project including:

1. Salary costs, as previously defined

2. Overhead, as previously defined (The Civil Engineer should be prepared to support

the basis for overhead charges.)

3. Direct non-salary expenses, as previously defined

4. Fixed fee, an amount to compensate the Civil Engineer for contingencies, interest
on invested capital, readiness to serve, and profit.

The cost plus fixed fee basis requires, as a prerequisite to equitable negotiations, that
the client and the Civil Engineer define and agree upon the scope of services the Civil
Engineer is to perform. Such definition of the scope of service is essential to enable the
Civil Engineer to estimate costs and propose an equitable fixed fee amount. The scope
of services, cost estimate, and fixed fee should be incorporated into the client-engineer
agreement.

The cost plus fixed fee method can also be used when the Civil Engineer is required to
start providing service before the detailed scope of services can be determined. In
such cases, the following considerations apply:

1. The general scale and intent of the project should be fairly well defined, even if the
full scope is indeterminate; for example, the number, size, and character of
buildings or other facilities, the type of utilities, and other such essential information
should be available.

2. The types of service to be performed the Civil Engineer should be agreed upon and
fully set forth. The agreements should also provide for appropriate adjustments in
the fixed fee. In the event that the physical scope of the project, time completion, or
level of effort and services required are materially changed over those
contemplated during the negotiations.

The fixed fee amount varies with the complexity and scope of the engineering services
required. It is frequently calculated as percentage of the salary costs, overhead, and
direct non-salary expenses.

Agreements for cost-based methods should provide for reimbursement of all costs to
be incurred directly or indirectly in connection with the project, including but not
limited to those foreseen when the agreement is negotiated. The list reimbursable
items should be as complete and detailed as possible. One advantage of the cost plus
fixed fee method
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is that it eliminates any suspicion that the costs have been allowed to grow in order to
increase the Civil Engineer's fee, which by definition is a fixed amount. Because the
entire fixed fee amount is due the Civil Engineer, whether or not the estimated project
costs have been reached the Civil Engineer has an incentive to complete the service
promptly.

FIXED PRICE

The fixed price method of compensation is frequently used for investigations and
studies and for basic services on design type projects where the scope and
complexity of the assignment are clearly and fully defined. The fixed price amount
can be calculated as the sum total of estimated engineering costs for salaries
overhead and nonsalary expenses, an allowance for contingencies, interest on
invested capital, readiness to serve, and a reasonable amount for profit. Fixed price
compensation for basic services on certain design-type projects can also be computed
as an appropriate percentage of estimated construction costs; this method and its
limitations are discussed in the following section. Results using the percentage
method and the direct calculation method are frequently used to check each other.

A fixed price agreement should contain a clearly stated time period during which the
services will be performed and a provision for adjustment of compensation if the project
is delayed for reasons beyond the Civil Engineer's control. For design services, there
should be a provision for changes required after approval of the preliminary design,
with a clear understanding as to where the final approval authority lies.

Partial payments should be made to the Civil Engineer at stated intervals usually once
a month during the performance of the services. These payments are usually based
on the Civil Engineer’s statement of percent completion to date.

PERCENTAGE OF CONSTRUCTION COST

The percentage of construction cost method is seldom used raw. Because of increasing
complexity and large variation in tasks for projects, the percentage of construction cost
fee curves no longer have a direct correlation to the required engineering fees for
specific projects. Owners should either use experienced "in-house" staff or retain
consultants to develop detailed program budgets for construction costs, right
of way, legal, administrative, engineering services and permits.

This Method may be used to determine the compensation of the engineer for services
where the principal responsibility is the detailed design or construction supervision of
facilities to be constructed.

Construction Cost is defined as the estimated total cost of constructing the facility to be
covered by the proposed detailed design or construction supervision services, excluding
the fees and other costs of such services, the cost of land and right-of-way, and legal
and administrative expenses.
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Over the years, engineering experience has established some appropriate correlations
between engineering costs and construction costs for certain types of engineering
design, where design procedures and materials of construction are more or less
standardized. These correlations have resulted in various curves and schedules
which have been widely used.
The validity of the percentage-of-construction-cost method rests upon the assumption
that detailed design and construction supervision costs vary in proportion to the cost of
construction. When judiciously applied, and with due consideration of the ranges within
which engineering scope may vary, this method is valuable as a tool for general
comparison with line-based fees for design services. Its acceptance over many years
also affords a valuable guide for judging the reasonableness of proposal for
consulting services.

The percentage fee shall consider the type, complexity, location, and magnitude of
construction cost of the project and shall not exceed the following percentages of
estimated construction cost:

a. Feasibility studies-three percent (3%);

b. Detailed engineering design-six percent (6%);

c. Detailed architectural and engineering design-eight percent (8%); and

d. Construction supervision-ten percent (10%)

These percentages include only those works normally undertaken In arriving at the
expected outputs and do not include special studies or investigations indicated under
Section 2.5 of the PICE manual, the outputs of which are ends by themselves.

It is further emphasized that the above percentages are only ceilings and it does not
necessarily mean that the said percentages shalI always be adopted for each project.
The actual percentage a particular project will depend on the factors mentioned above,
the type, complexity, location and magnitude of construction cost. As a general rule,
projects within a higher range of construction cost will have lower percentages of fees
than those acts within a lower range of construction cost. The above limits percentages
shall be reduced to the extent that some of the activities undertaken by the client.
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CHAPTER 07 REFLECTION

Through the Chapter 07: