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Understanding a Consultant Contract

1. Contracting Methods

Selecting a contracting method is a critical step in developing a scope and managing expectations to assure the project meets KYTC standards. Typical KYTC contracting methods for design-bid-build projects are described below. Alternative delivery methods (e.g., design-build) use different contract types. More information can be found in Alternative Delivery Guidance. Contracts are usually procured as a single type but can be procured as a combination of methods for various services. For example, a General Engineering Contract where KYTC hires a consultant to help administer and manage a large project. 

Lump Sum 

KYTC pays the consultant a fixed price for all negotiated work inclusive of all direct costs, indirect (overhead) costs, subconsultant fees, and a 15% profit margin. It is critical that KYTC and the consultant agree on expected work products and price before work begins. This type of contract is the best option when the scope and level of effort to complete engineering services is understood. KYTC makes extensive use of lump sum contracts because they require less project supervision, indicate how much will be spent, include well-established scope requirements, and project milestones and improve consultant efficiency. The Office of Audits currently performs post-audits on all lump sum contracts to serve as a basis for future negotiations. 

Cost Plus Fixed Fee 

KYTC pays the consultant for all project expenses — regardless of amount — plus a fixed fee. Project expenses include labor, subcontractors, equipment, and materials. The contract is still negotiated but the 10% fixed fee applies to direct labor and overhead costs. This fixed fee incentivizes the consultant to earn a profit while the Cabinet will not overpay for expenses. Consultants are reimbursed as work is completed. This gives KYTC maximum flexibility in assigning work. This type of contract is the best option when determining the scope upfront is difficult. This contracting method has drawbacks, however. Administration costs, internally and externally, can prove cumbersome and time consuming. The consultant should advise the Cabinet when invoices reach 90% of the contract total to ensure that funding is available to process invoices should the contract exceed the total. Also, the consultant has less incentive to complete work efficiently. The Office of Audits performs a post-audit on cost-plus fixed fee contracts to determine appropriate cost adjustments to or from the consultant. 

Specific Rates of Compensation 

KYTC pays direct salary costs, salary additives, indirect costs, and a net fee. This form of contacting is typically used for specific types of engineering and/or engineering-related tasks where the Cabinet pays for a specific position (e.g., construction inspector). The calculations are typically provided as a loaded wage rate per classification. 

 Cost Per Unit of Work  

KYTC pays the consultant based on units of work completed. This method is appropriate when KYTC cannot define the extent of work but can accurately determine in advance the cost of work units. An example is the cost of geotechnical drilling, which is paid by the foot. The amount of drilling necessary is difficult to estimate beforehand, but the unit cost of drilling is well-defined.  

2. Contract Process

KYTC adheres to policies in Kentucky Revised Statutes 45A (often regarded as the Model Procurement Code) when it negotiates with a consultant and establishes a contract. The Cabinet attempts to negotiate fair and reasonable prices for all engineering and engineering-related services. 

Within 10 days of a consultant being selected, the Project Manager (PM) arranges a pre-design conference. PMs should invite appropriate Subject Matter Experts (SMEs) as the conference provides an opportunity for KYTC and the consultant to clarify and document a scope, agree on work units and a schedule, and communicate expectations within the established budget. Early coordination between all parties (e.g., Environmental Analysis, Structural Design, etc.) can provide significant time savings during the estimation process. Key conference activities include:  

  • Reviewing project data to refine the purpose and need  
  • Reviewing the consultant’s scope of work  
  • Discussing proposed work units for the consultant contract
  • Discuss the selected consultant’s Project Approach 
  • Determine key milestones, deliverables, and a project schedule 

    The consultant is responsible for drafting meeting minutes, which must be ratified by attendees. A template for taking conference minutes is available on the Division of Professional Services website. The consultant is responsible for submitting units for KYTC approval directly in the Consultant Portal for all project-specific contracts. Currently, production-hour estimates for statewide contracts are still submitted via email using Excel worksheet templates. 

     Each task required to deliver the project is defined in terms of a unit of measurement (e.g., linear feet, number of occurrences). Each discipline has a list of standard tasks associated with performing work. The Division of Professional Services website has production hour worksheets and descriptions available for several disciplines. The PM can also work with individual division SMEs to develop the work units for their project needs. Examples of roadway design activities and their associated work units include: 

    • Study and develop horizontal alignments (miles) 
    • Study and develop vertical alignments (miles) 
    • Pre-size pipes (number of pipes) 
    • Study and development of intersection (each) 
    • Study and develop typical sections (each) 
    • Establish property and ownership (number of parcels) 

      Descriptions are important for clarifying what is included and what is not included in delivery of a specific work unit. Descriptions for individual work units have also been developed. Here are some example descriptions: 

      • Study and develop horizontal alignments  
        • Study, develop and document alternate horizontal alignments, including approaches.  Generate necessary graphics to depict the proposed alternative, including items such as disturbed limits and drainage structures. 
      • Study and development of intersection  
        • Study, develop, and document preliminary intersection layouts, including appropriate capacity analysis (if required), for each intersection. Intersections that require study will be identified at the Predesign Conference. 
      • Study and develop typical sections  
        • Study, develop, and document all necessary typical sections (including alternatives) for the mainline and all other roadways, including creating roadway templates for each roadway.


      Red Flag

      The PM can add work units and associated descriptions not included on the Cabinet’s standard list if the Project Development Team (PDT) determines additional tasks are needed to complete the scope of work. Additionally, they can adjust the descriptions for standard work items to better communicate the expected level of effort. 

      Red Flag

      The Division of Professional Services has developed a range of production hours typically accepted for most work units. PMs can use this information to develop their production hour estimate. 

      If a consultant’s production hour estimate for a discipline is less than 500 hours, the PM and SMEs can negotiate directly with the consultant without developing independent production hour estimates. If a consultant’s production hour estimate for a single discipline exceeds 500 hours, the PM/SMEs and consultant submit independent production hour estimates to the Division of Professional Services. The consultant is responsible for submitting the consultant team’s estimate for each work area directly in the Consultant Portal. The Division of Professional Services then determines what types of negotiations are appropriate and coordinates negotiations with the PM/SMEs and consultant.  

      Each KYTC division involved in the project prepares independent production hour estimates. The KYTC PM or SME is responsible for submitting the independent KYTC estimate for each work area directly in the Consultant Portal. For example, the Division of Traffic generates production hour estimates for striping and signing plans, signal plans, and lighting plans. The PM and the user division coordinate to ensure estimates are completed. The Division of Professional Services gathers production hour estimates from each division involved in the project.  

      Using the agreed-upon work units, the consultant submits its proposal and fee estimate. The fee must include a breakdown of the fee for performing the work and the following: 

      • A statement that the payment shall be based on the percentage of work completed 
      • The proposed project milestones and corresponding maximum percentage payments 

       The breakdown of the estimated fee must include: 

      • Cost of materials 
      • Direct salaries 
      • Overhead 
      • Payroll activities 
      • Other direct costs 
      • Indirect costs (such as travel and lodging if required) 
      • Operating margin (i.e., profit) 
      • Payout schedule 
      • Subconsultant costs (if applicable) 
      • Classifications and percentages for design 
      • Use of disadvantaged business enterprises (DBEs) (if applicable)
      • Facilities Capital Cost of Money (FCCM) 

      The Division of Professional Services compares the consultant’s proposed fee with KYTC’s estimate to: 

      (a) determine if the fee is reasonable and  

      (b) identify areas of substantial difference that may require further negotiation 

      The emphasis of negotiations is to provide the consultant with adequate resources to deliver the project at the KYTC’s anticipated level of effort within the available budget. If the Division of Professional Services cannot negotiate a satisfactory contract with the selected consultant, it terminates negotiations. The division then requests a proposal and fee estimate from the second-ranked consultant. Should negotiations with the second-ranked consultant fail, the division requests a proposal and fee estimate from the third-ranked consultant. If this fails, KYTC determines whether to re-advertise. However, being unable to retain the top-ranked consultant is an extremely rare occurrence. 

      Red Flag

      The 15% operating margin (profit) of any single firm for a lump sum contract is limited to the first $2 million of total direct labor costs plus overhead cost. Once the total labor costs exceed the $2 million threshold, the remaining operating margin drops to 10%. This reduction does not apply to DBE firms who may continue to operate at a 15% profit margin

      Once the fee estimate is agreed to, the Division of Professional Services prepares an agreement or contract that describes the scope of services to be provided, method and amount of payment, time for completion, and special provisions. The contract must be approved and signed by the Secretary of Transportation. The contract is then established and processed for eMARS approval. KYTC then submits to the consultant a notice to proceed to indicate the consultant may begin work and bill for services. The Legislative Research Council (LRC) Government Contract Review Committee reviews the contract as well to verify it is acceptable. Typically, four months elapse between advertisement and KYTC issuing the notice to proceed. 

      3. Subconsultants 

      Many projects use subconsultants. Prime consultants retain subconsultants to provide required prequalification services they cannot or to provide specialized services. KYTC also occasionally requires subconsultants to support growth of smaller companies, specifically Disadvantaged Business Enterprises (DBEs). Subconsultants must be prequalified with KYTC to perform the services they are assigned. Fee proposals submitted by prime consultants must include the amount of proposed subcontracted work. The fee proposal must be based on audited overhead and wage rates for the subconsultant. 

      On any project, the prime consultant should perform at least 50% of the dollar value of the work. However, the Director of the Division of Professional Services may, upon recommendation of the user division, waive the 50% requirement. This occurs frequently on large projects where a wide variety of services are needed, or additional resources are required (e.g., Bridging Kentucky). 

      Red Flag

      Subconsultants are typically specifically listed within a consultant’s response to announcement; however, they may be added later as well.  If permitted within the initial advertisement, specific services may be added by contract modification. The prime may choose to bring on a subconsultant to provide these services. KYTC may also require a prime to supplement their team with a subconsultant to provide specific services to benefit the project. 

      4. Contract Modifications 

      PMs must understand how scope changes affect milestones, project delivery, and project budgets. Based on this knowledge, they must diligently manage the scope throughout project development. SMEs, public officials, interested parties, and the consultant may attempt to influence a project’s final outcome by changing and/or increasing or reducing the scope. Although unforeseen developments can warrant a change in scope, the PM should resist scope changes. Significant scope changes should be confirmed with upper management. 

      If the amount of work or time allotted for a project is adjusted, a contract modification may be necessary. Due to the nature of the engineering services, some deviations in the originally scoped work are inevitable as the project progresses. However, the PM and location engineer should be judicious when considering additional work because additional services may demand a contract modification. Modifications are permitted under the following conditions: 

      •  Change in termini or typical section 
      • Addition of major phases of work to project scope (i.e., moving from preliminary engineering to final design) 
      • Modification of previously approved work resulting from factors beyond the consultant’s control 
      • Modification of a major item if (a) the item is designated as a basis of the original negotiations and (b) the conditions for a contract modification consideration are identified in the original contract
      • Delay by the Cabinet as outlined in each contract 
      • Use of a subconsultant for services previously slated to be done by the prime firm or other subconsultant 
      • Availability of current audit 

        Consultants must formally request contract modifications directly through the Consultant Portal. They can also be requested by the KYTC PM, Division of Professional Services, district office, or user division. Contract modifications must be negotiated using the same procedure employed to negotiate the original contract or justified in writing why a change is necessary. PMs coordinate with divisions affected by a proposed contract modification and must be cognizant of whether additional funds are needed. If the current funding is insufficient to cover added expenses, a PM must initiate a Project Authorization request to indicate additional funds are needed.

        Red Flag

        90 days must elapse between subsequent contract modifications. The consultant should maintain a chronology of all project modifications and submit this chronology with each request. 

        Red Flag

        PMs are often challenged with delivering a project within limited budgetary constraints. Before authorizing a contract modification for additional services, PMs should reconcile all previously agreed items to determine which services were not required. All items should be reduced from the modification at the previously authorized rates to lessen KYTC’s increase in cost from new services. This tactic may be employed to deliver required services with a net zero increase to the contract amount.

        Administration of Consultant Contracts Knowledge Book  (part of the Project Management Guidebook Knowledge Book):

        Access the complete Knowledge Book here: Administration of Consultant Contracts 

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