Why Should Contracts that Contain A Contingent Fee Be Avoided?

by | Dec 12, 2022 | Books, Liability Risks, Project Management | 0 comments

Contingent Fee Contracts for professional design services are ones in which payment to the Consultant for his or her service is dependent on the actions of an entity other than the Client.  A Client may attempt to tie payment of a Consultant’s fee to receipt of a grant, obtaining a permit, or a legislative funding process.  A contingent fee contract likely creates the highest possible level of business risk to the Consultant.  The risk is so high that many Consultants requires the specific approval from the highest levels of management.  Contingent fee contracts are considered so problematic that many public agencies are prohibited by law from entering into a contract until the project is fully funded.

Generally speaking, consideration of accepting a contract containing a contingent fee clause should begin with refusal to accept the contract.  Then move carefully away from refusal toward some justification for accepting it.  The following are some things to take into consideration:

  1. Is there is prior positive experience with the Client during which the Client has demonstrated correct judgment in evaluating the risk of the contingency being overcome?
  2. Is there prior positive experience with the entity that controls the funding on which the fee is contingent?
  3. Is the Consultant’s economic situation such that the risk is warranted or justified?
  4. An alternative to refusal could be proceeding with negotiating the contract scope, schedule, and budget with the understanding that work will not begin until the contingency is removed.
  5. Be aware that investing further time, energy, and money into the consideration process can create undue pressure to accept the contract containing the contingent fee provision.
  6. Entering a contingent fee contract may be a violation of a Professional Society Code of Ethics or a State Engineering Registration Statute.  Investigate this possibility before accepting a contingent fee contract.

All of the above considerations still contain considerable risk requiring managerial judgment and should be viewed as such.

Want more?

A book entitled “A Guide to Managing Engineering and Architectural Design Services Contracts – What Every Project Manager Needs to Know” is available to assist design professionals in managing their professional services contracts.

Click here to learn more.

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Lowe Consulting, LLC
John M. Lowe, Jr., P.E.
Happy Valley, OR