More on contingency fees

I thought this comment (from Paul Seddon)  that we had on the last post was so perceptive I wanted to highlight it here.  Two points Paul makes seemed to me key; paying contingency on delivered savings, not projected; and the excellent point that fixed or day rate deals that do not deliver benefits can be equally bad news for clients as contingency projects.  Those projects need clear, quantifiable deliverables.

"The 'Sending PwC to Coventry' post  is quite right to warn against pitfalls involved in contingency fee arrangements for cost saving projects. It is vital to establish an objective benchmark for costs – be they actual costs recently experienced or otherwise the costs that would be projected without the consultants’ intervention, e.g. a renewal premium for an insurance project. It is also important to agree a fee structure which rewards actual savings, not projected savings. Fees, or the major part of them, should be paid in arrears on the basis of demonstrated actual savings against the agreed benchmark costs.

If those principles are adhered to, then contingency fees – where appropriate – can provide both an incentive for the consultants to deliver what is required and a de-risking of the project for the client. There are more horror stories around of cases where consultants have been paid large fixed or day-rate fees for projects which have resulted in no real savings. These sorts of fee structure are inevitable where objective cost benchmarks cannot be established, but care must be taken to tie fees to deliverables that can be objectively demonstrated and, where possible, quantified."

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