Basis of Payment describes the method to be used to calculate the amount of money or fee owed to the Consultant. The following is a partial list of payment types in common use:
- Lump Sum – This method of payment stipulates that for a specific SOW, the Client will pay the Consultant a specific amount of money.
- Time and Materials (T&M) – The T&M method can frequently be used when the scope and level of effort are difficult to establish or agreement between the Client and Consultant cannot be quickly reached. The element called Time includes the Consultant’s labor, overhead, and profit with Materials including all non-labor related costs. Clients frequently limit the amount of all T&M costs.
- Cost plus a Fixed Fee – In this method, the Consultant’s compensation is based on its Cost (labor, overhead, and other direct costs) plus a Fixed Fee that, to some extent, represents the Consultant’s profit. The Fixed Fee remains the same regardless of the costs. This allows an efficient Consultant whose costs are lower than anticipated to experience a higher level of profit when expressed as a percentage of the total fee earned. On the other hand, the Consultant’s profitability is reduced when its costs are greater than anticipated. Clients frequently limit the amount of costs.
- Cost Reimbursable – Not-to-Exceed – This method is frequently used in connection with Contingency Items in the SOW. Cost in this case is a combination of all labor, overhead, and profit expressed as a hourly labor rates plus materials and ODC’s.
- Percentage of Construction – This method determines the fee to be paid to the Consultant by simply multiplying an agreed upon percentage by the project construction cost. Of concern to the Consultant is how and when the construction cost is determined. If the construction cost is based on the low bid received, the unknowns associated with the bidding process make managing design costs to a budget extremely difficult if at all possible. The risk to the Consultant in this method can be very high. If, on the other hand, agreement as to the construction cost has already been determined as in a Construction Manager/General Contractor (CM/GC) delivery method, the risk of this method may be acceptable.
Payment Terms defines the timing of how money is paid to the Consultant. Payment may be made at the end of the Consultant’s services or at specified intervals, commonly monthly, based on verifiable progress made during the invoice period.