LAWBUILD Letter No. 13

Wednesday, 22nd March 2006

Lawbuild provides construction law expertise to save clients time and money. A personal message from Lawbuild's Principal David Lewis

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Time and the hour

Sorry, you accountants and fellow solicitors out there, but is there anything dafter than the hourly rate for professional services?

You don’t agree?  Then let me ask you how many hours you spend over the course of a year in estimating your time before the job and justifying it afterwards.

Still not convinced?  Let’s try this one.  How many clients do you have who are happy to pay your fees, based on an hourly rate, however many hours it takes you to do the work?

To be fair, it’s not only we professionals who are addicted to time charges.  Jobbing builders and other tradesmen also tend to quote by the hour or by the day.  This may make sense for small building jobs, especially where the work is fairly standard and workers are hired by the day.  But law firms have to pay their fee-earning staff whether or not they’re working on client matters.

Some months ago Lawbuild began giving fixed price fee quotations as the norm rather than as an occasional alternative to an hourly rate, and we now usually quote a fixed price for each document and task which we can see may need to be done.  We use hourly rates only for general retainers (where the client requests advice from time to time on a variety of matters), for documents and tasks not foreseen and therefore not quoted for, and for abortive and discontinued work.  And once our quote is accepted, what a feeling of liberation to know we need never disclose let alone justify the time we spend.

Now you lawyers and accountants are probably thinking, “He estimates his time and multiplies it by his standard hourly rate.”  Wrong!  So how do we arrive at our fixed prices?  I won’t go into detail – commercial confidentiality and all that - but essentially we use a scale of prices, and the first step is to take a view as to what is a fair price on the scale for each task or document of its kind.  (Usually one of the figures jumps out at you when you do this.)  We then look at the circumstances of the particular task or document – such as its complexity, monetary value, importance to the client, urgency, and yes, the time required – and this exercise may result in our going up or down on the scale by one or even two prices when quoting.

And that’s it.  When we quote “full service” for a document, that means drafting or reviewing it, and negotiating, amending and finalising it, however many hours it takes.  If the negotiation requires meetings, there is no extra charge.  But we do quote a fixed price for any meetings which our client instructs us to attend.

Does this system mean we sometimes charge rather a lot of money for a task which doesn’t take us very much time?  Yes, though only occasionally.  But forgive me: in order to do a job which takes me only a couple of hours I’ve had to spend – during a career spanning more than four decades – very many hours, some of them unpaid, learning my trade and practising and honing my drafting and negotiating skills; which enables me to provide you with a document or service which could help you to earn many times more than you are paying me.  Moreover, I give you a fixed quote, so you have the opportunity of shopping around to find someone who can do it cheaper; and if you didn’t shop around, it is probably because you have confidence in those skills I’ve developed over the years.

In practice, and without having analysed it in depth, we’re finding that fixed price quotes tend to beat the hourly rate on small jobs, and vice versa on the larger ones.  Which is probably as it should be.

Dear fellow professionals, I understand the reasons of economy and convenience which bind you to the hourly rate because I’ve “been there, done that”.  If you think I’m dead wrong, or even letting the side down, let’s hear from you and I will publish all suitable contributions.  You may convince other readers, but you are unlikely to change our mind: for, having liberated ourselves from the hourly rate, we are unlikely to return willingly to its clammy embrace.

Principal of Lawbuild, solicitors
Editor of the Lawbuild Letter

Lawbuild seminar on JCT 2005

As mentioned in The Lawbuild Letter No. 12, for readers in the construction industry we can give a lunchtime seminar at your offices on the new JCT Standard Building Contract (SBC 2005), to which you could invite your partners and staff, and also clients and associates.

We also supply seminar papers (about 30 pages) for you to print and circulate to those attending.

For a price, please email us with details of the venue, numbers, and preferred date(s) and time(s).

A glossary of construction law expressions: P is for …

Parent company guarantee

A guarantee by the contractor's ultimate holding company for securing the contractor's performance of the contract.  Unlike a performance bond (which typically expires at practical completion or completion of making good defects) a parent company guarantee usually does not expire until twelve (sometimes six) years after practical completion.

Conversely, a contractor may occasionally ask a less than substantial employer to provide its own parent company guarantee for securing the employer’s payment of the contract sum.

Possession

Refers to the employer's delivery of the site to the contractor at the start of the construction period, as in clause 23 (JCT 98) and clauses 2.4 and 2.5 (JCT 05).

Slightly confusingly, it can also mean the takeover of the site by the employer at practical completion, as in clause 18.1 (JCT 98) and clauses 2.33 to 2.37 (JCT 05).

Practical completion

Completion by the contractor of the whole or a section of the works, as certified by the Architect or stated by the Employer's Agent.  “Practical” implies that completion may not be perfect down to the last screw, and in practice, because of business timetables, a certificate may sometimes be issued despite a large number of defects (usually set out in a snagging list), which must then be made good during the defects liability period.

Preliminaries

The first part of the main contract document (e.g. Employer's Requirements, specification or bills of quantities), containing a description of the site and the works, information about the employer and consultants, particulars of the building contract and how it will be amended and completed, site safety requirements, and other legal and administrative material.  Often abbreviated to "Prelims".

The contractor prices the items in the Preliminaries, to reflect the work and risk involved, as part of the contract sum.

Principal contractor

Under CDM - the Construction, Design and Management Regulations - the main contractor or whichever contractor or subcontractor is appointed to complete the health and safety file, and to perform other functions.

Professional indemnity insurance

Also known as “PI”.  Insurance against negligent design, specification or supervision, which appointments, building contracts and warranties often require architects and other designers and professionals, design and build contractors, and design subcontractors, to maintain, often until twelve (sometimes six) years after completion of work.

Not to be confused with product liability insurance, which does not pay out for economic loss and is no substitute for PI cover.

Project manager

A consultant appointed by the client.  His job is to act as the client's agent in connection with the development, to plan, programme and co-ordinate the project, to chase progress; and generally to promote the goals of meeting the client’s requirements and completing the project on time, within budget, and to the desired standards.  (These last three aims form the classical definition of project management.  We define it a little differently, as doing what the client would do for himself if he understood the technical side of construction.)

Letter

Mediation: not so cheap

My experience of mediation is that it can be expensive particularly as the costs of mediation are lost if there is no settlement.  That is these costs cannot be recovered from the losing party if the matter then proceeds to court.  Of course parties could agree that the losing party pays the winning party's costs of mediation or that the party keen to mediate or of greater means (for example a health authority) pays the mediation costs. However I believe this is rare and as indicated depends on the means of the parties involved.
 
The problem is that mediation does not always involve the parties alone.  Usually the solicitor and at times counsel are involved.  Further the mediation may last more than one day. You can therefore appreciate that the costs can mount up.  These costs could be justified if both parties are subtantial companies etc but not necessarily if individuals are involved.
 
The mediation service offered by the court is a cheaper option.  I have to admit I have not used this service but I understand the fee payable to the court is about £100 per party and the court appointed mediator limits the mediation to an afternoon.
 
Although courts are keen for parties to mediate, this is only so if it is reasonable to do so.  In a recent case I was was dealing with, there was a split trial and we won on liability.  We had tried to set up a mediation to deal with this aspect but the defendant initially agreed and then prevaricated until it was too late as the trial was upon us. The trial on liability in itself was an expensive exercise and the judge, when giving directions, took the view that although mediation as to damages was a good idea, the solicitors acting for the parties may wish to commence without prejudice negotiations on this aspect as a cheaper option!
 
Whether mediation is a better option than trial I believe ultimately depends on the nature of the dispute and the parties involved.

Chan d’Souza, Cumberland Ellis, solicitors, London.

Business Network International^®

Lawbuild and David Lewis are a member of the Victoria (London) Chapter of Business Network International (BNI).

BNI is a business and professional networking organisation whose purpose is to generate quality referred business for its members.

To learn more, visit BNI Europe and BNI Victoria.

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Lawbuild is a specialist construction law practice offering expert advice and services to anyone carrying out or lending money for construction, and to any buyer, seller, landlord or tenant of recently built or refurbished property.

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