A Rising Tide Fees & The Booming Economy
January 1, 2006
By John Leckie
Consulting Engineers in Alberta and British Columbia are discovering there is truth to the saying "a rising tide lifts all boats" when it comes to fees....
Consulting Engineers in Alberta and British Columbia are discovering there is truth to the saying “a rising tide lifts all boats” when it comes to fees.
Booming construction economies in both provinces have brought about substantial increases in fees in the past year. The increase has been welcomed with open arms by consulting engineers, particularly those in B.C. who suffered through a prolonged economic flat period during the 1990s.
While firms in the rest of the country are not seeing quite such a dramatic upturn in business, the trend has been positive in most markets.
These good economic times bring hope to those who have long complained that consulting engineers are not charging enough for their services compared to other professionals. Even some accountants and lawyers agree that engineers’ fees are relatively too low. In comparison, Hank Bulmash, principal of a small accounting firm in Toronto, says he charges $400 an hour for his services, while accountants in the large firms will charge much more. A top lawyer can command fees of around $700 to $800 an hour. The Canadian Association of Management Consultants lists its top recommended hourly fee at $560. In contrast, the recommended rate for the highest qualified engineer listed by Consulting Engineers of Alberta on its website early in January was $230 per hour.1 Not surprisingly, the association is considering raising the rates.
The current optimism among consulting engineers is tempered by their knowledge that it is the economy that has caused their fees to rise, not the sudden realization by clients that they have been wrong all these years in putting such a strong weighting on price in their consultant selection processes. Consultants also worry that when boom times turn to bust they will once again become their own worst enemies in competing against each other, cutting fees to ensure that work comes in the door. And even with the rising fee levels, there is a strong feeling that rates are still not high enough.
“They’re never high enough,” says Allan Russell, P.Eng., with a laugh. Russell, a senior vice-president of Trow Associates in Burnaby, B.C., was on a committee some years ago that looked at updating the fee guidelines for consulting engineers in that province. The guidelines had been developed jointly a decade before by Consulting Engineers of B.C. (CEBC) and the Association of Professional Engineers and Geoscientists of British Columbia. Russell’s committee did not complete the task, but a similar committee is again in place with hopes of coming up with new guidelines soon.
“Fees have gone up substantially in British Columbia in the past year and continue to go up,” Russell says. He adds that firms’ profitability across western Canada has also gone up.
“We have done some closing of the gap,” agrees Francois Morton, regional vice-president for B.C. at UMA Engineering. Morton is chair of the CEBC practice committee that is reviewing the fee guidelines.
Pressure on salaries
Boom times in western Canada also bring competition for skilled engineers. Salaries for professional engineers generally have risen — sometimes dramatically — meaning consulting engineering firms and government agencies are struggling to attract and keep qualified staff.
In October, for example, the Greater Vancouver Regional District (GVRD) announced pay increases of more than 19 per cent over two years for executive engineers on staff. Their salaries will jump to $167,000 annually in 2006 from $140,000 last year. Senior engineers will climb to $105,000 this year from the earlier level of $88,500.
Chief administrator at GVRD, Johnny Carline, told the Vancouver Sun that the salary increase was necessary because the district was losing too many of its professional staff to higher paying jobs elsewhere. He also pointed out that their staff had not had an increase in six years.
Consulting engineering firms face the same kind of salary pressure, which has given impetus to raising the fee schedule. They, like the municipalities, cannot match the wages paid by major oilsands companies. They also have to decide on the optimum staffing level they should maintain. When the work started to pick up, firms were able to carry on by expanding the workload of existing staff, but employees can only work extended overtime hours for so long.
Higher municipal engineering salaries could benefit consulting firms in one respect; a municipality that recognizes that large salary increases are required to keep its staff will have a hard time making a case for keeping a lid on the fees they pay consulting engineers. Wendy Cooper, executive director of Consulting Engineers of Alberta (CEA), says the salary pressure municipalities face as a result of the wages paid by large engineering companies working on oil sands development, has opened their eyes a bit on the need to pay higher fees to consultants.
Rising salaries have also dealt a blow to those consulting firms who consistently undercut their competitors. By charging lower fees they can’t afford to pay the necessary salaries to keep experienced staff. And, there is a point where no matter how low your proposed fee is, if you don’t have the experienced staff, you won’t be given the job.
Municipal clients and quality-based selection
Public agencies tend to be the prime offender in thinking of engineering as a commodity that can be selected by price, says Cooper of CEA. While public agencies often say they are looking at the qualifications of the firm in consultant selection processes, price can make up between 20 and 50 per cent of the weighting.
The public sector is under pressure to deliver projects at the lowest cost, says John Gamble, P.Eng., president of Consulting Engineers of Ontario, but that need almost always translates into a focus on obtaining the lowest initial cost for a project. It is shortsighted, in his view, not to look at life cycle costing because operations and maintenance make up the major cost of most of the projects delivered by consulting engineers.
“Typically, engineering fees are about two per cent of the overall cost of the project,” says Gamble. A little more spent on engineering could mean a lot less spent over the life of the project.
Gamble points out that engineers in the past have thought more in terms of service to clients rather than fees. They have helped their clients solve problems without reflecting the cost of doing that in their fee structures.
Like all the consulting engineering associations across the country, Consulting Engineers of Ontario has long been touting the use of quality-based selection (also known as qualifications-based selection, or QBS), as a method for hiring consultants, with somewhat limited success.
“We’re starting to see a glimmer of hope,” Gamble says. Much of the success is coming from the United States, where there has been a stronger movement to quality-based selection for consultants.
The public sector is the first line of attack when it comes to getting higher fees or changing the consultant selection process. Because the public sector makes up such a large market, it has to lead the way.
Boom and bust
The challenge will be to keep fees at high levels when the economy slows down. Right now, Morton of CEBC suggests, consulting engineers have the option of declining work they don’t want. They might not agree to work for those clients who put too much emphasis on price in their selection process.
Newcomers to consulting who have not been through a downturn before may think the current boom will go on forever but industry veterans know better. They also realize the impact layoffs can have on firms and individuals.
That is the dilemma for consulting engineering firms. When the economy slows down, the company still has to pay its overhead costs. If the way to keep the work coming in is to cut fees, they often decide to do so.
Some say that it is the mid-sized firms t
hat suffer most during the construction industry’s economic fluctuations. Large firms can be in enough different markets to balance the workload better among staff, while small firms don’t carry the same overhead costs.
For now, consultants are enjoying riding on the economic high tide. Thanks to the thriving economy, they are not only able to charge fair fees, they are even finding themselves in a position to turn down work they don’t want. Cooper at CEA and Glenn Martin, executive director at CEBC, both say municipalities that use price-based selection are having a hard time getting firms even to bid on their projects.
John Leckie is a Toronto-based freelance writer.
1 Consulting Engineers of Alberta’s recommended fee schedule for hourly rates for professional services ranges from $85 for students, to $125 for a supervisory engineer, to $230 for a senior management engineer. Technical service hourly rates range from $70 to $135 per hour.
Professional Engineers of Ontario posts a 2001 Schedule of Fees on its website. The hourly flat rates range from $95 for the least experienced engineer, to $205 for the most experienced.