WHAT DO WE TELL THE CLIENT? | The Top Consultant: Developing your Skills for Greater Effectiveness

Having estimated what the likely costs are on an assignment, what do you agree with the client? The Institute of Management Consultancy has provided some helpful guidance:

There must be a clear understanding between client and consultant:

as to the objective of the assignment;

the fees or the basis of fees to be charged.

So besides defining appropriate terms of reference, a consultant's proposal should quote:

a fixed fee, or;

a range within which the fee will fall, or;

the fee rate(s) to be charged in terms of time (hour, day, week) or other defined basis, or;

(recruitment work) a percentage of emoluments of appointee (with careful definition as necessary of 'emoluments'), any minimum fee or other conditions.

When significant expenses are likely to arise for the client's account some explanation or estimate should be given.

Some contracts are on a 'time and materials' basis: the consultancy keeps a record of the time spent on the assignment, and the related expenses, and charges the client accordingly. The consultant may give an indication of the likely total costs, but is not bound by that. The time and materials basis is used infrequently in management consultancy; it still pertains, however, in other professions (for example, among lawyers on domestic matters).

Most contracts, therefore, are not on a time and materials basis, so you have to tell the client how much the total costs are likely to be to achieve the deliverables required. This estimate is expected to be reasonably binding; the client will not expect you to charge more than the price stated without good cause. The reason for this is simple; most organizations have a budgeting system that requires budget holders to predict likely expenses. If a manager has authority to spend, say, £30,000 on a consultancy project, it can be politically embarrassing for him or her to feel obliged to ask for £10,000 more because the consultants had underestimated the cost of the assignment.

One way of avoiding this is to add a 'contingency' to your estimate, for example, to tell the client to budget for the cost of 20 days' fees when you estimate the project will need only 17. This has the advantage that the client will either be charged less, or get more for his or her money, than expected. (Or, if you are cynical, the consultant will take longer to do the same job, or the consultancy will make more profit!) But even if you add a contingency factor, there is the question, how much should it be? A small contingency will allow for minor errors or alterations to the assignment programme, but will not cover a large misjudgement of the amount of time required. Note that the purpose of a contingency is to cope with underestimates of the amount of work required to carry out a particular project - not to cover changes in the terms of reference (dealt with in Chapter 8).

For the consultancy, therefore, the question is one of managing risk. Furthermore, if there is keen price competition for winning an assignment, the consultancy has to balance the need to keep the price low versus the risk of not allowing enough time to do the work.

This difficulty is compounded when dealing with multi-phase assignments. For example, in the ICC case study (see Chapter 6), John Smith is first going to diagnose what are the major issues leading to high production costs. The next phase will be to address those issues. Although John Smith can estimate with some accuracy the amount of work involved in the first phase, that involved in the next will depend on what he finds out during this diagnosis. It is therefore difficult to estimate how much work would be involved in the second phase before the first is completed. Nonetheless, his client, the General Manager, will probably want an idea of the likely costs of the total project. Not unreasonably so; John Smith might ask for, say, £9,000 to do the first stage of the work, but this is only the start of meeting the client's objective. The GM will want to know what the next stage is likely to cost. Is it going to be £10,000 or £100,000?

So, you are faced with a 'Catch 22' situation: you cannot start the work unless you provide an estimate for the whole project, and you cannot provide a precise estimate until you have started the project. There are three techniques that help to resolve this dilemma:

Make explicit the assumptions on which your fee estimate is based. If, for example, you are carrying out data collection by interview, then list the locations at which you will be carrying out the interviews and how many people you expect to see at each. If the client then wants you to see more people, or visit other locations, this is a clear departure from the terms of reference, which invites an adjustment to the fee estimate.
A similar approach can be used for estimating (as yet undefined) future phases of work. You could identify one or two likely scenarios that might emerge after the diagnostic phase, and indicate the consultancy costs that would be involved in dealing with these. Again, if you have made your assumptions explicit, findings that depart from these will provide the basis for amending the fee estimate.
Quote a fee range. Unless you are undertaking a 'Royal Road' type assignment, the amount of time required to carry out an assignment is not totally predictable. Telling a client that an assignment will take 21 days implies a degree of precision that is usually spurious. If you say it will take (say) 19 to 23 days, this shows that at this stage it is difficult to be precise. As the assignment progresses, you can tell the client where in this range the out-turn is expected to be.

Above all, with fees, as with all other aspects of the client relationship, the consultant should manage clients' expectations. 'No surprises' is a good motto.